Latest Trends in Mortgage Fraud Special Agent Eric Mascari HUD Office of Inspector General (317) Ext Indianapolis, IN | July 23, 2013

Introduction/Topics of Discussion Latest Trends in Mortgage Fraud  Changes in the Federal Housing Administration (FHA)  FHA Fraud Trends and Schemes - Reverse Mortgages (HECM) - Property Flipping - Short Sales - Deed Theft -Loan Modification  Statutes  Case Examples  Questions and Answer

Changes in the FHA

Latest Trends in Mortgage Fraud  In the early 1990’s, FHA had about 15% of the home purchase market  By 2006, FHA’s market share had been reduced to 3% of all loans nationwide  Currently, FHA’s market share is in excess of 30%  Current Single Family Loan Limit in Marion County is $271, FHA Changes

Latest Trends in Mortgage Fraud  2007 – 580,813 FHA Loans  2008 – 1,467,252 FHA Loans  2009 – 2,022,250 FHA Loans  2010 – 1,623,934 FHA Loans  2011 – 1,150,724 FHA Loans  2012 – 1,239,874 FHA Loans FHA by the #’s

Latest Trends in Mortgage Fraud FHA Loan Volume

Latest Trends in Mortgage Fraud

FHA may need $943-million bailout (Chicago Tribune 4/10/13) The Obama administration's proposed budget projects that the FHA would need a $943-million bailout this year to stabilize its shaky long-term finances. As banks pulled back on lending during the recession, the Federal Housing Administration's role in the market expanded. Now its long-term finances are being dragged down by bad loans it backed from 2007 to Above, a foreclosure sign at a bank-owned home for sale in Las Vegas in (Robyn Beck, AFP/Getty Images / November 8, 2010)

Reverse Mortgage (HECM)

Latest Trends in Mortgage Fraud  People over 62 convert portion of their equity into cash or line of credit. Credit & Employment are non-issues  No repayment until the borrower no longer uses the home as their principal residence  HECM can also be used to purchase primary residence  Maximum Insurance amounts exceed $600,000 depending on locality  HUD has insured over 395,000 HECM Loans since 2008 Reverse Mortgage

Latest Trends in Mortgage Fraud Subject creates a fake mortgage company and “lends” funds to the borrower (No $ changes hands but the paper is filed with the County Recorder) The Subject refinances the borrower into a HECM. At closing the title company pays all debts up to and including the fake mortgage. -Subject may file subordinate mortgages, Promissory Notes, and other paperwork to create the illusion that the borrower owes money HECM Frauds - False Mortgage Payoff

Latest Trends in Mortgage Fraud Financial Professionals fraudulently convince HECM borrowers to invest proceeds in a financial product, such as an annuity The financial professionals receive increased fees and divert mortgage pay outs from the HECM proceeds HECM Fraud Annuity

Latest Trends in Mortgage Fraud  Individual, often family members, may keep HECM payments after the authorized recipient dies or permanently leaves the residence, i.e. Nursing Home or Assisted Living HECM Fraud – Unauthorized Recipient

Home Flipping Schemes

Latest Trends in Mortgage Fraud  The policy change will permit buyers to use FHA-Insured financing to purchase HUD owned properties, bank owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.  “FHA borrowers, because of the restrictions we are now lifting have been shut out from buying affordable properties” said FHA Commissioner David H. Stevens. “This action will enable our borrowers, especially first-time home buyers, to take advantage of this opportunity.”  Waiver was recently extended until 2014 Property Flipping, Continued

Latest Trends in Mortgage Fraud  From HUD Secretary Shaun Donovan “this change in policy is temporary and will have strict conditions and guidelines to assure that predatory practices are not allowed”  In today’s market, FHA research finds that acquiring, rehabilitating and the reselling of these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA Mortgage Insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant for a 90-day period of time. Property Flipping

Property Flipping, Continued Latest Trends in Mortgage Fraud  Investor buys & sells property on same day or shortly thereafter  Second sale had questionable appraisal/s  Second buyer prepares false documents in order to qualify for mortgage loan  Second sale immediately goes into default  Creates a artificial market/high property taxes/losses to the Government and the lender

Latest Trends in Mortgage Fraud

Appraisal Fraud

Latest Trends in Mortgage Fraud  Appraiser does not look at previous sales  Comparables are used for multiple files  Figures are backed into contract price  Pictures vary widely from comparables  House appraised “as is” when contingent upon stipulations  Appraising house you own by hiding ownership interests  Appraiser ID Theft

Short Sale Fraud

Short Sale Fraud Latest Trends in Mortgage Fraud  Investor Purchases property from bank at a lower price while new buyer is recruited  Many of the offers are “low balled”  Seller/Buyer/All Parties to the transaction fraudulently advise lender:  Sale is “Arm’s Length”  No Hidden Agreements Involved  No Party will received proceeds except as set forth on the HUD-1

Short Sale Fraud Latest Trends in Mortgage Fraud  Fraudster will find an end buyer  Double closing is possible, i.e. (A to (B) to C)  Broker Price Opinion (BPO) is influenced to yield a lower value  Lender is defrauded into accepting an artificially “LOW” price on the property

Warranty Deed Theft

Latest Trends in Mortgage Fraud  Property researched to ensure vacancy  In many cases, the property is in foreclosure or near foreclosure  Property has warranty deed recorded, which indicates the property is in receivership  Property transferred to an individual through a second warranty deed

Warranty Deed Theft Schemes Latest Trends in Mortgage Fraud  Cash out refinance (HELOC)  Subsequent sale to straw borrower  Section 8 Rental  Conventional/Market Rate Rental  Security Deposit Collection  Earnest Money Deposit Collection

Loan Modifications

Loan Modification Red Flags Latest Trends in Mortgage Fraud  99% Success Rate  Charging fees up front  Money Back Guarantee  Attorney Based Legal Team

Federal and State Mortgage Statutes

Federal Statutes Latest Trends in Mortgage Fraud  18 USC 1010, False Statements to HUD (Felony)  18 USC 1012, False Statements to HUD (Misdemeanor)  18 USC 1341, Mail Fraud  18 USC 1343, Wire Fraud  18 USC 1344, Bank Fraud  18 USC 1014, Loan Fraud (Statute is now 10 years)

Indiana State Statutes Latest Trends in Mortgage Fraud  IC , Fraud on a Financial Institution  Class C Felony  IC , Theft  Class C Felony  IC Forgery  Class C Felony

Questions?? Latest Trends in Mortgage Fraud

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