by Brian Mahany
The alphabet soup of mortgage fraud information – FBI (Federal Bureau of Investigation), DOJ (Department of Justice), NMFWG (National Mortgage Fraud Working Group), NBFWG (National Bank Fraud Working Group), HUD OIG (Housing and Urban Development Office of Inspector General) and my favorite, FFETF (Financial Fraud Enforcement Task Force). If nothing else, the feds are good at creating task forces to combat a perceived problem. According to the FBI’s 2010 annual report on mortgage fraud, the feds are participating in over 100 task forces and working groups.
According to the FBI, that agency alone had 3129 pending mortgage fraud investigations last year. Add the myriad of state and local agencies and its easy to see that mortgage fraud is finally being taken seriously.
While the chances of individual homeowners going to jail for false mortgage applications remains quite low, the bankers and mortgage companies that helped fuel the current foreclosure mess need to watch out.
The FBI report details the way in which these schemes operate. The most prevalent are the loan origination schemes – 62% of the cases opened last year. Here is what the FBI says about these and other schemes:
Loan Origination Schemes
Mortgage loan origination fraud is divided into two categories: fraud for property/housing and fraud for profit. Fraud for property/housing entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan. Fraud for profit, however, often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes, and participants are frequently paid for their participation.
Loan origination fraud schemes remain a constant fraud scheme. These schemes involve falsifying a borrower’s financial information––such as income, assets, liabilities, employment, rent, and occupancy status––to qualify the buyer, who otherwise would be ineligible, for a mortgage loan. This is done by supplying fictitious bank statements, W-2 forms, and tax return documents to the borrower’s favor. Perpetrators may also employ the use of stolen identities. Specific schemes used to falsify information include asset rental, backwards application, and credit enhancement schemes.
Freddie Mac is reporting that the loan origination frauds they are witnessing include false documents, property flips with phantom rehabilitation, fictitious assets, and fabricated payroll documents. Fraudsters are also using phantom rehabilitations to increase the property values. However, Freddie Mac has been interviewing borrowers and their neighbors to determine if the rehabilitations are actually occurring. Also, Freddie Mac is reporting that fraudsters continue to use transactional “lenders” such as the “dough for a day” businesses that “loan” potential borrowers money so that underwriters will see they have assets when conducting their “proof of funds” due diligence risk assessment on the loan application.
Backwards Application Scheme
In a backwards application scheme, the mortgage fraud perpetrator fabricates the unqualified borrower’s income and assets to meet the loan’s minimum application requirements. Incomes are inflated or falsified, assets are created, credit reports are altered, and previous residences are altered to qualify the borrower for the loan.
Fraudulently Inflated Appraisals
Mortgage fraud perpetrators fraudulently inflate property appraisals during the mortgage loan origination process to generate false equity that they will later abscond. Perpetrators will either falsify the appraisal document or employ a rogue appraiser as a conspirator in the scheme who will create and attest to the inflated value of the property. Fraudulent appraisals often include overstated comparable properties to increase the value of the subject property.
Illegal Property Flipping
Illegal property flipping is a complex fraud that involves the purchase and subsequent resale of property at greatly inflated prices. The key to this scheme is the fraudulent appraisal, which occurs prior to selling the property. The artificially inflated property value enables the purchaser to obtain a greater loan than would otherwise be possible. Subsequently, a buyer purchases the property at the inflated rate. The difference between what the perpetrator paid for the property and the final purchase price of the home is the perpetrator’s profit.
Traditionally, any exchange of property occurring twice on the same day is considered highly suspect for illegal property flipping and often is accompanied by back-to-back closings where there is a purchase contract and a sales contract that are both presented to the same title company. FBI combined intelligence and case reporting for FY 2010 indicates that property flipping is occurring in 47 out of 56 field office territories. The fraud continues to involve the use of fraudulent bank statements, W-2s, and pay stubs; the use of straw buyer investors to purchase distressed properties for alleged rehabilitation; perpetrators receiving cash-back at closing; and the failure to make the first mortgage payment. This type of fraud often results in foreclosure. FBI information indicates the top 10 states reporting same-day property flips (as recorded by county clerk’s offices throughout the United States) in 2010 were Florida, Ohio, Georgia, Minnesota, Hawaii, Michigan, Tennessee, New York, Maryland, and Washington.
Among other industry sources reporting significant property flipping, Interthinx reports that it is still prevalent and trending upward. Current property flipping schemes reported by Interthinx involve fraud against servicers; piggybacking on bank accounts to qualify for mortgages; and forgeries. HUD reporting indicates the use of limited liability companies (LLCs) to perpetrate fraudulent property flipping.
Title/Escrow/Settlement Fraud/Non-Satisfaction of Mortgage
A review of FBI cases opened in 2010 indicates that 38 percent of FBI field offices are reporting some form of title/escrow/settlement fraud. The majority of these frauds involve the diversion or embezzlement of funds for uses other than those specified in the lender’s closing instructions. Associated schemes include the failure to satisfy/pay off mortgage loans after closings for refinances; the reconveyance or transfer of property without the homeowner’s knowledge or consent; the failure to record closing documents such as property deeds; the recording of deeds without title insurance but charging the homeowner and absconding with the money; the use of settlement funds intended to pay subcontractors by general contractors to pay debts on previous projects; the use of dry closings; the delayed recording of loans; the filing of fraudulent liens to receive cash at closing; and the distribution of settlement funds among co-conspirators.
According to a review of FBI investigations opened in FY 2010, title agents and settlement attorneys in at least 21 investigations in 14 field office territories are involved in non-satisfaction of mortgage schemes. They are engaged in misappropriating and embezzling more than $27 million in settlement funds for their own personal use rather than using those escrowed funds to satisfy/pay off mortgages as directed per lender instructions provided at closing. Perpetrators diverted escrow monies intended for lenders to themselves or to entities that they controlled. In addition to embezzling escrow funds, perpetrators are also falsifying deeds, recording deeds without title insurance, and failing to record deeds and taxes.
Real Estate Investment Schemes
In a real estate investment scheme, mortgage fraud perpetrators persuade investors or borrowers to purchase investment properties generally at fraudulently inflated values. Borrowers are persuaded to purchase rental properties or land under the guise of quick appreciation. Victim borrowers pay artificially inflated prices for these investment properties and, as a result, experience a personal financial loss when the true value is later discovered. Analysis of FBI cases opened in FY 2010 revealed that 43 percent of FBI field offices are reporting this activity with losses exceeding $76 million.
Short Sale Schemes
A real estate short sale is a type of pre-foreclosure sale in which the lender agrees to sell a property for less than the mortgage owed. Short sale fraud consists of false statements made to loan servicers or lenders that take the form of buyer or seller affirmations of no hidden relationships or agreements in place to resell the property, typically for a period of 90 days. One of the most common forms of a short sale scheme occurs when the subject is alleged to be purchasing foreclosed properties via short sale, but not submitting the “best offer” to the lender and subsequently selling the property in a dual closing the same day or within a short time frame for a significant profit. Reverse staging and comparable shopping techniques are currently being used by fraud perpetrators in the commission of short sale frauds. The fraud primarily occurs in areas of the country that are experiencing high rates of foreclosure or homeowner distress.
Industry participants are reporting that short sale fraud schemes continue to be an increasing threat to the mortgage industry. A recent CoreLogic study indicated that short sale volume has tripled from 2009 to 2010. In June 2010, Freddie Mac reported that short sale transactions were up 700 percent compared to 2008.
Industry sources report that in the process of committing short sale fraud, fraudsters are manipulating the Broker Price Opinions (BPOs) and MLS; engaging in non-arms-length transactions; using LLCs to hide their involvement in short sale transactions; failing to record short sale deeds of trust; using back-to-back and multiple real estate agent closings; selling properties to an LLC or trust months before the sale; selling the property to a family member or other party the fraudsters control and deeding the property back to themselves; engaging in escrow thefts, simultaneous double sales to Fannie Mae and Freddie Mac, and failing to pay off the original loan in a refinance transaction; property flopping; bribing brokers and appraisers; refusing to allow the broker or appraiser access to the property unless the fraudster is present; providing their own comparables to the appraiser; taking unflattering photographs of the property and pointing out defects in the property to the appraiser; providing false estimates of repair, rebuttal of appraisal, and selection of poor comparable properties; and facilitating the partnership of attorneys with non-attorneys to split fees acquired during short sale negotiations.
Commercial Real Estate Loan Fraud
Commercial real estate loan fraud continues to mirror fraud in the residential mortgage loan market. Law enforcement investigations indicate that perpetrators such as real estate agents, attorneys, appraisers, loan officers, builders, developers, straw buyer investors, title companies, and others are engaged in same-day property flips; the falsification of financial documents, performance data, invoices, tax returns, and zoning letters during origination; the diversion of loan proceeds to personal use; the misrepresentation of assets and employment; the use of inflated appraisals; and money laundering.
FBI reporting indicates that some commercial real estate-driven bank failures may expose insider and accounting fraud in regional and community banks.57 According to FBI analysis, these frauds are emerging in addition to the residential mortgage frauds still being found in roughly half of all bank failures investigated by the FBI.58 FBI case information and open source financial reporting indicates some executives and loan officers may resort to issuing fraudulent loans, dishonest accounting, or other criminal activity to disguise the poor financial conditions of their institutions. A review of banks that failed due to overexposure to commercial real estate debt during the boom years revealed that a small percentage showed fraudulent commercial real estate activity, attempts to hide bank financial conditions, and insider loan schemes through which executives and other insiders benefited by controlling lending decisions.
The Congressional Oversight Panel examined commercial real estate losses and financial stability in February 2010 and found that poor-performing loans and defaults would affect banks into 2011 and beyond.59 Some banks are also extending the terms of some poor-performing commercial real estate loans, pushing the potential loan default dates past 2011.60
Foreclosure rescue schemes are often used in association with advance fee/loan modification program schemes. The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. This “foreclosure rescue” often involves a manipulated deed process that results in the preparation of forged deeds. In extreme instances, perpetrators may sell the home or secure a second loan without the
homeowners’ knowledge, stripping the property’s equity for personal enrichment. For example, the perpetrator transfers the property to his name via quit claim deed and promises to make mortgage payments while allowing the former home owner to remain in the home paying rent. The perpetrator profits from the scheme by re-mortgaging the property or pocketing fees paid by desperate homeowners. Often, the original mortgage is not paid off by the perpetrator and foreclosure is only delayed.
Financial industry reporting indicates that foreclosure rescue schemes remain a current threat.61 Analysis of FBI intelligence reporting indicates that foreclosure rescue schemes were the sixth- highest reported mortgage fraud scheme in FY 2010. According to FBI case analysis, mortgage fraud foreclosure rescue investigations comprised two percent of all mortgage fraud cases opened in FY 2010.
Advance Fee Schemes
Mortgage fraud perpetrators such as rogue loan modification companies, foreclosure rescue operators, and debt elimination companies use advance fee schemes, which involve victims paying up-front fees for services that are never rendered, to acquire thousands of dollars from victim homeowners, and straw buyers.
Builder Bailout Schemes
Builders are employing builder bailout schemes to offset losses and circumvent excessive debt and potential bankruptcy as home sales suffer from escalating foreclosures, rising inventory, and declining demand. Builder bailout schemes are common in any distressed real estate market and typically consist of builders offering excessive incentives to buyers, which are not disclosed on the mortgage loan documents. In a common scenario, the builder has difficulty selling the property and offers an incentive of a mortgage with no down payment. For example, a builder wishes to sell a property for $200,000. He inflates the value of the property to $240,000 and finds a buyer. The lender funds a mortgage loan of $200,000 believing that $40,000 was paid to the builder, thus creating home equity. However, the lender is actually funding 100 percent of the home’s value. The builder acquires $200,000 from the sale of the home, pays off his building costs, forgives the buyer’s $40,000 down payment, and keeps any profits.
Equity Skimming Schemes
Equity skimming schemes occur when mortgage fraud perpetrators drain all of the equity out of a property. For example, perpetrators charge inflated fees to “help” homeowners profit by refinancing their homes multiple times and thus skimming the equity from their property. A perpetrator will also help a homeowner establish a home equity line on a property. The perpetrator then encourages the homeowner to access these funds for investment in various scams.
Debt Elimination/Reduction Schemes
FBI reporting indicates a continued effort by Sovereign Citizen domestic extremists throughout the United States to perpetrate and train others in the use of debt elimination schemes. Victims pay advance fees to perpetrators espousing themselves as “sovereign citizens” or “tax deniers” who promise to train them in methods to reduce or eliminate their debts. While they also target credit card debt, they are primarily targeting mortgages and commercial loans, unsecured debts, and automobile loans. They are involved in coaching people on how to file fraudulent liens, proof of claim, entitlement orders, and other documents to prevent foreclosure and forfeiture of property.
The most recent statistics reveal little change in the number of mortgage frauds taking place. Although law enforcement has ramped its efforts since the housing meltdown in 2008 brought many of these frauds to light, unfortunately mortgage frauds continue to be reported in record numbers.
If you have been charged with bank fraud, contact one of our white collar criminal lawyers. At Mahany & Ertl, we handle a wide variety of fraud cases including mortgage fraud and money laundering. For more information contact attorney Brian Mahany at (414) 704-6731 or by email at
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