FBI Mortgage Fraud and Mortgage Scams Survey 2008

The FBI recently released its 2008 survey of Mortgage Fraud and Mortgage Scams. Among the key findings:

1. Mortgage fraud continued to be an escalating problem in the United States during 2008. Although no central repository exists for collecting mortgage fraud complaints, virtually all law enforcement and industry statistics indicated an upswing in mortgage fraud activity. SAR mortgage fraud filings from financial institutions increased 36 percent to 63,713 during Fiscal Year (FY) 2008 compared to 46,717 filings in FY2007 (an increase of more than 36 percent). The total dollar loss attributed to mortgage fraud is unknown; however, at least 63 percent (1,035) of all pending FBI mortgage fraud investigations during FY2008 involved dollar losses totaling more than $1 million. The suspected losses for FY2008 total more than $1.4 billion, an increase of 83 percent over FY2007, according to the report.

2. There was a decrease in loan originations and an increase in defaults and foreclosures continued to dominate the downward trend in the housing market in 2008. While the amount of mortgage fraud cannot be precisely determined, industry experts agree that there is a direct correlation between fraud and distressed real estate markets. As the housing market continued to decline in response to an increase in housing inventories, lack of sales, and new foreclosures surface, to include a wave of Alt-A and Option ARM loans due to reset beginning in April 2009, real estate values softened, and fraud reporting increased throughout 2008.

3. The top states for mortgage fraud mirror the worst states for foreclosures. Analysis of available law enforcement and industry information indicates the top states for mortgage fraud during 2008 were California, Florida, Georgia, Illinois, Michigan, Arizona, Texas, Maryland, Missouri, New Jersey, New York, Ohio, Colorado, Nevada, Minnesota, Rhode Island, Massachusetts, Pennsylvania, Virginia, and the District of Columbia. Rhode Island, Massachusetts, Pennsylvania, and the District of Columbia were new to the list in 2008, replacing Utah, Indiana, Tennessee and Connecticut from 2007.

4. The downward trend in the housing market during 2008 provided a favorable climate for mortgage fraud schemes to proliferate. Several of these schemes have the potential to spread if the current economic downward trend, as expected, continues into 2009 and beyond. Increases in foreclosures, declining housing prices, and decreased demand place pressure on lenders, builders, and home sellers. These and other market participants are perpetuating and modifying old schemes, including property flipping, builder-bailouts, short sales, and foreclosure rescues. Additionally, they are facilitating new schemes, including reverse mortgage fraud, credit enhancements, condo conversion, loan modifications, and pump and pay in response to tighter lending practices.

What is Mortgage Fraud?

Mortgage fraud is a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan. Mortgage loan fraud is divided into two categories: fraud for property 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. Although there is no centralized reporting mechanism for mortgage fraud complaints or investigations, numerous regulatory, industry, and law enforcement agencies collaborate to share information used to assess the current fraud climate.

Source: FBI Financial Crimes Section, Finanical Institution Fraud Unit, Mortgage Fraud : A Guide for Investigators, 2003.

Mortgage Fraud, Mortgage Scams and the Economy

According to the FBI report, mortgage fraud continues to be an escalating problem in the United States and a contributing factor to the billions of dollars in losses in the mortgage industry: Recent congressional economic stimulus legislation and the proliferation of FHA-insured mortgages are providing funding streams for perpetrators to further exploit this industry; multiple fraud schemes are being conducted by industry professionals who are in a position to exploit the current depressed housing market; market conditions are also fueling the use of traditional and emerging schemes which have the potential to multiply across jurisdictions as foreclosures increase, the market contracts, access to credit diminishes, and more homeowners are unable to sell or refinance their homes. Properties affected by these schemes negatively impact neighborhoods include federally insured loan programs; the mortgage, banking, and securities industries; secondary market investors; tax payers; homeowners; and the overall US economy.

Mortgage fraud provides perpetrators, including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, trust account representatives, investment banks, and credit rating agencies with a criminal activity which is relatively low-risk with high-yield returns. Rising housing prices and exotic financial instruments, including teaser-rate adjustable rate mortgages, low or zero-equity loans, and sub-prime loans allow them to shift the risk to others.1 Despite increased scrutiny, many industry insiders will perpetrate fraud to maintain or increase their current standard of living. In addition to traditional industry conspirators, there have been instances involving various organized criminal groups and gang members involved in mortgage fraud activity.

Victims of mortgage fraud activity may include borrowers, mortgage industry entities, and those living in neighborhoods affected by mortgage fraud. As properties affected by mortgage fraud are sold at artificially inflated prices, properties in surrounding neighborhoods also become artificially inflated. When this happens, property taxes also artificially increase. As unqualified homeowners begin to default on their inflated mortgages, properties go into foreclosure and neighborhoods begin to deteriorate, and surrounding properties and neighborhoods witness their values depreciating. As this happens, legitimate homeowners find it difficult to sell their homes. Additionally, the decline in US home values has a direct correlation to state and local government’s ability to provide resources for schools, public safety, and other necessary public services which are funded in large part from property tax revenue.2

The schemes most directly associated with the escalating mortgage fraud problem continue to be those defined as fraud for profit. Fraud for profit schemes often employ the use of a variety of loan products in addition to a standard conventional loan, such as sub-prime loans, Alt-A loans, Home Equity Lines of Credit (HELOCs), option-adjustable rate mortgage (ARM) loans, and Home Equity Conversion Mortgage loans. Prominent schemes include builder bail-out, short sale, foreclosure rescue, credit enhancement, loan modification, illegal property flipping, seller assistance, bust-out, debt elimination, mortgage backed securities, real estate investment, multiple loan, assignment fee, air loan, asset rental, backwards application, reverse mortgage fraud, and equity skimming. Many of these schemes employ various techniques such as the use of straw buyers, identity theft, silent seconds, quit claims, land trusts, shell companies, fraudulent loan documents (to include forged applications, settlement statements, and verification of employment, rental, occupancy, income, and deposit), double sold loans to secondary investors, leasebacks, and inflated appraisals.

Source: FBI 2008 Mortgage Fraud Report