In its 2008 survey of mortgage fraud, the FBI concluded there is a strong correlation bewteen mortgage fraud and distressed real estate markets. Indeed, some of the states with the highest levels of mortgage fraud also had the highest levels of foreclosures. But new mortgage fraud scams emerged in 2008 that tested the abilities of the FBI to contain them. Read more: FBI Reports Mortgage Fraud and Mortgage Scams Increase in 2008.
Here is a look at the newest mortgage fraud scams, from the FBI’s latest report:
Emerging Mortgage Fraud Scams
Industry experts concur that there is a strong correlation between increased fraud and distressed real estate markets. The 2008 current housing market, suffering from an increase in inventory, lack of sales, and a high foreclosure rate, provided an attractive environment for mortgage fraud perpetrators who discovered methods to circumvent loopholes and gaps in the mortgage lending market. Lenders, builders, sellers, borrowers, and other market participants employed and modified old schemes, including:
New mortgage fraud scams, which have surfaced due to tighter lending practices include:
Reverse mortgage fraud
Pump and pay
Emerging fraud trends are draining lender, law enforcement, regulatory, and consumer resources. Here’s a look at each of the new mortgage fraud scams in more detail:
Reverse Mortgage Fraud Schemes
Unscrupulous loan officers, mortgage companies, investors, loan counselors, appraisers, builders, developers, and real estate agents are exploiting Home Equity Conversion Mortgages (HECMs)—also known as reverse mortgages—to defraud senior citizens. They recruit seniors through local churches, investment seminars, television, radio, billboard, and mailer advertisements, to commit the fraud primarily through equity theft, foreclosure rescue, and investment schemes.33 Equity theft schemes are the most common method used by mortgage fraud perpetrators to exploit HECMs.
Perpetrators, often with the aid of straw buyers, execute a scheme designed to withdraw false equity from properties. They typically identify foreclosed, distressed, or abandoned properties (or buyers) using information contained within county deed records. Perpetrators purchase the properties using straw buyers who commit occupancy fraud by fraudulently stating they will be using them as their primary residence. They recruit seniors to “purchase” the properties from the straw buyers. This is generally accomplished by the perpetrator transferring the deed to the property to the senior with no exchange of money.
After the senior is living in the home for at least 60 days, the perpetrators arrange for the seniors to obtain HECMs, with the aid of a fraudulently inflated appraisal, and encourage the seniors to request a lump sum disbursement of the equity. The perpetrators, often in collusion with the settlement attorney, abscond with all of the equity at closing. They facilitate appraisal fraud by arranging for minor cosmetic repairs, or falsely documenting repairs, that were never performed to inflate the appraisal. They also fraudulently create fictitious loans and liens that enable them to distribute the loan proceeds to themselves, the straw buyer, and others at closing.
As more members of the “baby boomer” generation turn 65, their vast and expanding real estate holdings make reverse mortgage fraud an increasingly attractive scam for perpetrators.
Credit Enhancement Scams
Credit enhancement schemes may take various forms. In the most basic scheme, a loan officer and home builders are taking measures to encourage borrowers to have their names added to the bank accounts of friends or family members temporarily to circumvent the underwriting process to show that they have sufficient deposits on hand. Additionally, some originators and homebuilders are depositing money into the accounts of loan applicants who are in the process of trying to qualify for a mortgage to be used as an asset.
Once the underwriting process qualifies the loan and it closes, the builder withdraws the money and uses it for the next potential borrower. According to Fannie Mae, perpetrators are also filing amended tax returns and paying “back taxes” on unreported income for previous years to aid in the verification of income process for a new loan application.
Perpetrators are also using credit enhancement schemes to circumvent tightened lending practices established by Fair Isaac Credit Organization (FICO). The schemes include purchasing credit privacy numbers (CPNs) and seasoned trade-line accounts, creating fraudulent retailer financial relationships, and staging credit-washing schemes with the intent to strengthen a perpetrator’s credit history and ability to apply for new loans. These schemes are facilitating both mortgage fraud activity and illicit credit representation practices.
Builder-Bailout Scams – Modified
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 often occur when a builder or developer experiences difficulty selling their inventory and uses fraudulent means to unload it. In a common scenario, the builder has difficulty selling 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. If the home forecloses, the lender has no equity in the home and must pay foreclosure expenses.
Builder-bailout schemes continue to be problematic in the current distressed market in which builder inventory is increasing while demand is decreasing. These schemes typically consist of builders offering excessive incentives to buyers, which are not disclosed on the mortgage loan documents. Recent modifications to this scheme involve condominium-conversion, and “pump and pay” schemes (see below).
Builder-Bailout – Condominium Conversion
Individuals are participating in builder-bailout and property flipping schemes using apartment complexes that were converted into condominium developments. During the housing boom, many apartment complexes were purchased by developers and contractors and converted into condominiums. When the housing market began to decline, developers had excess inventory of units that they could not sell. They began to offer incentives such as cash-back at closing and paid condominium association dues to encourage investors to purchase units within the newly established developments. Since the buyers purchased the condos as investment properties, they were not owner-occupied. The developers and contractors claimed that they would find people to rent the condos, would oversee the management of the complex, and would collect rent from the tenants. These schemes often target investors interested in low- to no-risk investment properties. Perpetrators of these schemes typically inflate the value of the condominium to obtain a larger sales price to offset the cost of the incentives.
Builder-Bailout – Pump and Pay
Builders in Florida, North Carolina, California, Texas, and various other locations throughout the United States are working with co-conspirators to inflate the appraised value of their properties. This false equity is distributed to the perpetrators and disguised as set-asides for future maintenance, insurances, and tax payments on the property.
Foreclosure Rescue Scams
Foreclosure rescue schemes continue to be problematic, especially in the current distressed market in which more than 2.3 million properties were in foreclosure in 2008. These schemes typically consist of perpetrators soliciting homeowners in foreclosure and offering to “rescue” them from losing their home for a fee. Recent modifications to this scheme involve arson/insurance fraud, bankruptcy schemes, and loan modification program schemes (see below).
Foreclosure Rescue – Arson
Homeowners, property flippers, and investors are committing arson to avoid real estate foreclosure. The insurance policy holder files a false insurance claim following the arson to extract illicit proceeds from the property to avoid foreclosure.
Foreclosure Rescue – Bankruptcy
Perpetrators are exploiting US Bankruptcy courts to defraud homeowners who are facing foreclosure. They are targeting distressed homeowners through Internet advertisements, newspapers, flyers, and through publicly available county foreclosure notices. They offer to provide the homeowner with assistance designed to prevent them from losing their home. They charge the homeowner an up-front fee, typically ranging from $200 to $1,000. In many instances, the perpetrators convince the homeowner to continue to make their monthly mortgage payment, but to direct the payment to the perpetrator. They also misguide the homeowner to cease any communication with the lender. The perpetrators direct the homeowner to complete the necessary paperwork which includes signing a bankruptcy petition. The perpetrator subsequently files the bankruptcy petition in the homeowner’s name with either the signed petition or a forged petition.
The bankruptcy petition invokes the automatic stay, resulting in the imminent foreclosure being postponed, and the homeowner stops receiving collection calls and letters. Frequently, homeowners are unaware of the bankruptcy petition and believe that the perpetrators have fulfilled their obligation to prevent them from losing their home. The perpetrators further misinform the homeowners to ignore any court notices to appear at the bankruptcy hearing. However, when no one appears at the bankruptcy hearing, the foreclosure process begins again.
In a variation of this scheme, the perpetrators convince the homeowner to “quit-claim” the property to the perpetrator or to sell the property for a nominal fee, usually $1. The perpetrators charge the homeowner rent until the mortgage problems are resolved. Supposedly, the homeowner is able to repurchase the property or share the profits if the perpetrator sells the property. In some property transfers, the homeowner is instructed to transfer only a fractional interest in the property to the perpetrator who then transfers that interest to another individual or entity (often fictitious). Often, the fractional interest is transferred numerous times as the automatic stays are lifted, which delays foreclosure for months and generates additional proceeds for the perpetrators. According to the Executive Office of US Trustees, one residential property was linked to 24 different bankruptcy cases.
Foreclosure Rescue – Loan Modification Program Schemes
Loan modification schemes, typically in the form or an advance-fee/foreclosure rescue scheme, are emerging as recent vulnerabilities in HERA and EESA legislation becomes apparent. Lenders are mandated by recent legislation to work with homeowners to assist them in keeping their homes out of foreclosure. However, individuals are perpetrating advance-fee schemes to generate income from victim homeowners. Perpetrators solicit homeowners with mail flyers offering to help them stop the foreclosure process on their homes. Homeowners are falsely told that their mortgages would be renegotiated, their monthly payments would be reduced, and delinquent loan amounts would be renegotiated to the principle.
Perpetrators require an up-front fee ranging from $1,500 to $5,000 from homeowners to participate in the loan-modification program. Perpetrators often request that the victim homeowners stop payments and communication with their lender. When victims receive delinquency and foreclosure notices, the perpetrators convince them that the loan was renegotiated, but that the lender needs a good faith payment to secure the new account.
Serial Property Flipping
Illegal property flipping continues to be a significant scam identified by both industry and law enforcement agencies. Perpetrators are taking advantage of the distressed housing market and repeatedly flipping the same property numerous times.
Short Sale Schemes – Modified
Short sale fraud schemes continue to be used in combination with foreclosure rescue schemes in an effort to victimize homeowners and financial institutions. Short-sale schemes are desirable to mortgage fraud perpetrators because they do not have to competitively bid on the properties they purchase, as they do for foreclosure sales. Perpetrators also use short sales to recycle properties for future mortgage fraud schemes. Short-sale fraud schemes are difficult to detect since the lender agrees to the transaction, and the incident is not reported to internal bank investigators or the authorities. As such, the extent of short sale fraud nationwide is unknown. 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. In a typical short sale scheme, the perpetrator uses a straw buyer to purchase a home for the purpose of defaulting on the mortgage. The mortgage is secured with fraudulent documentation and information regarding the straw buyer. Payments are not made on the property loan causing the mortgage to default. Prior to the foreclosure sale, the perpetrator offers to purchase the property from the lender in a short-sale agreement. The lender agrees without knowing that the short sale was premeditated. The mortgage owed on the property often equals or exceeds 100 percent of the property’s equity.
Perpetrators across the country are recruiting real estate agents and paying them referral fees for locating and soliciting homeowners undergoing foreclosure. Homeowners are entering into agreements with perpetrators deeding their property to them in the form of a land trust. The homeowner is listed as the beneficiary of the trust and the real estate agent is listed as the trustor. The perpetrators then negotiate a short sale with the lender. After the short sale, the real estate agent sells the property for a profit to another previously identified buyer, but the lender and the homeowner do not know this. In effect, the perpetrator sells the property for less than the mortgage and re-sells the property, often the next day, for a profit.
Sources for the FBI FY2008 Report
FinCEN. Established by the US Treasury Department, the Financial Crimes Enforcement Network’s mission is to enhance US national security, deter and detect criminal activity, and safeguard financial systems from abuse by promoting transparency in the US and International financial systems. In accordance with the Bank Secrecy Act, Suspicious Activity Reports, filed by various financial entities, are collected and managed by FinCEN and used in this report.
US Department of Housing and Urban Development – Office of Inspector General. HUD-OIG is charged with detecting and preventing waste, fraud, and abuse in relation to various HUD programs, such as single and multi-family housing. As part of this mission, HUD-OIG investigates mortgage fraud related waste, fraud, and abuse of HUD programs and operations.
Mortgage Asset Research Institute (MARI). MARI maintains the Mortgage Industry Data Exchange (MIDEX) data base which contains information submitted by major mortgage lenders, agencies and insurers describing incidents of alleged fraud and material misrepresentations. Also, MARI releases a report to the mortgage industry highlighting the geographical distribution of mortgage fraud based on these submissions, and subsequently ranks the states based on the MARI fraud Index (MFI) which also incorporates Home Mortgage Disclosure Act data provided by the MBA which is a key component of calculating a state’s MFI value. The MFI is an indication of the amount of mortgage fraud discovered through MIDEX subscriber fraud investigations in various geographical areas within a particular year relative to the amount of loans originated.41
Interthinx®. Interthinx® is a provider of proven risk mitigation and regulatory compliance tools for the financial services industry. Data from Interthinx® fraud detection tools (DISSCO and FraudGUARD®) include nearly 2 million loan applications from more than 2,000 mortgage originators and loan purchasers nationally. Loans are flagged for possible fraudulent activity and scored as “Investigate” or “Critical Risk” if they demonstrate high impact variances in employment/income, identity, occupancy, straw-buyer, property valuation, or property flipping. More than 24 percent of loans submitted to Interthinx® mortgage fraud detection tools during 2008 had at least one high impact variance in one of these categories.
Fannie Mae. Fannie Mae is the nation’s largest mortgage investor. To aid in mortgage fraud prevention and detection, the company publishes a mortgage fraud newsletter that includes information concerning misrepresentations discovered in loan files.
Radian Guaranty, Inc. Radian is a leading provider of mortgage insurance which provides coverage that protects lenders against borrower loan default.
RealtyTrac. RealtyTrac is the leading real estate marketplace for foreclosure properties and publishes the country’s largest most comprehensive foreclosure database, with more than 1.5 million default, auction, and bank-owned homes from across the country covering 90 percent of all US households.
Mortgage Bankers Association. The Mortgage Bankers Association is the national association representing the real estate finance industry. The MBA is a good source of information for regulatory, legislative, market, and industry data.
To get more details on the FBI report, go to the FBI website