If the deal sounds too good to be true, it probably is
It's not hard to guess why. Just like our shoes and our pizza, we want choice, we want it fast and we want it for less. Lenders, in response to consumer demands have developed new and creative loan products, instituted automated processes and rely more heavily on third party entities with no first-hand knowledge of the property, borrower or seller in a transaction.
While these efforts have enabled lenders to offer greater choice and respond more quickly, they are also providing fraudsters more opportunities to cheat the system.
Mortgage fraud schemes have become more complex, involving multiple transactions and numerous individuals, often fictitious individuals, including industry professional who assist in the loan application process.
The Mortgage Bankers Association estimated that more than $2.5 trillion in mortgage loans were generated in 2005. The actual amount of money lost to mortgage fraud each year is unknown largely because no central organization collects mortgage fraud data. However, the mortgage industry estimates that 10-15 percent of the mortgage loans processed annually involved some fraud.
According to the 2006 report from the Mortgage Asset Research Institute (MARI), Ohio is one of the top ten states experiencing mortgage fraud.
Mortgage Fraud Investigations
The FBI compiles data on mortgage fraud through Suspicious Activity Reports (SARs) filed by federally-insured financial institutions, and Department of Housing and Urban Development Office of Inspector General (HUD-OIG) reports. The FBI also receives complaints from the mortgage industry at large.
Mortgage fraud nationwide has more than doubled in the last five years. There were 21,994 SARs filed in 2005 (up from 17,127 in Fiscal Year 2004). Losses in 2005 totaled $1,014,000,000 (up from $429,000,000 in Fiscal Year 2004).
FY 2002 -- approximately 200 MF cases
FY 2003 -- 436 MF cases
FY 2004 -- 533 MF cases
FY 2005 -- 721 MF cases
FY 2006 -- 817 MF cases
The FBI investigates mortgage fraud in two distinct areas: Fraud for Profit and Fraud for Housing.
- Fraud for Housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding their income or employment history to qualify for a loan.
- Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. There are generally multiple loan transactions with several financial institutions involved.
Typical Fraud Schemes
Property Flips
These frauds include numerous gross misrepresentations including overstated income, assets, collateral, length of employment or fictitious employment. The borrower's debts are not fully disclosed, nor is the borrower's credit history, which is often altered. Often, the borrower assumes the identity of another person (straw buyer).
The borrower states he intends to use the property for occupancy when he/she intends to use the property for rental income, or is purchasing the property for another party (nominee). Appraisals almost always list the property as owner-occupied.
Down payments do not exist or are borrowed and disguised with a fraudulent gift letter. The property value is inflated (faulty appraisal) to increase the sales value to make up for no down payment and to generate cash proceeds in fraud for profit.
Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.
Although there are many mortgage fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders.
Typical Fraud Schemes
The most common scheme involves flipping where the property is purchased, falsely appraised at a higher value, and then quickly resold. What makes property flipping illegal is that the appraisal information is fraudulent. The schemes typically involve fraudulent appraisals, doctored loan documents, and inflation of the buyer's income. Kickbacks to buyers, investors, property/loan brokers, appraisers, title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.
Shotgunning
There are two types of shotgunning schemes. The first is that a property owner applies for home equity loans with multiple lenders at the same time. As lenders don't all report into the same credit bureau, they may not be aware the same owner had simultaneously applied elsewhere as well.
The second shotgunning scheme involves multiple sales of the same house. In this case, the same `owner'-- who may not even be the rightful owner -- sells the same property simultaneously to several unsuspecting buyers. As each buyer uses a different lender and title company, this scheme can be very difficult to detect.
Air Loans
These are non-existent property loans where there is usually no collateral. An example would be where a broker invents borrowers and properties, establishes account for payments and maintains custodial accounts for escrows. They may set up an office with a bank of telephones each one used as the employer, appraiser, credit agency, etc. for verification purposes.
Silent Seconds
The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.
Equity Skimming
An investor may use a straw buyer, false income documents and false credit reports to obtain a mortgage loan in the straw buyer's name. Subsequent to closing the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.
Air Loans
These are non-existent property loans where there is usually no collateral. An example would be where a broker invents borrowers and properties, establishes account for payments and maintains custodial accounts for escrows. They may set up an office with a bank of telephones each one used as the employer, appraiser, credit agency, etc. for verification purposes.
Silent Seconds
The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.
Equity Skimming
An investor may use a straw buyer, false income documents and false credit reports to obtain a mortgage loan in the straw buyer's name. Subsequent to closing the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.
Foreclosure schemes
The perpetrator identifies homeowners who are a risk of defaulting on loans or whose houses are already in foreclosure. Subjects mislead the homeowner into believing that they can save their homes in exchange for a transfer of the deed and upfront fees. The subject profits from these schemes by re-mortgaging the property or pocketing the fees paid by the homeowner.
Nominee Loans
The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee's name and credit history to apply for a loan.
Straw Buyers (also referred to as the Victim Borrower Scheme)
Unqualified buyers are recruited and convinced through various misrepresentations that they can make easy money through the purchase and resale of a home. The buyer, who is usually paid a nominal fee to consummate the transaction, believes the property will be resold quickly and he/she will not have responsibility for the mortgage -- only to find out later they are saddled with the property, the mortgage payment, the property taxes, and the problems associated with foreclosure.
Inflated/Faulty Appraisals
An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.
Fictitious/Stolen Identity A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant's name, personal identifying information and credit history are used without the true person's knowledge.
Who pays the price? Everyone.
Without question, lenders and investors are hit hard by the significant losses. As a result, the consumer ends up paying higher loan rates and fees. And sellers suffer whenever buyers are hindered.
Borrowers who purchase a home that has been flipped, and individuals whose mortgage application has been altered by a broker or other professional often end up losing their home to foreclosure, while others lose down payments and/or their credit is ruined.
Lenders and investors with properties in neighborhoods affected by real estate fraud can suffer collateral losses, including deteriorating property values.
As with other lenders and investors, the property values of neighbors may decline as a result of foreclosures in a neighborhood.
Urban blight from abandoned properties often imposes a greater pull on services such as fire and police, exacerbating city budget constraints caused by a reduced tax base as a result of reduced property values.
And finally, legitimate lending professionals, appraisers and real estate agents bear the public's perception of guilt by association.
What can you do if you suspect mortgage fraud?
Contact the FBI at (614) 224-1183.
Even if it seems too little to be of consequence -- Due to the sheer volume of mortgage fraud cases, the FBI will focus on higher end losses (i.e. higher dollar loan amounts). However, they still want to know about suspicious activity involving average loan amounts as they could be just one of many fraudulent loans involving the same individuals (i.e. a conspiracy).
Contact them early -- an investigation is labor intensive and takes time. By the time most complaints are filed, the guilty parties are long gone. The earlier they find out about a possible mortgage fraud, the better chance they have of catching the guilty parties.
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