PROSECUTING MORTGAGE FRAUD

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1 PROSECUTING MORTGAGE FRAUD JAMES R. BUCHANAN Assistant United States Attorney Chief, Fraud Section Southern District of Texas 713/ State Bar of Texas 30 TH ANNUAL ADVANCED REAL ESTATE LAW COURSE July 10 12, 2008 San Antonio CHAPTER 2

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3 JAMES BUCHANAN Assistant United States Attorney A career prosecutor, Jim Buchanan served as an Assistant District Attorney for Harris County, (Houston) Texas for 11 years and has been an Assistant United States Attorney since As an A.U.S.A., Jim has served as a white collar crimes prosecutor, an Organized Crime Strike Force prosecutor, and as Chief of the Violent Offenders Group. He is currently assigned as the Chief of the White Collar Enforcement Group where he supervises 15 attorneys involved in the prosecution of complex fraud cases, including health care fraud, bank fraud, wire fraud, mail fraud, corporate and securities fraud, tax fraud, and mortgage fraud. He currently serves as the Chair of both the Department of Justice Securities Fraud Task Force and the Procurement Fraud Task Force for the Southern District of Texas In 2002, U.S. Attorney General John Ashcroft presented Jim with the Attorney General=s Award for Fraud Prevention for his work prosecuting Nigerian Organized Crime. In 1998, he received the Director=s Award from Attorney General Janet Reno for his prosecution of insurance / health care fraud in South Texas. Texas. He has served as the chairman of the Government Lawyer=s Section of the State Bar of From , he served as the Director of the Attorney General=s Nigerian Crime Initiative for the Southern District of Texas. He has taught federal agents, local law enforcement and private investigators, and has traveled to Europe to lecture on prosecuting organized criminal activity. He also serves as an adjunct professor at the College of Criminal Justice at Sam Houston State University. An experienced trial attorney, Mr. Buchanan has been lead prosecutor in over 100 jury trials ranging from simple forgery to capital murder to organized crime.

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5 Prosecuting Mortgage Fraud Chapter 2 PROSECUTING MORTGAGE FRAUD James R. Buchanan Chief, Fraud Section Southern District of Texas Mortgage Industry is key to our growing economy! Home ownership is the great American Dream Over $3 trillion in mortgages originated in 2006, including refinancing. 1

6 Prosecuting Mortgage Fraud Chapter 2 In 2007, the mortgage industry estimated more than $60 billion in fraudulent mortgage loans were processed, resulting in $4 - $6 billion in losses. According to the mortgage industry and the F.B.I., that number is growing! For the fiscal year ending 9/30/07, the F.B.I. received over 46,000 SARs of mortgage fraud. In 2003, only 6900 reports of mortgage fraud. As of May, 2008, there were 1380 active FBI mortgage fraud investigations. Doesn t include investigations by other federal agencies or State authorities. 2

7 Prosecuting Mortgage Fraud Chapter 2 Top Ten Hot Spots Florida Nevada Michigan California Utah Georgia Virginia Illinois New York Minnesota The next savings & loan crisis? In the late- 1980s, many S&Ls failed because of Poor Management Risky loans Riskier investments FRAUD Cost to taxpayers? - $132 billion 3

8 Prosecuting Mortgage Fraud Chapter 2 Consequences? Typical mortgage fraud flipping scheme Property is quickly sold & resold At jacked up prices (inflated appraisals) Result: The ultimate buyer is left with a home that is less valuable than the loan amount. Buyer walks, loan defaults Property is abandoned and lender forecloses Property becomes neglected Surrounding property loses value Criminals move in Drugs Prostitution Auto theft rings 4

9 Prosecuting Mortgage Fraud Chapter 2 Every mortgage fraud scheme will have two things in common A material misrepresentation or omission which is relied upon by the underwriter or lender to fund, purchase, or insure the loan. GREED Mortgage Fraud Indicators Inflated Appraisals Exclusive use of one appraiser Increased Commissions/Bonuses Bonuses paid for fee-based services Higher than customary fees Falsification on loan applications Buyers are told how to falsify mortgage apps. Buyers requested to sign blank apps. 5

10 Prosecuting Mortgage Fraud Chapter 2 Mortgage Fraud Indicators Fake Supporting Loan Documentation Buyers sign blank employee or bank account verifications Purchase Loan disguised as Refinance Less documentation, less lender scrutiny Investment w/ Guaranteed Re-Purchase Used to flip properties Often involves multiple holding companies Participants include... Loan brokers Loan originators R.E. owners R.E. investors Home builders Home improvement contractors Accountants Lawyers Bank employees Credit officers Appraisers Closing agents Title Co. employees 6

11 Prosecuting Mortgage Fraud Chapter 2 Common Mortgage Fraud Schemes Property Flipping: Property purchased, falsely appraised, quickly resold Fraudulent appraisal Doctored loan documentation Kickbacks to buyers, appraisers, and title company employees Common Mortgage Fraud Schemes Silent Second Buyer borrows the down payment from the seller Non-disclosed 2 nd mortgage Loan docs lead lender to believe buyer has invested his own money in the down payment 7

12 Prosecuting Mortgage Fraud Chapter 2 Common Mortgage Fraud Schemes Nominee Loans / Straw Buyers True identity of the borrower is concealed from the lender through the use of a nominee borrower Borrower uses the name, d.o.b., and credit history of the nominee to apply for a mortgage loan for which he otherwise would not qualify Common Mortgage Fraud Schemes Fictitious / Stolen Identities A fraudulent or stolen identity is used on the loan application Name, Personal Identifying Information (PII) and SSN are used without the owner s knowledge 8

13 Prosecuting Mortgage Fraud Chapter 2 Common Mortgage Fraud Schemes Foreclosure schemes Actor identifies homeowners at risk of defaulting or already in foreclosure Actor misleads homeowner into believing they can save their homes in return for Transfer of deed d Up front fees Actor remortgages the home & pockets the fees Recent federal prosecutions GHANDI BEN MORKA (Dallas) A real estate appraiser who participated in a scheme to recruit straw buyers, submit fraudulent applications, and inflate appraisals of the properties to be purchased Defrauded Countrywide of more than $2.3 million 1/23/08, sentenced to 60 months in federal prison 9

14 Prosecuting Mortgage Fraud Chapter 2 Federal Prosecutions, cont. LAWRENCE BENHAM (Houston) Recruited nominee borrowers to submit mortgage loan applications on which he exaggerated income Inflated property appraisals At closing, siphoned off $1.5 million to accounts under his control Sentenced to 97 months in federal prison Federal prosecutions, cont. MICHAEL HARRIS & MARJORIE FORD (Houston) Harris recruited investors who applied for new home loans using false information Used Ford, an escrow agent, to close the loans Submitted invoices at closing for work never done on the properties Ford created multiple HUD-1s by Xeroxing the signature page 10

15 Prosecuting Mortgage Fraud Chapter 2 Federal Prosecutions, cont. HARRIS & FORD Both were caught when an investor agreed to wear a wire to the closing Harris pleaded guilty, testified against Ford, was sentenced to 25 months federal prison Ford was convicted by a federal jury, sentenced to 71 months in prison Federal prosecutions, cont. JOHN TURNER (Houston) Licensed RE Agent Skimmed $2 million from 44 residential property closings using shell companies Submitted invoices for work never performed at the residences Awaiting sentencing 11

16 Prosecuting Mortgage Fraud Chapter 2 Federal prosecutions cont. U.S. v. GOODSON, TARRANCE, & BOOTH (Houston) R.E. Broker Goodson recruited straw buyers Builder Tarrance inflated the price of the homes and kicked back money to Goodson & Booth Loan Officer Booth made the fraudulent loans All three convicted in a scheme that caused $11 million in losses & awaiting sentencing Federal prosecutions cont. RICHARD BELL (Houston) Real Estate Developer in Clear Lake Made false statements to FDIC insured banks to obtain RE loans Submitted false tax returns and financials as proof of his inflated net worth Pleaded guilty to bank fraud and money laundering Awaiting sentencing 12

17 Prosecuting Mortgage Fraud Chapter 2 Federal prosecutions, cont. U.S. v. RAYBON et. al. (Houston) Nine defendants charged, including owners, appraisers, brokers and closers Closing transactions on manufactured homes as refinancing instead of new loans Engaged in pre-closing transaction to vest title in the buyer Then, did a 100% refinance at an inflated price Federal prosecutions, cont. U.S. v. Charles Head, et. al. (Sacramento) Nineteen people charged in a foreclosure scam Convinced struggling homeowners with resetting ARMs to add an investor to their home s title Homeowners believed they were paying rent to investor Head and others would refinance the home under the investor s name & walk away with any equity 155 homeowners, 22 states, $13 million fraud Awaiting trial 13

18 Prosecuting Mortgage Fraud Chapter 2 Federal prosecutions, cont. Greensboro, N.C., July businessmen & a real estate attorney were indicted by a federal grand jury on charges of wire fraud & mail fraud Properties purchased in the names of straw borrowers False applications, inflated appraisals, double closings Federal Statutes Conspiracy Title 18, U.S.C. 371 Mail fraud/wire fraud Title 18, U.S.C & 1343 Bank fraud Title 18, U.S.C False statement to obtain credit, Title 18, U.S.C Aggravated Identity Theft Title 18, USC U.S.C Money Laundering Title 18, U.S.C

19 Prosecuting Mortgage Fraud Chapter 2 Conspiracy Allows us to bring all players into the courtroom Does not require the successful completion of the criminal activity A person commits an offense if he and at least one other person make an agreement to commit a federal offense and one of the conspirators does an act in furtherance of the agreement. Mail fraud / Wire fraud A person commits an offense if he executes or attempts to execute a scheme or artifice to defraud, And the scheme or artifice involves the use of the mail or interstate wire communications Maximum 20 year sentence 15

20 Prosecuting Mortgage Fraud Chapter 2 Bank fraud A person commits an offense if he executes or attempts to execute a scheme or artifice to defraud, A federally insured financial institution 30 year maximum sentence False statement to obtain credit A person commits an offense if he makes a false statement for the purpose of influencing a federally insured financial institution to make or renew a loan Includes overvaluing collateral, false name, inflated income, or material omission 30 year maximum sentence 16

21 Prosecuting Mortgage Fraud Chapter 2 Aggravated Identity theft A person commits an offense if he intentionally and without lawful authority uses a means of identification of another person in relation to certain enumerated offenses (includes wire, mail, & bank fraud) Mandatory 2 year sentence stacked on any sentence for the underlying offense Money laundering Not just for drug cases anymore! A person commits an offense if he engages in a financial transaction with proceeds of specified unlawful activity when the defendant knows the funds were the proceeds of unlawful activity and the purpose of the transaction is to conceal the source or ownership of the funds or to promote the criminal activity 17

22 Prosecuting Mortgage Fraud Chapter 2 To prosecute a case, we need Bank records Title company closing files Lender files Spreadsheets and charts Witnesses who aren t too busy to come testify How can you help? Institute a mandatory system of reporting fraudulent activities Seriously scrutinize loans for properties where the sellers have held title for less than 90 days ZERO TOLERANCE Call us! 18

23 Prosecuting Mortgage Fraud Chapter 2 James R. Buchanan Assistant United States Attorney Chief, Fraud Section Southern District of Texas 713/

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31 PROSECUTING MORTGAGE FRAUD ADDENDUM JAMES R. BUCHANAN Assistant United States Attorney Chief, Fraud Section Southern District of Texas 713/ State Bar of Texas 30 TH ANNUAL ADVANCED REAL ESTATE LAW COURSE July 10 12, 2008 San Antonio CHAPTER 2

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