Mortgage Fraud and Consumer Protection Law

Transcription

1 Module 8 Module 8 Mortgage Fraud and

2 Explanation: This pdf is only a copy of the module slides. To proceed through the course, you must read and click through each slide.

3 Mortgage Fraud The Fraud Enforcement and Recovery Act of 2009 For many years mortgage lenders not regulated or insured by the federal government and were not subject to prosecution under federal fraud laws. The subprime crisis increased in the number of federal investigations into mortgage fraud and fostered the enhancement of the government s enforcement powers to create a law applicable to the entire mortgage industry. As a result of this effort, the Fraud Enforcement and Recovery Act (FERA) was introduced in Congress in February 2009 and signed into law by President Obama on May 20, FERA strengthens the capacity of federal prosecutors and regulators to hold accountable those who have committed fraud. The amendments expand the Department of Justice s authority to prosecute crimes involving mortgage fraud. Convictions for mortgage fraud can carry a 30 year maximum prison sentence or a maximum $1 million fine, or both. Even more significantly, mortgage fraud cases will now have a 10 year statute of limitations, as opposed to the 5 year statute of limitations for other frauds, which will give federal prosecutors much more time to develop such cases.

4 Mortgage Fraud The Fraud Enforcement and Recovery Act of 2009 FERA provides nearly a half of billion dollars in additional funding to the FBI, Justice Department and other federal agencies to investigate and prosecute financial fraud, including mortgage fraud. Some of the highlights of the new Act include: Amending the definition of financial institution in Title 18 of the US Code (i.e. the federal fraud laws) to include mortgage lending businesses, which are defined as organizations which finances or refinances any debt secured by an interest in real estate, including private mortgage companies and any subsidiaries of such organizations, and whose activities affect interstate or foreign commerce. Extending the reach of the false statements in mortgage loan application statute (18 USC 1014) to include material false statements and willful property overvaluations used to influence any action by a mortgage lending business. 18 U.S.C. 1014, which makes it a federal offense to falsify loan documents submitted to a broad range of financial institutions, is amended to include mortgage lending businesses in that range, and for good measure also includes any other person that makes in whole or in part a federally related mortgage loan. Amending the federal criminal money laundering statute (18 USC 1856) to change the definition of proceeds to include not only the profits from the illegal activity, but also the gross receipts.

5 Mortgage Fraud The Fraud Enforcement and Recovery Act of 2009 The Fraud Enforcement and Recovery Act expands federal fraud laws to encompass independent mortgage companies, which in the past were are not covered by antifraud statutes that apply to traditional banks. Such independent mortgage companies originated approximately half of all subprime loans in 2005 and Reckless and fraudulent lending practices, permitted by lax regulation and regulators asleep at the switch, were a leading cause of the mortgage crisis that put millions homeowners at risk of losing their homes. Approximately half of the subprime loans originated in 2005 and 2006 were made by independent mortgage companies which were less regulated than traditional bank lenders. Operating beneath the radar, these mortgage companies issued abusive mortgages that often targeted the aspiring households. The Fraud Enforcement and Recovery Act strengthens protections against the worst abuses by independent mortgage companies, such as inflated appraisals and other fraudulent activities. Investigators and prosecutors at all levels of government are now sufficiently armed with the tools necessary to investigate and prosecute mortgage fraud, financial fraud, and related crimes.

6 Where Are We Now The Fraud Enforcement and Recovery Act expands federal fraud laws to : a. regulate Federal depository lenders only. b. encompass independent mortgage companies. c. prohibit lenders from originating subprime loans. d. Provide assistant for victims of mortgage fraud. The Fraud Enforcement and Recovery Act expands federal fraud laws to encompass independent mortgage companies, which in the past were are not covered by antifraud statutes that apply to traditional banks. Such independent mortgage companies originated approximately half of all subprime loans in 2005 and 2006.

7 Mortgage Fraud Mortgage Loan Origination Fraud 2010 Trends Mortgage fraud is a material misstatement, misrepresentation, or omission relied on by an underwriter or lender to fund, purchase, or insures a loan. This type of fraud is usually defined as loan origination fraud. Mortgage fraud remained elevated in 2010 despite modest improvements in various economic sectors and increased vigilance by financial institutions to mitigate it. 7 The FBI reported: 8 Mortgage fraud continued at elevated levels in 2010, consistent with levels seen in Mortgage fraud schemes are particularly resilient, and they readily adapt to economic changes and modifications in lending practices. Mortgage fraud perpetrators include licensed/registered and non licensed/registered mortgage, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, and trust account representatives. 7 Federal Bureau of Investigations, Publications, 2010 Mortgage Fraud Report Year in Review, Washington: ibid.

8 Mortgage Fraud Mortgage Loan Origination Fraud 2010 Trends (Continued) Total dollar losses directly attributed to mortgage fraud are unknown. A continued decrease in loan originations from 2009 to 2010 (and expected through 2012), high levels of unemployment and housing inventory, lower housing prices, and an increase in defaults and foreclosures dominated the housing market in RealtyTrac reported 2.9 million foreclosures in 2010, representing a 2 percent increase in foreclosures since 2009 and a 23 percent increase since Analysis of available law enforcement and industry data indicates the top states for known or suspected mortgage fraud activity during 2010 were California, Florida, New York, Illinois, Nevada, Arizona, Michigan, Texas, Georgia, Maryland, and New Jersey; reflecting the same demographic market affected by mortgage fraud in 2009.

9 Mortgage Fraud Mortgage Loan Origination Fraud 2010 Trends (Continued) Prevalent mortgage fraud schemes reported by law enforcement and industry in FY 2010 included loan origination, foreclosure rescue, real estate investment, equity skimming, short sale, illegal property flipping, title/escrow/settlement, commercial loan, and builder bailout schemes. Home equity line of credit (HELOC), reverse mortgage fraud, and fraud involving loan modifications are still a concern for law enforcement and industry. With elevated levels of mortgage fraud, the FBI has continued to dedicate significant resources to the threat. In June 2010, the Department of Justice (DOJ), to include the FBI, announced a mortgage fraud takedown referred to as Operation Stolen Dreams. The takedown targeted mortgage fraudsters throughout the country and was the largest collective enforcement effort ever brought to bear in combating mortgage fraud.

10 Mortgage Fraud Mortgage Loan Origination Fraud 2010 Trends (Continued) The current and continuing depressed housing market will likely remain an attractive environment for mortgage fraud perpetrators who will continue to seek new methods to circumvent loopholes and gaps in the mortgage lending market. These methods will likely remain effective in the near term, as the housing market is anticipated to remain stagnant through Mortgage Fraud Perpetrators Mortgage fraud enables perpetrators to earn high profits through illicit activity that poses a relative low risk for discovery. Mortgage fraud perpetrators include licensed/registered and non licensed/registered mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, and trust account representatives. Source: Federal Bureau of Investigations, Publications, 2010 Mortgage Fraud Report Year in Review, Washington: 2010

11 Mortgage Fraud Perpetrators (continued) Mortgage fraud perpetrators using their experience in the banking and mortgage related industries including construction, finance, appraisal, brokerage, sales, law, and business exploit vulnerabilities in the mortgage and banking sectors to conduct multifaceted mortgage fraud schemes. Mortgage fraud perpetrators have a high level of access to financial documents, systems, mortgage origination software, notary seals, and professional licensure information necessary to commit mortgage fraud and have demonstrated their ability to adapt to changes in legislation and mortgage lending regulations to modify existing schemes or create new ones. Mortgage fraud perpetrators target victims from across a demographic range, with perpetrators identifying common characteristics such as ethnicity, nationality, age, and socioeconomic variables, to include occupation, education, and income. They recruit people who have access to tools that enable them to falsify bank statements, produce deposit verifications on bank letterhead, originate loans by falsifying income levels, engage in the illegal transfer of property, produce fraudulent tax return documents, and engage in various other forms of fraudulent activities. Mortgage fraud perpetrators have been known to recruit ethnic community members as co conspirators and victims to participate in mortgage loan origination fraud.

12 Fannie Mae report on Fraud (continued) In 2010 Fannie Mae reported the occurrence of loan origination fraud in the form of affinity fraud, reverse mortgages, condo conversion, and multi family fraud schemes and stated that Fannie Mae is witnessing a shift in loan origination fraud from the Southeast to the Northeast. Servicing fraud reported by Fannie Mae includes short sale fraud, fraud involving REOs, and loan modifications. Current reverse mortgage fraud schemes reported by Fannie Mae include the use of asset misrepresentation, occupancy fraud, and identity theft. Condo conversions currently represent 14 percent of Fannie Mae's mortgage fraud investigations. Fraudsters are using payment abatements to delay defaults, inflated property values, and failure to disclose debt. In a majority of these schemes, the fraudsters made payments before defaulting. Fraud involving multi family properties includes valuation fraud, in which fraudsters misrepresent the condition of the rehabilitated units or factor in incomplete renovations perpetrators divert funds to their own companies but do not complete the renovations. Perpetrators are also falsifying occupancy rates on their rent rolls and flipping properties to non arms length purchasers. Source: FBI; Electronic Communication;19 April 2011; 28 March 2011; Hot Topics and Emerging Issues in Fraud; UNCLASSIFIED; UNCLASSIFIED; Source is presentation at the 28 March 2011 Mortgage Banker s Association National Fraud Issues Conference.

13 Where Are We Now? The FBI has continued to dedicate significant resources to the mortgage fraud threat. In June 2010, the Department of Justice (DOJ), and the FBI, announced a mortgage fraud enforcement effort referred to as: a. Operation Stolen Dreams. b. Operation Fundamental Fraud c. Project Smoke and Mirrors d. Fraud Scheme 2010 With elevated levels of mortgage fraud, the FBI has continued to dedicate significant resources to the threat. In June 2010, the Department of Justice (DOJ), to include the FBI, announced a mortgage fraud takedown referred to as Operation Stolen Dreams. The takedown targeted mortgage fraudsters throughout the country and was the largest collective enforcement effort ever brought to bear in combating mortgage fraud.

14 Fannie Mae Report on Fraud (continued) Fannie Mae s top 10 mortgage fraud states based on significant misrepresentations discovered by the loan review process through the end of December 2010 were California, New York, Florida, Illinois, Texas, New Jersey, Arizona, Georgia, Alabama, and Michigan. According to Fannie Mae, short sale, foreclosure rescue, and real estate owned (REO) sales fraud continue to thrive as a result of the opportunities created by defaulting markets. For example, Fannie Mae is investigating fraud schemes perpetrated by real estate agents who manipulate Multiple Listing Services (MLS) data to bolster sagging sales prices. Fannie Mae continues to investigate REO flipping involving real estate agents who withhold competitive offers on REO properties so that they can control the acquisition and subsequent flip.

15 Mortgage Fraud Types of Mortgage Fraud Mortgage loan origination fraud is divided into three categories: Fraud for housing Fraud for profit Fraud for criminal purposes

16 Mortgage Fraud Fraud for Housing Fraud for housing is a misrepresentation and/or concealment made by a borrower or other party in order to qualify for a mortgage loan. The applicant may understate expenses, disguise the source of the down payment, alter or falsify a tax return, or misrepresent employment in order to qualify for the loan. Generally, the borrower intends to make the loan payments and does not have a profit motive. An appraiser, loan originator, builder, financial advisor, or other participant attempting to help the new homebuyer, may assist in the fraud by inflating a value or by omitting/understating expenses. While these frauds may seem harmless, investors such as Freddie Mac, Fannie Mae, or Ginnie Mae may discover the fraud and demand that the originating lender repurchase the unpaid principal balance of the loan or compensate the investor for liquidation costs on foreclosed properties. Once detected, a simple misrepresentation can have large consequences for the originator, seller, or investor.

17 Mortgage Fraud An example of fraud for housing: 9 Alaskan Woman Sentenced for Loan Application Misrepresentations (September 2007,Anchorage, Alaska) In this case, the defendant committed bank fraud by providing false information to the mortgage lender in an attempt to obtain a home mortgage. To obtain a loan, the defendant, claiming to be employed, submitted a pay stub to document the amount of income she allegedly earned. It was later learned that she had been terminated from her employer for unlawfully transferring funds to her personal bank account. The woman was sentenced in federal court to 37 months in prison on one count of forgery, one count of computer fraud and one count of bank fraud. 9 Emerging Fraud Trends, < 15k

18 Mortgage Fraud Common themes of fraud for housing schemes: 10 Individual involved may include the borrower and/or loan officer Normally involves a single loan Contains loan level misrepresentations to qualify Borrower intends to repay the loan usually does not default The appraised value is not typically inflated at origination 10 ibid.

19 Mortgage Fraud Fraud for Profit The second motive, fraud for profit, is a major concern for the mortgage lending industry. It often results in larger losses per transaction and usually involves multiple transactions. These schemes are frequently well planned and organized. There may also be intent to default on the loan when the profit from the scheme has been realized. Multiple loans and people may be involved and participants, who are often paid for their involvement, do not necessarily have knowledge of the whole scheme. Fraud for profit can take many forms including: Receipt of an undisclosed or unusually high commission or fee, Representation of investment property as owner occupied since lenders usually offer more favorable terms on owner occupied properties, Sale of an otherwise unsalable piece of property by concealing undesirable traits, such as environmental contamination, easements, building restrictions, etc.,

20 Mortgage Fraud Fraud for Profit (Continued) Attainment of a new loan to redeem a property from foreclosure to relieve a burdensome debt, Rapid buildup of a RE portfolio with an inflated value to perpetrate a land flip scheme, Mortgage of rental RE with the intention of collecting rents and not making payments to the lender, retaining funds for personal use, The advance of loan approvals for customers to benefit from the commission payments, and/or Misrepresentation of personal identity, i.e., use of illegally acquired social security numbers, to illegally obtain a loan, or to sell/take cash out of equity on a property with no intention of repaying the debt.

21 Module 8: Mortgage Fraud and Mortgage Fraud An example of fraud for profit 11 Thirty one Defendants Charged in Massive Mortgage Fraud Scheme (December 2007, Miami, Florida) This scheme involved fraudulent mortgage loans obtained for the purchase of 27 properties located throughout southern Florida. According to the indictment, the scheme involved sellers of residential properties who were willing to overstate the true selling price of their properties, and straw buyers who were paid to participate in the fraudulent purchase of the selected properties. The loan officers involved submitted fraudulent mortgage loan applications, which included false employment verifications, pay stubs, income and funds on deposit, and IRS Forms W 2. Additionally, to support the overstated sales prices on the properties and the fraudulent mortgage applications for the straw buyers, fraudulent appraisals attesting to the inflated property values were prepared. False settlement statements/hud 1s were created to conceal from the lender the existence of the credit given to the buyer from the seller, and the alleged funds provided by the straw borrower. 11 ibid.

22 Mortgage Fraud Common themes of fraud for profit schemes 12 Often involves multiple industry professionals/insiders Fraud is committed throughout multiple transactions Includes numerous misrepresentations and omissions The borrowers involved may be unaware of the scheme Participants are often well compensated for the role they played Property appraisals contain misrepresentations or value issues Participants may include straw borrowers who do not intend to repay the loan Fraud for criminal purposes 12 ibid.

23 Mortgage Fraud Fraud for Criminal Purposes The third motive, which involves additional criminal purposes beyond fraud, is becoming more of a concern for law enforcement and lenders. This involves taking the profit motive one step further by applying the illegally obtained funds or assets to other crimes, such as: Money laundering through purchase of RE, most likely with cash, at inflated prices, Terrorist activities such as the purchase of terrorist safe houses and, Other illegal activities like prostitution, drug sales or use, counterfeiting, smuggling, false document production and resale, auto chop shops, etc.

24 Mortgage Fraud An example of fraud for criminal purposes: 13 St. Louis Man Sentenced to Almost 25 Years in $4.5 Million Cocaine Trafficking and Mortgage Fraud (March 2005, St Louis, Missouri) In this case it was determined that the defendant attempted to launder the proceeds of his drug activity by using cash to invest in real estate. In one instance, he delivered more than $500,000 to a mortgage broker for real estate investments. The defendant was sentenced to six years in prison, and three years of supervised release for conspiracy to distribute drugs and conspiracy to engage in money laundering. 13 ibid.

25 Mortgage Fraud Common themes of fraud for criminal enterprise schemes 14 Perpetrators of this type of fraud often include members of crime organizations who temporarily conceal the identity, source and/or destination of money by laundering it through real estate transactions. This includes three basic steps of money laundering: Placement placing large amounts of illegally obtained funds into the financial system by virtue of mortgage fraud Layering buying properties with dirty money and reselling them without intent to inflate value Integration requesting the refund of principal reduction payments Property flipping is the fraud scheme commonly employed 14 ibid.

26 Where Are We Now? A misrepresentation and/or concealment made by a borrower or other party in order to qualify for a mortgage loan is called: a. Fraud for housing b. Fraud for profit c. Fraud for shelter d. Fraud for criminal purposes Fraud for housing is a misrepresentation and/or concealment made by a borrower or other party in order to qualify for a mortgage loan. The applicant may understate expenses, disguise the source of the down payment, alter or falsify a tax return, or misrepresent employment in order to qualify for the loan. Generally, the borrower intends to make the loan payments and does not have a profit motive.

27 Mortgage Fraud The FBI Defines Current Loan Origination Schemes 15 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. 15 Federal Bureau of Investigations, Publications, 2010 Mortgage Fraud Report Year in Review, Washington: 2010

28 Loan Origination Schemes 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. 46 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.

29 Mortgage Fraud 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.

30 Mortgage Fraud 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.

31 Mortgage Fraud Illegal Property Flipping (Continued) 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.

32 Mortgage Fraud Illegal Property Flipping (Continued) 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. 16 FBI; Electronic Communication;19 April 2011; 28 March 2011; The Full Fraud Solution; UNCLASSIFIED; UNCLASSIFIED; Source is presentation at the 28 March 2011 Mortgage Banker s Association National Fraud Issues Conference. 17 CoreLogic, 2011 Short Sale Research Study, May 2011,

33 Mortgage Fraud Title/Escrow/Settlement Fraud/Non Satisfaction of Mortgage Scheme 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.

34 Mortgage Fraud Title/Escrow/Settlement Fraud/Non Satisfaction of Mortgage (Continued) 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.

35 Mortgage Fraud 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.

36 Where Are We Now? What is a fraud scheme that is often very complex and involves the purchase and subsequent resale of property at greatly inflated prices.? a. Churning b. Chunking c. Loan Flipping d. 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.

37 Mortgage Fraud 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 In June 2010, Freddie Mac reported that short sale transactions were up 700 percent compared to CoreLogic, 2011 Short Sale Research Study, May 2011,

38 Mortgage Fraud Short Sale Schemes (Continued) 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; 19 using LLCs to hide their involvement in short sale transactions; 20 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 21 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, 22 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, 23 providing false estimates of repair, rebuttal of appraisal, and selection of poor comparable properties, 24 and facilitating the partnership of attorneys with non attorneys to split fees acquired during short sale negotiations , 20, 21, 22, 23, 24, 25 FBI; Electronic Communication;19 April 2011; 28 March 2011; UNCLASSIFIED; UNCLASSIFIED; Source is presentation at the 28 March 2011 Mortgage Banker s Association National Fraud Issues Conference.

39 Mortgage Fraud Foreclosure Rescue 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.

40 Mortgage Fraud Foreclosure Rescue (Continued) Financial industry reporting indicates that foreclosure rescue schemes remain a current threat. 26 Analysis of FBI intelligence reporting indicates that foreclosure rescue schemes were the sixth highest reported mortgage fraud scheme in FY According to FBI case analysis, mortgage fraud foreclosure rescue investigations comprised 2 percent of all mortgage fraud cases opened in FY Internet site; Carrick Mollenkamp and Lingling Wei; To Fix Sour Property Deals, Lenders Extend and Pretend, The Wall Street Journal; 7 July 2010; URL; accessed on 25 April 2011; Source is for background.

41 Mortgage Fraud 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.

42 Where Are We Now What is the name of the mortgage fraud scheme that 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? a. Builder Bailout Scheme b. Title/Escrow/Settlement Fraud/Non Satisfaction of Mortgage Scheme c. Short Sale Scheme d. Backwards Application Scheme 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.

43 Mortgage Fraud 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.

44 Mortgage Fraud 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.

45 Mortgage Fraud 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.

46 Predatory Lending Predatory lending can take on different tactics, but simply put, it is any loan that is not in the best interest of the consumer. Predatory lenders take advantage of consumers by charging excessive fees, using deceptive practices and burdening consumers with debt they will never be able to repay. Because these lenders try to appeal to consumers who are new homebuyers or have credit problems, it s important to learn what predatory lending looks like and how to protect yourself. Predatory lenders tend to target certain types of borrowers. The targets include homeowners who have bad credit, lack financial management skills or need cash because of a financial crisis, Elderly, low income or minority homeowners are also at risk. Predatory Lending Practices The reach and effect of abusive practices by predatory lenders have increased along with the dramatic growth of the sub prime industry. The following are some of the more common predatory practices.

47 Financing Excessive Fees into Loans Predatory lenders often finance huge fees into loans, stripping thousands of dollars in hard earned equity and racking up additional interest in the future. Borrowers in predatory loans are routinely charged fees of just under 8% of the loan amount in fees, compared to the average 1% 2% assessed by banks to originate loans. Once the paperwork is signed and the rescission period expires, there is no way to get that equity back, and borrowers frequently lose up to $10,000 or $15,000 from their home while receiving little, if any, benefit from the refinancing. The damage is compounded at higher interest rates as borrowers often pay tremendous interest costs in the years it takes just to pay down the fees. Typically, the loan fees are kept below 8% in order to stay under the HOEPA fee threshold established by federal law, which would then require additional disclosures to the borrower and additional consumer protections. A couple with limited English speaking skills were convinced to refinance their mortgage and take a cash out of around $9,500. To do so, they were charged $10,368 in lender fees, plus another $927 in third party fees, which totaled around 8% of their loan amount of $145,259. They are now struggling to make their monthly payments, which, unlike their previous loan, do not include taxes and insurance.

48 Making Loans Without Regard to the Borrower s Ability to Pay Some predatory lenders make loans based solely on a homeowner s equity, even when it is obvious that the homeowner will not be able to afford their payments. For mortgage brokers, the motivation to engage in this kind of practice is a short sighted desire for the fees generated by the loan. Loan officers at mortgage companies may have similar motivations based on earning commissions, regardless of the consequence to the lender for which they work. For some lenders, especially when there is significant equity in a home, the motivation is the ultimate foreclosure on the house which can then be resold for a profit. A mortgage lender solicited a homeowner for a second mortgage to consolidate his debt. The new loan had a 13.4% interest and a monthly payment of $612, leaving him with a total housing payment of $1,257 a month. At the time that he received the loan, he was working at a plastic company and had gross earnings of $1,600 a month, meaning that his housing payment was 79% of his income. As would be expected, he has fallen behind on both of his payments and is facing foreclosure.

49 Negative Amortization In a negatively amortized loan, the borrower s payment does not cover all of the interest due, much less any principal. The result is that despite regularly making the required monthly payment, the borrower s loan balance increased every month and they lose, rather than build, equity. Many borrowers are not aware that they have a negative amortization loan and don t find out until they call the lender to inquire why their loan balance keeps going up. Predatory lenders use negative amortization to sell the borrower on the low payment, without making it clear that this payment will cause the principal to rise rather than fall. A homeowner with good credit received a $64,000 loan through a mortgage broker. The broker told her the loan would have an interest rate of 5.5% and a monthly payment of $363. However, she was not told that this was only a teaser rate and that the interest rate would increase and soon rise to 8.4%. Her monthly payment of $363, which was based on the teaser interest rate, remained the same even after the interest rate increased, and so did not cover all of the interest due. Thus, even when she makes her full payment, her principal amount increases. The homeowner was unaware that her loan contained these terms.

50 Where Are We Now? Predatory lending can take on different strategies, but simply put, it can be best described as any loan that is: a. not in the best interest of the lender b. designed to provide financing to consumer who would not qualify for a standard mortgage loan. c. not in the best interest of the consumer. d. one of the best performing products in the mortgage industry Predatory lending can take on different tactics, but simply put, it is any loan that is not in the best interest of the consumer. Predatory lenders take advantage of consumers by charging excessive fees, using deceptive practices and burdening consumers with debt they will never be able to repay.

51 Loan Flipping Flipping is a practice in which a lender, often through high pressure or deceptive sales tactics, encourages repeated refinancing by existing customers and tacks on thousands of dollars in additional fees or other charges each time. Some lenders will intentionally start borrowers with a loan at a higher interest rate, so that the lender can then refinance the loan to a slightly lower rate and charge additional fees to the borrower. This kind of multiple refinancing is never beneficial to the borrower and results in the further loss of equity. Flipping can also take place when competing lenders refinance the same borrowers repeatedly; promising benefits each time which are not delivered or which are outweighed by the additional costs of the loan. A lender convinced an elderly couple to refinance their mortgage to a new loan amount of around $93,000, which included over $10,000 in refinanced fees and single premium credit life insurance policy for close to $6,000. Two years later, the same lender convinced the couple to refinance again (without paying off any other debts) a fixed interest rate of 11.5%, financing into their loan what looks like over $2,200 in fees plus a credit insurance policy for over $10,000. Another year later, the same lender refinanced them again at an 11.5% interest rate without any discernible benefit while they were charged another nearly $900 in additional fees.

52 Aggressive and Deceptive Marketing The Use of Live Checks in the Mail Much of the competition between lenders in the sub prime industry is not based on the rates or terms offered by the different lenders, but on which lender can reach and hook the borrower first. Predatory lenders employ a sophisticated combination of high tech and high touch methods, using of multiple lists and detailed research to identify particularly susceptible borrowers (minority, low income, and elderly homeowner) and then mailing, phoning, and even visiting the potential borrowers in their homes to encourage them to take out a loan. One of the methods used routinely and successfully by predatory lenders such as household is the practice of sending live checks in the mail to target homeowners. The checks are usually for several thousand dollars and the cashing or depositing of the check means the borrower is entering into a loan agreement with the lender. The appeal of the checks is that they are a fast and easy way for a homeowner to obtain cash. This initial loan is just an entry point into the financial life of the homeowner. The loan has an artificially high interest rate and monthly payment, in order for the predatory lender to be able to offer the homeowner an opportunity to refinance it, along with other debts, into another loan. The predatory lender s ultimate goal is to get the homeowner to refinance their first mortgage with them.

53 Aggressive and Deceptive Marketing The Use of Live Checks in the Mail (continued) A couple received a check in the mail for $4,000. It came at a time when they needed money and so they decided to deposit it. The check was a loan with a 21% interest rate and a 5 year repayment tem. Almost immediately after depositing the check, the lender called the homeowner and offered to refinance that loan at a lower rate and give them additional money. The new, larger loan was at 19% interest rate with a 10 year repayment term which lowered the monthly payments. Shortly after this, the lender again contacted the homeowner and encouraged them to refinance again and to consolidate other debts. This loan was a 17% interest rate and had a repayment term of 20 years. The lender went back to the homeowner and encouraged them to refinance this loan along with their first mortgage which was with another lender. Their loan had a 12% interest rate and a 30 year repayment term.

54 Where Are We Now? What is the name of a type of mortgage loan where the borrower s payment does not cover all of the interest due, much less any principal? a. reverse mortgage loan. b. amortized loan c. Negative Amortization loan d. Higher Priced mortgage loan Negative amortization occurs when your monthly payments are not large enough to cover all the interest due on the loan. The unpaid interest is added to the unpaid balance of the loan making your overall balance higher than the prior month rather than lower. The danger of negative amortization is that the buyer ends up owing more than the original amount of the loan.

55 The Homeowner s Protection Act (HPA) of 1998 Consumer s Right to Cancel Mortgage Insurance The Homeowner s Protection Act (HPA), also known as the PMI Cancellation Act, was passed in 1998, addressing the difficulties homeowners have experienced in canceling private mortgage insurance (PMI). It established provisions for the cancellation and termination of PMI, established disclosure and notification requirements, and required the return of unearned premiums. Prior to HPA, homeowners had little recourse when lenders refused to cancel PMI. HOPA protects homeowners by prohibiting life of loan PMI for borrower paid products, and it establishes uniform procedures for cancellation of PMI policies. HPA took effect on July 29, Generally, the HPA applies to residential mortgage transactions obtained on or after July 29, 1999, but it also has requirements for loans obtained before that date. This law does not cover VA and FHA government guaranteed loans.

56 The Homeowner s Protection Act (HPA) of 1998 Eligible Residential Mortgage Transactions There are four requirements for a transaction to be considered a residential mortgage transaction: (1) a mortgage or deed of trust must be created or retained; (2) the property securing the loan must be a single family dwelling; (3) the single family dwelling must be the primary residence of the borrower; and (4) the purpose of the transaction must be to finance the acquisition, initial construction, or refinancing of that dwelling.

57 The Homeowner s Protection Act (HPA) of 1998 Cancellation Under HPA, consumer s have the right to request cancellation of PMI when they pay down their mortgage to the point that it equals 80 percent of the original purchase price or appraised value of the home at the time the loan was obtained, whichever is less. Consumer s must have an acceptable payment history, meaning that the consumer has not been 30 days late with a mortgage payment within a year of the request, or 60 days late within two years. The lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

58 Module 8: Mortgage Fraud and The Homeowner s Protection Act (HPA) of 1998 Automatic Termination Under HPA, mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once the consumer pays down the mortgage to 78 percent of the value if they are current on the loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to the consumer within 45 days of the cancellation or termination date. For high risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided the consumer is current on the loan.