The Scheme of Things: What you Should Know About Mortgage Fraud. Protecting Homeowners Empowering Victims

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1 The Scheme of Things: What you Should Know About Mortgage Fraud Protecting Homeowners Empowering Victims

2 U.S Department of Housing and Urban Development Office of Inspector General 2

3 Session Speaker Michael H. Stolworthy Director, Fraud Prevention and Program Integrity U.S. Department of Housing and Urban Development Office of Inspector General 3

4 Session Objectives Discuss the Role of the Office of Inspector General Provide history and background of the FHA Mortgage Insurance Program Describe Home Mortgage Basics 4

5 Session Objectives Outline Common Mortgage Fraud Schemes Discuss Current Mortgage Fraud Trends Detail the Impact of Mortgage Fraud on Borrowers and Communities 5

6 Inspector General Act Enacted in October 1978 Created Inspectors General in 12 of the largest Federal agencies Currently authorizes IGs in more than 50 agencies 6

7 HUD-OIG MISSION Prevent and detect fraud, waste, and abuse Promote integrity, efficiency and effectiveness in HUD programs and operations Seek administrative sanctions, civil, and/or criminal prosecution Independent and objective reporting to the Secretary and Congress 7

8 What is the Federal Housing Administration (FHA)? The FHA is a wholly-owned government corporation created by Congress in 1934 The FHA was consolidated into HUD in 1965 FHA provides mortgage insurance on loans made by FHA-approved lenders It is the largest mortgage insurer in the world 8

9 Ups and Downs of FHA In the early 90s, FHA had about 15% of the home purchase mortgage market Through the 90s FHA lost business to the sub-prime By 2006 FHA market share was a marginal 3%-- and dropping People asked if we still needed the FHA 9

10 The Perfect Storm 10

11 Mortgage Crisis FHA was left as the only game in town Market conditions, new products and a Congressionally mandated expanded role caused a resurgence in FHA s market share Mortgage limits raised to $729,750 Now about 35% market share In some markets, FHA loans constitute about 70% of the new loan market 11

12 FHA s Resurgence Today, FHA insures million mortgages Totaling $1.1 trillion More than 75% of First-Time Homebuyers Nearly 1/3 Minority Households Nearly one-quarter of all refinances 12

13 Negative Trends 284,196 Claims Paid FY ,236 Conveyances 100,000 REO Sales 9.6 % of FHA Loans are Seriously Delinquent (739,000 loans) 13

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15 FHA s Impact on HUD-OIG Realignment of investigative priorities: Single Family investigations are an investigative priority Established nationwide mortgage fraud initiatives Special Agents participate in numerous task forces and working groups 15

16 Financial Fraud Enforcement Task Force (FFETF) Created by President in November 2009 HUD-OIG is co-chair of Mortgage Fraud Working Group 16

17 Mortgage Fraud Summits Miami, FL Phoenix, AZ 17

18 The Lending Process Types of Mortgages The Paperwork The Players 18

19 Government Conventional HELOCs Reverse Mortgages Types of Mortgages 19

20 Types of Mortgages Government Mortgages FHA 203b 203k VA AG Conventional Fixed Rate ARMs Interest Only Option ARMs Piggy Back (80/20) 20

21 Types of Mortgages HELOCs Reverse Mortgages HECMs Proprietary 21

22 Processes and Players Application Processing Underwriting Post-Closing Review 22

23 Loan Origination Loan Officer Application (Form 1003) Upfront charges (Credit Report and Appraisal) 23

24 Loan Processing Verification of Employment (VOE) Verification of Rent (VOR) Verification of Deposit (VOD) Alternative forms of Credit 4506 Tax Return Request Appraisal 24

25 Underwriter Review Credit review Adequate income Ratios Stability of income Available assets to close Underwriting 25

26 Closing Bank Attorney or Escrow or Title Company HUD-1 26

27 Quality Control (QC) 4506 Loans Post-Closing 27

28 Paperwork 28

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45 Reverse Mortgages 45

46 Home Equity Conversion Mortgages (HECMs) Created by HUD in Allow seniors to draw equity from their homes. Major FHA product. FHA dominates HECM market. 46

47 What is a Home Equity Conversion Mortgage (HECM)? Most commonly known as a reverse mortgage it is a home loan that allows homeowners over age 62 to convert a portion of their equity into cash No repayment is required until the borrower(s) no longer use the home as their principal residence A HECM can even be used to purchase a primary residence in some cases 47

48 51,124 HECMs FY 2012 HECMs 44,714 Typical HECMs 1,335 HECM Refinances 1,487 HECMs for Purchase 3,591 HECM Savers 48

49 HECM Application 49

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51 Mortgage Fraud Schemes Basic Schemes False Statements Straw Borrowers Flipping Silent Second Mortgages Inflated Appraisals Bogus Gifts More Schemes Flopping Builder Bailouts HECM Schemes Foreclosure Rescue Bankruptcy Loan Modification Schemes 51

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53 WKYC.com Cleveland, OH Video 53

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55 False Statements Rescue Schemes Flopping Trends 55

56 ABC News Report Loan Modification Scams Target Desperate Homeowners - YouTube 56

57 Common Loan Modification Scams Phony Counseling or Foreclosure Rescue Schemes Forensic Loan Audits Rent to Own or Leaseback Schemes Short Sale Scams Bankruptcy to Avoid Foreclosure 57

58 Mortgage Forensics 58

59 Property Flipping/Flopping 59

60 Flopping Short sales up 33% over last year FBI and Freddie Mac have warned that flopping may be on the rise HAFA 60

61 For More Information National Crime Prevention Council 2001 Jefferson Davis Highway Suite 901 Arlington, VA HUD-OIG 451 7th Street, SW Washington, DC Hotline:

62 Don t Forget Visit the Exhibition Hall to meet our exhibitors! 62