ACFE Toronto Chapter 1

Transcription

1 ACFE Toronto Chapter 1

2 Mortgage Fraud William Vasiliou CFE ACFE Toronto Chapter 2

3 Equifax report February 2012 Uncovered $400 million in mortgage fraud in Canada a fraction of the cheating in the R/E market (post media) Detected $650 Million in attempted fraudulent activity (TO Star) Two thirds of all fraud in 2011 was R/E related Increased 150% in 2011over 2010 Occurs across Canada concentrated in large urban areas Quebec, Ontario, Alberta and BC ACFE Toronto Chapter 3

4 Defined: (CMHC): A deliberate misrepresentation of information on a loan application, to obtain mortgage financing that likely would not have been approved if the truth had been known. (CISC): Any scheme designed to obtain mortgage financing under false pretenses. ACFE Toronto Chapter 4

5 CISC & Freddie Mac identify 3 major categories: 1) Fraud to further other criminal activity 2) Fraud for profit 3)Fraud for shelter ACFE Toronto Chapter 5

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7 1) Fraud to further other criminal activity Fraud for money laundering: Use R/E transactions to launder proceeds of crime Value Tampering : Property bought on paper at below market Difference between paper & actual value paid in cash Mortgage (real or phantom) obtained for (80%) of paper value Property can then be sold for its actual value ACFE Toronto Chapter 7

8 2) Fraud for Profit Generally multiple loan transactions Multiple industry professionals Several financial institutions Gross misrepresentations of: Income Asset value /faulty appraisal (to increase sale value & generate cash) Collateral Employment (length & type) Hidden liabilities Credit history may be altered or fabricated Identity theft / straw borrower Owner occupied Purchasing for others (nominee/ in-trust) No down payment or fraudulent gift letter Falsifying deposit Undisclosed kickbacks Silent second mortgage ACFE Toronto Chapter 8

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10 2) Fraud for Profit Illegal Property Flipping (Flipping) Not the same as in Flip this House (Quick Turns) Repeated & frequently selling of property between colluding individuals or nominees Then acquired by a straw buyer obtains mortgage -defaults Involves one or more of: Fraudulent appraisals; Grossly inflated prices; Straw buyers; Friendly parties; False loan documentation; Inflated buyer income; or Kickbacks to buyers, investors, or industry professionals ACFE Toronto Chapter 10

11 2) Fraud for Profit Illegal Property Flipping (Flipping) Edmonton: from a single flip $180,000 profit (from ACFE Mortgage Fraud, 2008) ACFE Toronto Chapter 11

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13 2) Fraud for Profit Fictitious identities: Hides borrowers true identity May take a year or more to build up credit under the fictitious names in order to borrow Start with credit cards Lines of credit. Mortgages Can earn $200 to $300 per fake identity ACFE Toronto Chapter 13

14 2) Fraud for Profit Air Loans: An application for a mortgage on a non existent property / address Collusion False property profiles on MLS Compromised lawyer or stolen identity Fake appraisals ACFE Toronto Chapter 14

15 2) Fraud for Profit Title Fraud: The fraudulent transfer of property (stealing home). Perpetrator assume legitimate owner s identity False identification, forged documents, owner s credit rating Sells or refinances the property without the owner s knowledge Use of straw buyer to obtain new financing default, or Sells to unsuspecting 3 rd party ACFE Toronto Chapter 15

16 2) Fraud for Profit Foreclosure Schemes / (Phantom Help Scam): Foreclosure rescue services contact financially vulnerable homeowners a) For an upfront fee - rid debt and save the property, or b) Fraudster offers to refinance transfer of title, or c) Consolidate debt payments- Upfront fees, transfer of title Owner receives cash to pay some bills Remains in home as tenant Fraudster refinances house or sells to an accomplice and leaves with the funds ACFE Toronto Chapter 16

17 3) Fraud for Shelter Common themes: Perpetrators may include the borrower, mortgage broker, real estate broker &/or loan officer Normally involves a single loan Contains loan-level qualifying misrepresentations Borrower intends to repay loan usually does not default Appraisal value not typically inflated at origination ACFE Toronto Chapter 17

18 3) Fraud for Shelter Usually involves a borrower on a single loan with the intent to live in the property Falsifying personal or financial information to obtain a larger loan than the income can support Occupancy fraud Income fraud Employment fraud Hidden liabilities Shot gunning fraud No down payment or fraudulent gift letter Silent second mortgage ACFE Toronto Chapter 18

19 One applicant tried to borrow through a number of institutions using the identity of: Robert Consumer One problem: Robert Consumer is a trade name used by Trans Union on its promo material Even used the same address ACFE Toronto Chapter 19

20 Calgary: Fraud operated by14 interconnected groups Generated $140mill in mortgages $70 mill in phony mortgages Estimated loss to bank $30 mill ACFE Toronto Chapter 20

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22 Calgary: Purchase Price $900,000 In 3 yrs $2.3 Mill Profit $1.4 Mill ACFE Toronto Chapter 22

23 5 Features, of credit applications lenders evaluate most heavily The absence of any one-feature makes the others moot 1) Character How does the borrower conduct his personal affairs? 2) Capacity Can the borrower repay the mortgage? Applicants ability to meet their obligations. 3) Collateral What if the borrower doesn t repay? Property provides lender with another method of repayment. 4) Capital What is the net worth? Who has the risk? 5) Conditions/Credit Will the borrower repay the mortgage? How much $ can the borrower afford? ACFE Toronto Chapter 23

24 Standard process Can be viewed as just: Credit, Capacity, Collateral. A weakness in one does not disqualify a borrower Risk is higher (capacity vs. property) Lenders layer risk blending the C s If all three are weak, - lenders have accepted higher capacity risk Lower the docs required (stated income loans, subprimes, extended AM s, 107% financing) Sell high risk loans to investors Utilize mortgage default insurance ACFE Toronto Chapter 24

25 Credit score condenses a borrower s credit history into a single number the higher the score the lower the risk Legitimate borrowers- good credit: Join an investment club personal information obtained Sold on scheme too good to be true Legitimate borrowers- marginal credit: Altering score and trade lines Piggybacking added as authorized user on a credit card Legitimate borrowers- No credit history: Use of alternative trade lines fabricated trade letters verified by the credit bureau (USA) Landlords, utility and telephone companies, car dealers, childcare, furniture stores, Insurance agents ACFE Toronto Chapter 25

26 Straw Borrower- good credit: Recruited- as passive investors Guarantors: Relatives, friends, sponsors Straw accomplice: Paid a fee to originate a loan Identity Fraud: Use of a family member s SIN to establish a credit profile (e.g.: child) A borrower recruited to establish a credit history using a SIN with no established credit history under a fictitious name Industry insider with a borrower s personal information Fabricating a borrower with a SIN that has NOT been assigned ACFE Toronto Chapter 26

27 Occupancy: Multiple loans all listed as owner occupied LTV: Inflated sales price Overstated bank balances Funds deposited into borrowers account Borrower added to a bank account Multiple loans one account balance Purchase transaction disguised as a refinance Fabricated fictitious down payment Phony gift letter Silent second mortgage ACFE Toronto Chapter 27

28 Debt service ratios: GDSR 39% (CMHC) / 35% to 39% (Genworth) TDSR 40% to 44% (CMHC) / 42% to 44% (Genworth) Employment: Unemployed fabricate an employer Under employed falsify position, years, education Self employed position: president CEO, CFO Income: Fabricate T4 s, NOA s, paystubs ACFE Toronto Chapter 28

29 Why is mortgage fraud relatively easy? Technological advances Automated underwriting systems Permits multiple submissions manipulation of data Property, price, rate, income Automated valuation models Electronic communications Little contact if any with borrowers Economic trends: Strong competition and market share Lack of due diligence / know you client Weak verification systems Hiring practices & policies: Industry insiders Institution loan originators / commissions Weak oversight and long term review of products ACFE Toronto Chapter 29

30 Victims: Five condominium corporations (1 a victim of bid rigging or construction fraud ) More than 1000 condo owners victims of property fraud Misappropriation in excess of $20 million ACFE Toronto Chapter 30

31 Perpetrator: Owner of a property management firm Immigrant entrepreneur made good Manzoor Moorshed Khan / Chanel Property Management Seen as rags-to-riches story source: Toronto Star ACFE Toronto Chapter 31

32 Perpetrator: Worked as a superintendent in a building in Mississauga Opened a property management company in 2003 Described as outgoing, lavish, personable, had his finger in many pies Collected cars like shoes In the driveway of a 2 car garage Mercedes, Lexus, Audi, BMW Wore gold & diamonds on every finger Boasted managed 40 condominium corporations actually only managed 15 at any one time Travelled often to the middle east - Dubai source: Toronto Star ACFE Toronto Chapter 32

33 Perpetrator: Private, religious, kept his staff happy, always good Persuasive Argued with boards Never a problem he couldn t solve Lots of these (condo) board members are immigrants and they identified with Khan source: Toronto Star ACFE Toronto Chapter 33

34 Scheme: Obtain a management contract by bidding low Get to know the board & its weaknesses Dupe an employee by offering an opportunity to substantially increase their salary with a job offer From a contract concierge to employee of the company Convince the condo board that they need to hire a full time manager and that they have to pay not only the management fee to the company but also the salary for the new full time property manager ACFE Toronto Chapter 34

35 Forge the signature of a legitimate director Register a fake borrowing by-law under sec. 56 Declare 2 employees as the president & secretary of the Condo Falsify a series of legal paper Open a new bank account Have a law firm confirm the legitimacy Have funds electronically transferred ACFE Toronto Chapter 35

36 How was this uncovered? Lawyer working for a buyer Her documents showed a loan of over 3 mill Lawyer spoke to the condo corp. lawyers August 2011 Scheme unraveled ACFE Toronto Chapter 36

37 Khan and Channel Property Management Mortgage Broker Trust Company Banker Major Law Firm ACFE Toronto Chapter 37

38 vel+canada+report+says/ /story.htm m?p= ACFE Mortgage Fraud, 2008 ACFE Toronto Chapter 38

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