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Mortgage Fraud

Financial Institution Fraud General Overview

On September 17, 2004, The Federal Bureau of Investigation (FBI) announced action against hundreds of  individuals in the largest nationwide enforcement operation in FBI history directed at organized groups and individuals engaged in financial institution fraud.

The ongoing initiative reflects the FBI's ongoing mission and effort to identify, target, disrupt and dismantle criminal organizations and individual operations engaged in fraud schemes that target the nation's financial institutions.

Continued action is targeting a variety of fraud schemes to include mortgage and loan fraud, insider fraud, financial institution failure investigations, identity theft, check fraud and check kiting. Criminal investigations are ongoing nationwide and targets organized criminal groups and individuals engaged in significant financial institution fraud.

This initiative involved the coordination of 47 FBI Field Offices, the Criminal Division of the Department of Justice, participating United States Attorney's Offices, federal, state and local law enforcement agencies and financial institution regulatory agencies that work with the FBI on a daily basis in combating financial institution fraud.

From its inception in August 2004, the investigators have identified thousands of subjects in hundreds of investigations. More than 151 indictments, informations and complaints have been filed to date. These charges have thus far led to hundreds of arrests, convictions, sentences and millions of dollars in forfeiture and restitution. The cases represent potential losses due to fraudulent activities against financial institutions in excess of $3 billion.

From 2000 to the present, the FBI's investigations in the financial institution fraud arena have resulted in more than 11,466 indictments, 11,362 convictions and approximately $8.1 billion in restitution orders.

The Federal Bureau of Investigation received more than double the number of mortgage-related "suspicious activity reports" from 2003 to 2004.  Nationally, lenders reported 17,127 suspected incidents of mortgage fraud to the FBI in 2004.  FBI cases have grown from 534 in 2004 to 642 in the first half of 2005 alone.  At the IRS criminal investigations of mortgage fraud have nearly doubled from 2001 to 2004.

Mortgage Fraud

he increased reliance by both financial institutions and non-financial institution lenders on third-party brokers has created opportunities for organized fraud groups, particularly where mortgage industry professionals are involved.

Combating significant fraud in this area is a priority, because mortgage lending and the housing market have a significant overall effect on the nation's economy. All mortgage fraud programs were recently consolidated within the Financial Institution Fraud Unit, even where the targeted lender is not a financial institution. This consolidation provides a more effective and efficient management over mortgage fraud investigations, the ability to identify and respond more rapidly to emerging mortgage fraud problems, and a better picture of the overall mortgage fraud problem.

Each mortgage fraud scheme contains some type of "material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan." The Mortgage Bankers Association projects $2.5 trillion in mortgage loans will be made during 2005. 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.

A significant portion of the mortgage industry is void of any mandatory fraud reporting. In addition, mortgage fraud in the secondary market is often under reported. Therefore, the true level of mortgage fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. Based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing.

The FBI investigates mortgage fraud in two distinct areas: Fraud for Profit and Fraud for Housing. 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. Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders. 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 his income or employment history to qualify for a loan.

The defrauding of mortgage lenders should not be compared to predatory lending practices which primarily affect borrowers. Predatory lending typically effects senior citizens, lower income and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, sub-prime or higher interest rates, and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on his mortgage payment and undergoing foreclosure or forced refinancing.

Although there are many mortgage fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders. The FBI is engaged with the mortgage industry in identifying fraud trends and educating the public. Some of the current rising mortgage fraud trends include: equity skimming, property flipping, and mortgage related identity theft. Equity skimming is a tried and true method of committing mortgage fraud. Today's common equity skimming schemes involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors. Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers and shell companies, along with industry insiders to conceal their methods and override lender controls.

Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially valued properties are then repurchased several times for a higher price by associates of the "flipper." After three or four sham sales, the properties are foreclosed on by victim lenders. Often flipped properties are ultimately repurchased for 50 - 100 percent of their original value.

A recent analysis of mortgage industry fraud surveys identified 26 different states as having significant mortgage fraud problems. Although every survey identified Georgia and Florida as having significant mortgage fraud related investigations, the survey also identified nine other states in the South and Southwest, seven states in the West and five states in the Midwest as having mortgage fraud problems.

COMMON MORTGAGE FRAUD SCHEMES

Property Flipping - Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. 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.

Silent Second - 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.

Nominee Loans/Straw Buyers - 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.

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.

Inflated 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.

Foreclosure Schemes - The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner.

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 - This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts 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.

MORTGAGE FRAUD INDICATORS

Inflated Appraisals
• Exclusive use of one appraiser

Increased Commissions/Bonuses - Brokers and Appraisers
• Bonuses paid (outside or at settlement) for fee-based services
• Higher than customary fees

Falsifications on Loan Applications
• Buyers told/explained how to falsify the mortgage application
• Requested to sign blank application

Fake Supporting Loan Documentation
• Requested to sign blank employee or bank forms
• Requested to sign other types of blank forms

Purchase Loans Disguised as Refinance
• Purchase loans that are disguised as refinances
requires less documentation/lender scrutiny

Investors-Short Term Investments with Guaranteed Re-Purchase
• Investors used to flip property prices for fixed percentage
• Multiple "Holding Companies" utilized to increase
property values

A typical example from Houston, Texas:

On September 12 , 2005 United States Attorney Chuck Rosenberg announced the indictment of a Houston man (now “the defendant”) on Thursday, September 8, 2005, for his role in a multi-million dollar mortgage fraud scheme allegedly executed in the Houston area since 2002.

The Defendant is charged with five (5) counts of wire fraud, two (2) counts of mail fraud, and one count each of bank fraud, and making a monetary transaction with criminally derived property. Wire fraud, mail fraud, or bank fraud, carries a maximum sentence of 30 years in federal prison upon conviction. The monetary transaction charge carries a maximum 10-year prison term upon conviction. Additionally, substantial fines and restitution to victims can be ordered as part of any sentence imposed following conviction.

The indictment alleges the Defendant devised a mortgage fraud scheme in which he located residential properties for sale, and persuaded and used others as nominee purchasers of the properties for his benefit. Using the nominee borrower's credit and identifying information on loan applications, The Defendant is alleged to have exaggerated the nominee's financial resources and ability to repay the loans, and arranged for the nominee borrowers to purchase the properties at prices far in excess of their true value. According to allegations in the indictment, The Defendant then directed large sums of money from the closing on the residential properties be paid to himself or accounts controlled by him. The indictment alleges that the five (5) loans obtained in this manner between July 2003 and April 2005 amounted to about $1.5 million. The Defendant is also accused of two counts of mail fraud arising from the mortgage loan scheme.

The one count of bank fraud accuses The Defendant of defrauding a Houston area bank by allegedly forging the signature of a payee on a $58,504 check and retaining the proceeds for himself. Lastly, The Defendant is accused of transferring approximately $25,000 of proceeds allegedly derived from his mortgage fraud scheme to a local Land Rover dealership.

This case was investigated by special agents of the Federal Bureau of Investigation and the Department of Housing and Urban Development, Office of Inspector General, with significant assistance provided by the Harris County District Attorney's Office.

While this example may seem rather typical, because Mortgage Fraud allegations usually involve mid to high prices properties, mortgage fraud cases normally involve much higher fraudulent loan amounts.

For example, according to the press release from the United States Attorney’s office, Northern District of Georgia, on February 15, 2005, a federal jury returned a verdict of guilty against a former Atlanta area closing attorney (“the Attorney”), after a 12-day trial on multiple charges related to a $20 million mortgage fraud scheme.

The jury found The Attorney, the only defendant in the trial, guilty on all 169 counts submitted to them.

The Attorney was convicted of multiple charges of conspiracy, wire fraud, bank fraud, money laundering, identity theft, and the use of false social security numbers, related to a multi-million dollar mortgage fraud scheme. The Attorney was also convicted of obstruction of justice for failure to produce mortgage closing files to a Federal Grand Jury and submission of false affidavits in an effort to cover up the mortgage fraud scheme, and perjury for testifying falsely in a civil suit filed by a lender.

Evidence presented at trial showed that The Attorney owned and operated a Law Firm located in Stone Mountain, Georgia. The Attorney closed mortgage loans using the names of stolen borrower identities or in the names of straw borrowers who had been paid for the use of their identity, to purchase for herself or assist co-conspirators in making purchases of residential properties located in the Atlanta area. Many of the properties were purchased for same-day resale at prices artificially inflated by about $100,000, a fraudulent practice commonly referred to as "flipping." Often The Attorney would close both sides of the "flip," using the loan proceeds from the resale to pay for the initial purchase at the lesser amount. The excess amount of the loans so generated was shared by The Attorney and her co-conspirators through disbursements to themselves and their shell companies.

The Attorney failed to verify either the accuracy of the information on the borrowers' loan applications or the identities of the parties who appeared for closings. The Attorney and co-conspirators used shell, "air" or other companies to falsify the straw borrowers' income and employment histories and fake leases to account for other properties already placed in their names. As the scheme evolved, no one, except the true seller on flip deals, was required to appear at the Attorney’s law office to close loans, although The Attorney directed her paralegals to notarize and witness the purported signatures of the parties for submission to the lenders.

The coconspirators, all from the Atlanta area were  sentenced and received sentences ranging from 4 months to up to 5 years in federal prison.  The Attorney, 37, was sentenced to 30 years in federal prison by United States District Judge Thomas W. Thrash, Jr., on charges of Conspiracy, Bank Fraud, Wire Fraud, Mail Fraud, Identity Theft, Fraudulent Use of Social Security Numbers, Money Laundering, Obstruction of Justice, And Perjury. She was also ordered to pay restitution of $11,588,465.45, and ordered to serve 5 years supervised release.