FBI Issues 2007 Mortgage Fraud Report

The volatile housing market has created a ripe environment for mortgage fraud.

Palm Coast – May 14, 2008 – The FBI’s 2007 Mortgage Fraud Report highlights an increase in fraud and details several different types of fraud. Here are excerpts of the report.

Mortgage Fraud falls into two categories:

• Fraud for Property – Fraud for property/housing entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan.
• Fraud for Profit – Fraud for profit, however, often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. It is this second category that is of most concern to law enforcement and the mortgage industry. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation.

Emerging Schemes

The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market. Several of these schemes have emerged with the potential to spread as the recent rise in foreclosures, depressed housing prices, and decreased demand place pressure on lenders, builders, and home sellers. As lending practices tighten, in response to the subprime lending crisis, fewer loans will be originated. Perpetrators will seek alternative methods of defrauding mortgage loan products. Identity theft is historically a popular tool for use in mortgage fraud schemes. As financial institutions begin to enforce higher lending standards, the identities of individuals with good credit will increase in value to perpetrators. As such, individuals with good credit will likely be at a more significant risk for identity theft and mortgage fraud schemes, and the continued vulnerability of identifying information will allow perpetrators the accesses necessary to commit such schemes.

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. Builder-bailout schemes often occur when a builder or developer experiences difficulty selling their inventory and uses fraudulent means to unload it. In a common scenario, the builder has difficulty selling 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. If the home forecloses, the lender has no equity in the home and must pay foreclosure expenses.

Seller Assistance Scams

Mortgage fraud perpetrators are exploiting the depreciating housing market by assisting sellers and providing buyers to conduct property sales that are based on inflated appraisals. In a typical seller assistance scam, a perpetrator solicits an anxious seller or his real estate agent and offers to find a property buyer. The perpetrator negotiates the amount that the property seller is willing to accept for the home. The perpetrator then hires an appraiser to inflate the property’s value. The property is sold at the inflated rate to a buyer who is recruited by the perpetrator. The buyer takes out a mortgage for the inflated amount. The seller then receives the asking price for the home, and the perpetrator pockets a “servicing fee,” the difference between the home’s market value and the fraudulently inflated value. When the mortgage defaults, the lender forecloses on the house, but is unable to sell it for the amount owed as a result of the inflated value.

Seller assistance programs may be easily perpetrated in any depressed market where sales of homes have languished and sellers are motivated. The current instability in the housing market and mortgage industry has created an ideal environment for perpetration of this fraud. Seller assistance schemes eliminate the need for the two property transactions that are required for illegal property flipping, which involves first purchasing and then selling a property. Some industry sources have coined the phrase “cash back purchase” or “one transaction flip” to describe the scheme because it eliminates the need for two property transactions to generate a profit.

Short-sale Schemes

Short-sale schemes are desirable to mortgage fraud perpetrators because they do not have to competitively bid on the properties they purchase, as they do for foreclosure sales. Perpetrators also use short sales to recycle properties for future mortgage fraud schemes. Short-sale fraud schemes are difficult to detect since the lender agrees to the transaction, and the incident is not reported to internal bank investigators or the authorities. As such, the extent of short sale fraud nationwide is unknown. 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. In a typical short sale scheme, the perpetrator uses a straw buyer to purchase a home for the purpose of defaulting on the mortgage. The mortgage is secured with fraudulent documentation and information regarding the straw buyer. Payments are not made on the property loan so that the mortgage defaults. Prior to the foreclosure sale, the perpetrator offers to purchase the property from the lender in a short-sale agreement. The lender agrees without knowing that the short sale was premeditated. The mortgage owed on the property often equals or exceeds 100 percent of the property’s equity (see figure17).

Foreclosure Rescue Scams

As in 2006, foreclosure rescue scams continued to be problematic in 2007. Escalating foreclosures provide criminals with the opportunity to exploit and defraud vulnerable homeowners seeking financial guidance. 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.

Identity Theft Used to Drain Home Equity Lines of Credit

Stolen customer identification information is being used to compromise Home Equity Lines of Credit (HELOC) accounts. To facilitate this scheme, perpetrators pose as customers to establish HELOC Internet account services and manipulate customer account verification processes, including rerouting telephone calls, forging signatures, using passwords, and reciting recent account history. For example, a perpetrator uses the account holder identification information to contact a financial institution and request an advance of funds on a HELOC account. Once the advance is granted, the perpetrator sends a facsimile to the financial institution requesting that the funds be wire transferred to another account. On receipt of the facsimile request, the financial institution contacts the account holder using the telephone number on record to verify the transaction. However, the call is unknowingly forwarded to the perpetrator who verifies the account holder’s information to complete the wire transfer.