MORTGAGE FRAUD. What is Mortgage Fraud? A material misstatement, misrepresentation, or omission made...

MORTGAGE FRAUD

Stephen LocherAssistant United States AttorneyUnited States Attorney’s OfficeSouthern District of Iowa110 E. Court Ave., Ste. 286Des Moines, IA 50309(515) 473-9300

What is Mortgage Fraud?

A material misstatement, misrepresentation, or omission made in connection with the purchase, financing, or insuring of real estate.

Just the facts…

Estimated annual loss resulting from mortgage fraud: $4 to $6 Billion

66% of pending FBI mortgage fraud investigations involve losses > $1 million

1,571 mortgage fraud cases opened in fiscal year 2009 (compared to 136 in 2004)

3,000+ pending FBI mortgage fraud investigations (through 6/17/10)

Recent National Mortgage Fraud Initiatives

Operation Malicious Mortgage (March – June 2008)

Primary types of fraud investigatedLending fraudForeclosure rescue scamsMortgage-related bankruptcy scams

Results144 criminal cases406 defendants>$1 billion in losses

Operation Stolen Dreams (March – June 2010)Broader range of fraudulent schemes

investigatedExpanded use of civil enforcement

toolsResults

673 criminal cases1,215 criminal defendants$2.3 billion in losses191 civil enforcement actionsApproximately 400 civil defendants

Who are the targets?Everyone

BuyersSellersReal Estate AgentsMortgage BrokersClosing AgentsAttorneysAppraisersTitle CompaniesBank employeesEtc…

Common Mortgage Fraud Schemes

FlippingSilent Second

MortgagesForeclosure

Rescue ScamsChunkingAsset RentalOrigination Fraud

Asset RentalDouble SellingDouble FinancingShort Sale FraudReverse MortgageShort Sale FraudBuilder Bailouts

Flipping Property is purchased then resold (often

quickly) at inflated price.Common characteristics

Fraudulent appraisals False loan documentation Straw buyers Kickbacks

House used in flipping scheme May 2007

Foreclosure Rescue ScamsVictims: homeowners who can no longer

afford mortgage payments. Some have equity, some don’t.

Perpetrators convince homeowners they can save their homes Homeowners transfer deed to perpetratorHomeowners pay upfront fees to perpetratorPerpetrator takes out mortgage loanHomeowners may make monthly payment to

perpetrator

Foreclosure Rescue Scams (continued)Scheme typically results in foreclosure

Perpetrator may take equity and disappearPerpetrator may collect monthly payments for

a while but not forward them to new lenderPerpetrator may “flip” property to straw buyers

to extend duration of scheme

Silent Second MortgagesDown payment money comes via second

mortgageExistence of second mortgage is

concealed from primary lenderOften involves two closings in rapid

successionClosing agent almost always involvedRecurring question: why did real estate

agent, attorney, mortgage broker, etc. let this happen?

Common Mortgage Fraud Schemes (continued)Asset Rental

◦Money is temporarily put into borrower’s account to give appearance of creditworthiness

◦Money later given back Origination Fraud

◦False statements regarding income, assets◦False statements regarding intention to use

house as primary residence

Common Mortgage Fraud Schemes (continued)Double Selling

Mortgage loan originator accepts legitimate application and documentation from buyer but sends loan package to multiple warehouse lenders to each fund the loan.

Double FinancingBuyer takes out two mortgages from two

lenders on same dateOr, buyer refinances at new bank but fails to

use proceeds to pay off prior mortgage

Chunking

Chunking

Perpetrator convinces uninformed victim to invest in real estate.

Victim applies for one loanPerpetrator takes out additional loans for

other properties in victim’s name without victim’s knowledge

Perpetrator keeps some or all loan proceeds; victim is stuck with loan obligations

Short Sale FraudBorrower purposely withholds mortgage

payments, forcing loan into defaultAccomplice submits “straw” short-sale

offer at a purchase price less than the borrower’s loan balance. Fraudster may approach distressed homeowner

with this scheme.Fraudster may obtain kickback or become

outright owner of home.

Builder Bailout SchemesBuilders with excess inventories make

“too good to be true” offers to buyers◦No money down◦False promises to subsidize monthly payments

or make subsequent improvements to property at no cost

Builders may set up shell corporations to “purchase” the properties◦Sales price often exceeds market value◦Corporation may later disappear or go bankrupt

Kickback SchemesOften involve two purchase agreements –

one “real” agreement and one “for the bank.”

The agreement “for the bank” contains inflated price.

Seller kicks back funds to borrower.Real estate agents often involved.

Red FlagsInsistence on use of particular appraiser,

closing agent, etc.Unusual bonuses/feesTransaction is inconsistent with marketKickbacksFalse statements/omissions on bank

documentsBuyer may be assured these are “harmless”

Requests to sign blank documentsParties appear to be affiliated

Red Flags (continued)

Best PracticesFull disclosure throughout the transaction

◦Purchase Agreement, loan documents, HUD-1Look for discrepanciesAsk questions/verify

Mortgage Fraud and Federal Law

Wire FraudMail FraudBank FraudBank BriberyFalse Statement to BankPenalties

◦Up to 30 years’ imprisonment per count of conviction

◦Up to $1 million fine per count of conviction

Money Laundering

Process used by criminals to conceal or disguise the proceeds of their crimes or convert those proceeds into goods or services.

Makes “dirty” money look “clean.”

Three Stages of Money Laundering

Placement◦ Initial introduction of criminal proceeds into the

stream of commerce◦Most vulnerable stage of process

Layering◦Distancing the money from its criminal source

◦ Movements of $ into different accounts/countries◦ Increasingly difficult to detect

Integration◦Laundered proceeds are distributed back to the

criminal◦Creates appearance of legitimate wealth◦May happen years after original crime

Money Laundering & Real Estate

Examples of Money Laundering via Real Estate Transactions

Purchase of real estate with proceeds from illegal activity (drugs, theft, fraud, etc.)

Use of real-estate related business to launder proceeds◦e.g., kickbacks flowing through legitimate

businessPurchasing personal real estate in name of

third-party individual or company

Money Laundering Red Flags

Money Laundering Red Flags (continued)

Desire to keep individual transactions below $10,000

Use of third-party to make paymentRefusal/inability to explain source of

proceedsTransactions not in conformity with

standard practice◦e.g., seller willing to accept surprisingly low

price for property

Resources

U.S. Department of Justice◦ www.justice.gov

Federal Bureau of Investigation◦ www.fbi.gov

Internal Revenue Service◦ www.irs.gov

U.S. Department of Housing & Urban Development◦ www.hud.gov

Federal Deposit Insurance Corporation◦ www.fdic.gov

Federal Financial Institutions Examination Council◦ www.ffiec.gov