©2011 Kaplan, Inc.1 Mortgage Fraud-Appraiser Risk Management Course Number 027 Instructor Phone: cell or ____home/office

©2011 Kaplan, Inc. 1

Mortgage Fraud-Appraiser Risk Management

• Course Number 027• Instructor ____________

Phone: ______________ cell or ______________home/office

Email: ________@______

Mortgage Fraud and Predatory Lending: What Every Agent Should Know Second Edition

Written By Marie S. Spodek, DREI, GRI®, and Jerome Mayne

Appraisal Supplement, George Harrison, phd ed


Course Learning Objectives• When you complete this course you will be able to:1. Understand USPAP’s directives on fraud2. Review the history of mortgage fraud in the

mortgage system3. Identify the fraud indicators4. Read how frequently mortgage fraud occurs and is

detected5. Understand the characteristics of Predatory Lending

and Illegal Flipping

6. Review Federal Activities regarding fraud


Introduction

• Historically mortgage fraud has always been in existence

• Fraud is the “intentional perversion of truth in order to induce someone to part with something of value or to surrender a legal right” (Webster’s Dictionary)


Introduction

• Borrowers greed prompted misrepresentation on loan applications such as stating their intent to occupy a residence when their real intent was to rent.

• Mid-2000s other types of fraud became more prevalent such as the acts to deceit and conspiracy to deceive primary and/or secondary market lenders for the purpose of pocketing large sums of money.


The Appraiser and Risk Management• The appraiser is a member of the real property financing system

appraiser The appraiser is expected (under USPAP) to be independent, impartial and objective

• The appraiser is also required to be competent to complete any appraisal assignment they accept

• Unfortunately in most cases the scheme of mortgage fraud would not have been successful without the participation of the appraiser

• One of the appraiser’s most significant tool to manage their risk is their workfile

• Included in this handout is the extract from the Ethics and competency rule of USPAP. Its critical to review those rules to protect from potential involvement with fraud through adherence


The Appraiser and Risk Management• Special emphasis must be given to the NEW Record Keeping Rule

• Included in this handout is the extract from Chapter 5 of the HUD Handbook which provides a guide that may be used for discussion in the class of what might be expected to be found in the appraiser’s workfile.

• Although the book used is primarily written for real estate agents it is also beneficial for appraisers.


FHA Work File Example extract HUD Handbook 4150.2 Sec 5-3

Section Supporting Data

Acceptance of assignment

File Memorandum

Property Description Legal descriptionPhotographs, Floor plans, Tax Map and info from Field notes during inspection, Listing info, Offers to purchase

Neighborhood Notes from field visit,Photographs, Demographic data

Cost Approach Relevant Cost New data, Land Sales Details


FHA Work File Example extract HUD Handbook 4150.2 Sec 5-3Section Supporting Data

Sales Approach Sales details and photosTransaction informationDerivation of adjustmentsInterview notes

Income Approach(if applicable)

Market rent comparable information,Cap rate justification,Historical financial statements

VC Conditions Noted(the VC is retired but many of the required notations about the conditions have not been retired)

Photo of condition, Field notes supporting any assumed repairs, Calculation of cost to repair a condition


FHA Work File Example extract HUD Handbook 4150.2 Sec 5-3Section Supporting Data

Additional Information Relevant Surveys,Market data and,Other sources of data such as property inspections or CC&Rs, etc.


Introductory Case StudiesCase Study 1-Fraud in a Down Market

•“The appraiser was in collusion with the broker and, •Knowing that the house was worth about $200,000 owing a balance of about $180,000; he appraised it for $250,000. •The broker told the owner how lucky she was and that they would ask the full $250,000 in a listing.•The broker reported the property was under contract but there was no real subsequent offer•Under the advice of this broker (implying to the seller the market was falling) the seller took the property off of the market•The seller being desperate to sell and telling the broker that foreclosure was imminent the broker agreed to purchase the property for $165,000•After the sale the seller declared bankruptcy and during the hearings the suspicious judge reported the matter to the FBI


Introductory Case StudiesCase Study 1-Fraud in a Down Market (cont)

Questions1.Might the broker have committed some illegal act? If so, what?

2. Might the appraiser have committed some illegal acts? If so what?

3. Might both (broker and appraiser) be liable to the homeowner for damages?

4. What was necessary for this to occur?

5. Is it still possible for this to occur?


Case Study 2-Fraud in a Stable Market• Residential area is constructed near a major urban area by a real

estate developer• The cost to construct, including the lots, is $400,000 +/- each• Spec houses were built on several lots as has as $500,000• The developer’s broker and he jointly decided to improve productivity

which included soliciting the help of a mortgage broker who:• Identified local celebrities (primarily television) who acted as

straw buyers• The deed would actually be in their name but a side contract

existed retaining ownership by the developer• Three of these transactions were completed without appraisals,

for more than $600,000 each• Other properties were listed in the $600,000 range• Appraisal was provided using the three “straw buyer sales” for which

the state appraisal board asked “why those three sales”• Appraiser did not mention the source being the developer stated

he often relied on builder data in new subdivisions of non-MLS sales


Introductory Case StudiesCase Study 2-Fraud in a Stable Market

Questions1.Did the developer do anything unethical?

2. Did the developer do anything illegal?

3. Did the broker do anything unethical?

4. Did the broker do anything illegal?

5.Did the appraiser do anything unethical?

6. Did the appraiser do anything illegal”

Chapter 1: Financial Crisis


Housing Market Collapse

• Record number of foreclosures• Continued mortgage fraud schemes• Appraiser reforms


Dodd-Frank Reform Act

• Residential loan originators• Minimum standards for mortgages• Standards for appraisals


Industry Insiders

• Collaboration• Collusion


U.S. Mortgage Fraud

• Affects real estate values

• Rental markets

State 2009 Fraud Ranking

2005 Fraud Ranking

Florida 1 1

New York 2 —

California 3 8

Arizona 4 —

Michigan 5 9

Maryland 6 —

New Jersey 7 —


Mortgage Fraud in the United States

• Fraud

• 1974–1975

• 2000–2005


Effects of Foreclosures

• Boarded up homes• Negative feelings• Difficult to find

buyers• Lower tax appraisals• Eroded tax base• Fewer community

services


Effects of Foreclosures

• Foreclosed property– Lowers for one-eighth

mile– 0.9% to 1.44%

• Each foreclosed Property– Reduces by 1.8%– There goes the

neighborhood


Factors Leading to Foreclosures

• Effect of credit scores• Personal bankruptcy• Poor loan servicing• ARM adjustments • Identity theft• Mortgage fraud and illegal flipping• Predatory lending

www.ftc.gov/idtheft


SAFE Act

• License mortgage loan originators (MLOs) • Exemption individuals• Minimum standards• NMLSR

Chapter 2: Mortgage Basics for Real Estate Licensees


Loan Application

• Qualify borrowers– Income– Asset– Credit information

• Qualify security (appraisal)


Roles of Professionals

• Mortgage loan originators (MLOs)• Loan processors• Underwriters• Appraisers• Importance of proper risk assessment


Impact of Liens

• Promissory/mortgage note• Mortgage/deed of trust


Cost of Borrowing Money Factors

• Term of loan• Time value of money• Assessing borrower’s borrowing history• Loan amount• Security for loan

ValueValue

TimeTime


Loan Sources

• Government-assisted programs– FHA– VA

• Private sector programs


Loan Types

• Fixed-rate mortgage (FRM)

• Adjustable-rate mortgage (ARM)


Exotic Loans

• Interest-only (IO) loans

• Pay-option ARMs

• Negative outcomes


Underwriting Criteria

• Income• Credit• Assets/down payment• Occupancy


Alternatives to Traditional Requirements

• Full documentation loan• Lite doc/alt doc loan• No doc loan• Stated income loan• Seller carryback loan• Combinations


Role of Secondary Market

• Primary market• Secondary market

– Securitization– Tighter standards– More losses


Manage Buyer Expectations

• Lenders who specialize– Meet buyers’ needs– Use reputable lenders

• Avoid unrealistic expectations

Chapter 3: Mortgage Fraud


Tracking Suspected Fraud

• Financial Crimes Enforcement Network (FinCEN)

• Financial Institution Fraud Unit (FIFU)• Suspicious Activities Reports (SARs)• Suspicious Mortgage Activity Report (SMARt

Form)


Fighting Identity Theft

• Fair and Accurate Credit Transactions Act (FACTA)– Identify warning signs

– How to detect

– Actions to be taken

– Update programs

• Mortgage buy backs


Mortgage Fraud

• Define– Deception, false facts

– Collusion, false premises

– Lying

• Types– Fraud for housing

– Fraud for profit (and business)


Penalties for Fraud

• Felonies– Lying on loan application

– Lying about purchase price

– Lying on mortgage application

• Federal and state fines

• Imprisonment


Red FlagsPossible Mortgage Fraud

• Shady practices

• Dual contracts/double HUDs

• Hidden addenda

• Silent mortgage

• Inflated appraisals


Red FlagsPossible Mortgage Fraud

• False information on applications– Straw buyers

– Unreported debt

• Rebates to borrowers

• Creative financing

Chapter 4: Predatory Lending


Dilemma for Low Income and Poor Credit

• Federal Housing Administration (FHA) loans– Lost market share

– Regained popularity

• Growth of subprime market– Concentration of credit problems

– Little or no credit history


Signs of Predatory Lending

• Subprime – Not always predatory

– Legal interests not in best interest of borrower

• Lack of competition from prime lenders


Predatory Lending

• Higher interest rates• Adjustable-rate mortgages (ARMs)• Excessive origination and closing fees• Prepayment penalty fees• Binding mandatory arbitration (BMA)• Yield spread premiums (YSPs) as kickbacks


Signs of Predatory Lending

1. Large origination fees2. Prepayment penalties3. YSP to loan originator4. Steering and targeting5. Low entry arms6. Promise to fix with more loans7. Flipping loans8. Hiding tax and insurance payments


Steering and Targeting

• Elderly• Reverse mortgages• Racial profiling• Immigrants• Those with low credit scores• Flipping loans• Unnecessary products• Misleading or no information


Changing the Climate

• Automated underwriting systems• More regulation/SAFE Act

– Prohibit appraisal fraud/Dodd-Frank Reform Act

• Consumer education

Chapter 5: Illegal Flipping


Real Estate Flips

• Positive effects– Gentrification– Construction jobs– Increase tax base

• Negative effects– Locals forced out– Tenants displaced


Real Estate Flips

• Equitable title– Beneficiary– Developer– Foreclosed property purchaser– Vendee in installment sale

• Back-to-back closings


Illegal Flipping

• Schemes– Use of kickbacks– Fake documents– Straw buyers– False identities– Flopping

• FHA anti-flipping waiver


Signs of Illegal Flipping

• Lender fraud• Possible activities

– Deed not in seller’s name and lender unaware– Owned for short period– Seller orders appraisal– Rapid increase in value– Unusual payments


Results of Illegal Flipping

• Neighborhood responses• NeighborWorks America• Georgia real estate fraud prevention and

awareness (GREFPAC)


Protect Against Illegal Flipping

• Know market• Use competitive market analysis (CMA)• Thoroughly inspect• Know extent of repairs• Meticulous documentation

Chapter 6: Federal Protections


Federal Laws

• Fair Housing Act• Equal Credit Opportunity Act (ECOA)• Home Mortgage Disclosure Act (HMDA)• Community Reinvestment Act (CRA)• Real Estate Settlement Procedures Act

(RESPA)• Truth-in-Lending Act (TILA)


Federal Laws

• Mortgage Disclosure Improvement Act (MDIA)

• Dodd-Frank Wall Street Reform Act• Secure and Fair Enforcement for Mortgage

Licensing Act of 2008 (SAFE Act)• Fair and Accurate Credit Transactions Act of

2003 (FACTA) (Red Flags Rule)• FHA Anti-Flipping Waiver


Educate Buyer Borrowers

• HUD Web Site• HUD Pamphlet

– English– Spanish


MDIA 3-7-3

1. Three business days after application to provide good-faith estimate (GFE)

2. Seven business days between GFE and signing loan documents

3. Three business days to close if lender changes GFE and/or APR


Real Estate Settlement Procedures Act (RESPA)

• Federally related residential loans• Disclosures at time of application

– Information booklet– Good-faith estimate (GFE)– Affiliated business arrangement (AfBA) – Seller cannot require certain title insurance

company


RESPA (continued)

• Prohibits kickbacks• Disclosures at settlement/closing• Disclosure after settlement/closing

– Escrow account rules– Servicing transfer statement

• Possible scams

www.realtor.org


RESPA Enforcement

• Section 6: Servicing of loans• Section 8: Anti-kickbacks and unearned

referral fees• Section 9: No specific title insurance

company• Section 10: Limits on escrow accounts


RESPA Enforcement

• Injunctive Relief

• File a Complaint with HUD– In Writing

– Confidentiality


Truth-in-Lending Act (TILA)

• Implemented by Regulation Z• No coverage

– Business, commercial, agricultural, organizational loans

– More than $25,000 loan– Student loan programs


Truth-in-Lending Act (TILA)

• Right of rescission– Three days– Not for first mortgage loan

• Trigger items• Penalties

– Fines– Imprisonment

• Missing information from disclosure


Home Mortgage Disclosure Act (HMDA)

• Implemented by Regulation C• Monitors reporting of loan data

– Serving community needs?– Investments attracting private investments?– Possible discriminatory lending patterns?


Community Reinvestment Act (CRA)

• Regulations 12 CFR• Meet credit needs of community• Loan applicants asked

– Ethnicity, race, and color– Applicants should answer honestly– Used to monitor compliance


Tips for Real Estate Licensees

• Know the laws• Find buyers earlier

– Help find appropriate lender– Manage expectations


Reporting Appraisal and Mortgage Fraud

• Federal Bureau of Investigation (FBI)• Federal Trade Commission (FTC)• Department of Housing and Urban

Development (HUD)• Department of Justice (DOJ)

Documents

©2011 Kaplan, Inc.1 Mortgage Fraud-Appraiser Risk Management Course Number 027 Instructor ____________ Phone: ______________ cell or ______________home/office

©2011 Kaplan, Inc.1 Mortgage Fraud-Appraiser Risk Management Course Number 027 Instructor Phone: cell or ____home/office