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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