1. MORTGAGE FRAUD: ITS LEGAL, POLITICAL, COMMUNITY, AND CONSUMER IMPLICATIONS Presented by: Andy Carswell, Ph.D. University of Georgia HACE Department JURIS 5540 September 12, 2013

2. QUESTIONS TO BE ADDRESSED DURING TODAYS PRESENTATION What exactly is (isnt) mortgage fraud? How pervasive is it? What are the consequences of mortgage fraud? What are some of the warning signs for mortgage fraud within communities? Why has it taken so long for mortgage fraud to become newsworthy? How does mortgage fraud change over time? What can be done about mortgage fraud for the long- term? 3. What exactly is mortgage fraud? 4. Mortgage Fraud Is 1. A crime whereby property values are artificially inflated in order to take significant funds out of the propertys equity 2. A crime in which a party knowingly makes any deliberate misstatement, misrepresentation, or omission during the mortgage lending process. 3. A scheme to defraud banks and usually requires collusion by: Buyer / Seller Real Estate Agent Real Estate Appraiser Mortgage Broker Real Estate Attorney Source: Scott Smith 5. Mortgage Fraud Is NOT Flipping properties for the sake of turning a profit after improvements have been made A reference to non owner-occupied property used for speculative purposes over time Predatory lending 6. Illustration of a Common Fraud Scheme Property flipper purchases house for $100,000. Obtains fraudulent appraisal for $400,000. Sells house for $400,000 and walks away with $300,000 profit. Home usually results in foreclosure. Bank takes a $300,000 loss. If FHA insured, government absorbs loss. Source: Sgt. Terry Joyner, ATL Police 7. Source: FBI 8. OK, so how bad is this mortgage fraud problem? 9. SUSPICIOUS ACTIVITY REPORTS Mortgage loan fraud reported on SARs: Falsification of loan application Identity theft Misrepresentation of Loan Purpose Misuse of Loan Proceeds Appraisal fraud Fraudulent flipping 10. Source: Lexis-Nexis 11. Source: Lexis-Nexis 12. Source: Lexis-Nexis 13. Mortgage Fraud in Georgia Declines in 2005 The dramatic reduction in mortgage fraud in Georgiais due to very aggressive efforts by many parties, including this department, local, state and federal law enforcement and prosecutors, lenders and GREFPAC. It has been a coordinated effort, which is what it takes to adequately address such a widespread problem. Department of Banking of Finance Commissioner Rob Braswell May 26, 2006 14. What are some of the consequences of mortgage fraud? 15. Some Common Misperceptions About Mortgage Fraud Banks are the only victims Surrounding communities should not be concerned This is a white-collar crime only This only happens in a few neighborhoods Source: Scott Smith 16. Economic Consequences of Mortgage Fraud Falsely escalated property values Increases in property taxes and home owners insurance Increases in foreclosures Neighborhood decline Source: Sarah Gillespie 17. Falsely Escalated Property Values Comparative analysis becomes difficult to determine Buyers and sellers assume market value based on fraudulent sales Buyers purchase homes overpriced for the current sustainable market Sellers expect to sell their homes at escalated prices. Create affordability issues within your communities. Source: Sarah Gillespie 18. Increases in Property Taxes, Insurance and Bank Fees Tax assessors increase property taxes based on artificial property value increases Homeowners Insurance policies increase due to artificial values and fraudulent activity The cost of doing business at your bank just increased considerably Source: Sarah Gillespie 19. Increases in Foreclosure Criminals pull value out without improving property Abandoned properties Properties foreclose and fall below actual market values (banks sell at a loss) Artificial values increase property taxes forcing some legitimate low-income owners to foreclose Source: Sarah Gillespie 20. Neighborhood Decline Instability, caused by high foreclosures, fractures community social fabric Ultimately lowers actual values, not just prices, for properties in community Legitimate homeowners risk getting no return for real improvements Homes are abandoned, vacant and boarded up attracting bad elements Crime increases and inevitably the value of property goes down Appeal of neighborhood decreases, and neighborhood could become blighted Source: Sarah Gillespie 21. MORTGAGE FRAUD AND ITS RELATIONSHIP WITH HOUSE VALUES 22. Mortgage Fraud House Neighborhood Property Value Surrounding City Property Value FRAUD DETECTED! True Market Value? Fraud 23. Source: Carswell, A., Wade, M., Smith, S., & Huet, B. (2010). Techniques to enhance the recognition of mortgage fraud in college classrooms and affected communities. Journal of Forensic Studies in Accounting and Business, 2(1), 73-91. 24. Source: Carswell, A.T. (2009). Effects of mortgage fraud on property tax assessments. Journal of Property Tax Assessment and Administration, 6(2), 5-17. Mortgage Fraud Helps Push Assessment Values Upward 25. Source: Carswell, A.T. (2009). Effects of mortgage fraud on property tax assessments. Journal of Property Tax Assessment and Administration, 6(2), 5-17. Mortgage Fraud Helps Push Assessment Values Upward 26. WHAT ARE SOME OF THE WARNING SIGNS OF MORTGAGE FRAUD? 27. Table 1: Concentration of Mortgage Fraud Area # of Census Tracts Analyzed Total No Fraud Single Fraud Multiple Frauds Ohio 1587 1508 24 55 Georgia (Atlanta metro) 186 129 21 36 Missouri 573 504 7 62 CONCENTRATION OF MORTGAGE FRAUD Source: Carswell, A., & Bachtel, D. (2009). Mortgage fraud: A risk factor analysis of affected communities. Crime, Law, & Social Change, 52(4), 347-364. 28. MORTGAGE FRAUD INDICATORS BY STATE Unemployment Rate Poverty Rate Vacancy Rate Median House Price Underserved Status Ohio Fraud Census Tracts 8.35% 20.42% 10.89% $108,851 N/A Non-Fraud Census Tracts 6.59% 14.32% 7.69% $192,496 N/A Georgia (Atlanta metro) Fraud Census Tracts 9.27% 16.31% 7.13% $189,349 25.64% Non-Fraud Census Tracts 11.74% 22.68% 8.89% $157,263 39.13% Missouri Fraud Census Tracts 9.49% 20.80% 53.46% $ 67,701 21.27% Non-Fraud Census Tracts 7.37% 12.82% 24.51% $105,249 4.03% Source: Carswell, A., & Bachtel, D. (2009). Mortgage fraud: A risk factor analysis of affected communities. Crime, Law, & Social Change, 52(4), 347-364. 29. INDICATORS BY SEVERITY OF MORTGAGE FRAUD Census Tract Underserved Areas Unemployment Rate Poverty Rate Vacancy Rate Median House Price No Fraud 49.63% 7.08% 14.47% 11.73% $115,920 Moderate Fraud (1-8 occurrences) 70.21% 8.61% 19.18% 20.69% $112,618 Heavy Fraud (over 8 occurrences) 65.63% 11.47% 20.85% 47.16% $100,944 Source: Carswell, A., & Bachtel, D. (2009). Mortgage fraud: A risk factor analysis of affected communities. Crime, Law, & Social Change, 52(4), 347-364. 30. Source: Carswell, A., & Bachtel, D. (2009). Mortgage fraud: A risk factor analysis of affected communities. Crime, Law, & Social Change, 52(4), 347-364. 31. Why am I just now learning about mortgage fraud? 32. MEDIA COVERAGE OF MORTGAGE FRAUD 2000 2001 2002 2003 2004 2005 2006 Major Papers 25 33 25 29 42 66 100 Magazines and Journals 1 1 1 1 4 14 51 Policy Papers 0 0 0 0 0 0 0 Midwest Regional Sources 16 10 27 12 17 46 50 Northeast Regional Sources 9 18 15 15 12 24 35 Southeast Regional Sources 12 17 22 36 67 53 99 Western Regional Sources 7 14 22 21 48 29 48 North/South America News Sources 6 17 17 19 32 75 93 Foreign News Sources 20 13 14 47 20 37 69 Business & Finance 33 29 38 41 96 181 242 Industry News 27 24 32 27 72 116 138 Totals 156 176 213 248 410 641 925 Source: Lexis-Nexis 33. Why am I just now learning about mortgage fraud? Mortgage fraud has actually existed for a long time. State of the housing economy Rise of Internet banking Increased use of 3rd party brokers/lack of regulation Popularity of real estate investor groups Concurrent with rise in identity theft Decline of neighborhood cohesiveness 34. How does mortgage fraud change over time? 35. DIFFERENCES BETWEEN FORECLOSURE RESCUE AND OTHER TYPES OF MORTGAGE FRAUD Instead of occurring at the beginning of the loan transaction, this occurs sometime within the duration of the mortgage period. Bank not really the victim here, it is the homeowner! There are varying punishments and legal remedies for this type of fraud. 36. Source: Freddie Mac 37. REVERSE MORTGAGES AS AN ATTRACTIVE TARGET FOR FRAUD 38. HOW DO REVERSE MORTGAGES WORK EXACTLY? Traditional Refi Must be 62 or older Must claim the home as primary residence A portion of the home owners equity is made available to homeowner based on: - homes value - owners age - prevailing interest rates Proceeds are available through either: - lump sum payment - annuity stream - line of credit 39. POTENTIAL MARKET FOR REVERSE MORTGAGES Nearly 7 million elderly households fit the profile of house-rich, cash-poor Rasmussen, Megbolugbe, & Morgan (1995) Just under 1 million low- to moderate-income would see a significant increase to their financial well-being Merrill, Finkel, & Kutty (1994) Kutty (1998) estimated that RMs could effectively lower the poverty rate by 2.4% 40. Source: Carswell, A., Seay, M.C., & Polanowski, M. (2013). Reverse mortgage fraud against seniors: Recognition and education of a burgeoning problem. Journal of Housing for the Elderly, 27(1/2), 146-160. 41. MORE REASONS FOR GROWTH IN REVERSE MORTGAGES Lack of retirement preparedness, as stated by EBRIs Retirement Confidence Survey Recent economic downturn exacerbated the problem (VanDerhei, 2011) An increasing desire for older households to age in place (Bayer & Harper, 2000) Astonishing rise in medical expenses (Skinner, 2007) 42. Source: Carswell, A., Seay, M.C., & Polanowski, M. (2013). Reverse mortgage fraud against seniors: Recognition and education of a burgeoning problem. Journal of Housing for the Elderly, 27(1/2), 146-160. 43. ROLE OF HOUSING COUNSELORS IN ADDRESSING FRAUD 44. TRADITIONALLY HECM HOUSING COUNSELORS ARE EXPECTED TO: Serve as a trusted gatekeeper by closing the information asymmetry gap between buyer and seller Be higher trained than other types of housing counselors Provide some follow-up with clients even after the HECM has been transacted 45. OK, so what can be done about mortgage fraud? 46. Warning Signs of Fraud Unkempt lawn/yard No sign of person living there People arriving at location only at night Houses selling unusually quickly Source: Derrick Duckworth, Jeannie Mills 47. Problem Resolution Requires Communication and Action on a Variety of Fronts Community/HOAs Mayor/City Council Local Police Force Real Estate Industry Professionals Source: Scott Smith 48. Some Inconsistencies with Technological Tools Inconsistencies in ownership between title commitment, appraisal and sales contract More than 5 mortgage inquiries reflected on credit report within last 90 days Bank statement deposits do not coincide with income/payroll deposits Seller is corporation Cross-outs on title commitments, sales contracts, or other loan documents A small % of fraud transactions are automatically flagged by technological tools A large majority of some banks claims include loans that passed technological tool screening Over-reliance on technological tools costs the industry billions of dollars in losses on an annual basis 49. Know Some of the Targets for Mortgage Fraud Out-of-Town Investors Young Women Military Older, More Mature Neighborhood Elderly Residents Elderly Investors Appraisersyes, Appraisers! No HOA/Weak HOA Source: Scott Smith 50. Places To Turn For Help In Mortgage Fraud Situations GREFPAC Local law enforcement Housing/building code inspectors Community Association Institute Legitimate appraisers DO NOT hostilely confront fraudsters! Source: Scott Smith