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May 2007
This house was used in a Mortgage Fraud Scheme
Key Findings
Top Areas for Mortgage Fraud
- Analysis of available law enforcement and industry
resources indicates that the top ten mortgage fraud
areas are California, Florida, Georgia, Illinois,
Indiana, Michigan, New York, Ohio, Texas, and Utah.
Other areas significantly affected by mortgage fraud
include Arizona, Colorado, Maryland, Minnesota, Missouri,
Nevada, North Carolina, Tennessee, and Virginia.
- There is a strong correlation between mortgage
fraud and loans which result in default and foreclosure.
Emerging Schemes
- Recent statistics suggest that escalating foreclosures
provide criminals with the opportunity to exploit
and defraud vulnerable homeowners seeking financial
guidance.
- Perpetrators are exploiting the home equity line
of credit (HELOC) application process to conduct mortgage
fraud, check fraud, and potentially money laundering-related
activity.
FBI and Industry Respond to Escalating Mortgage
Fraud
- The FBI is proactively working with the mortgage
industry in an effort to curb mortgage fraud crimes.
The FBI signed a memorandum of agreement with the
MBA to promote the FBI’s Mortgage Fraud Warning
Notice.
Introduction
The Prieston Group, a risk management
solutions provider that administers an insurance
product covering losses due to fraud and misrepresentation,
calculated that losses attributed to mortgage fraud
will most likely reach $4.2 billion for 2006. This
figure does not take into account another estimated
$1.2 billion spent on fraud prevention tools. |
- The Prieston Group, 2006 Data,
16 February 2007,and 2 April 2007. |
Mortgage Fraud is defined as the intentional misstatement,
misrepresentation, or omission by an applicant or other
interested parties, relied on by a lender or underwriter
to provide funding for, to purchase, or to insure a
mortgage loan. Although no central repository collects
all mortgage fraud complaints, statistics from multiple
sources indicate that mortgage fraud is on the rise.
Some industry explanations for this increase point to
recent high mortgage loan origination volumes that strained
quality control efforts, the persistent desire of mortgage
lenders to hasten the mortgage loan process, the escalation
of home prices in recent years, and the introduction
of non-traditional loans which contain fewer quality
control restraints such as low documentation and no
documentation loans1.
Mortgage loan fraud is divided into two categories:
fraud for property and fraud for profit. Fraud for property/housing
entails minor misrepresentations by the applicant solely
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,
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. Recent
events likely resulted in an increase in mortgage fraud
as higher housing prices tempted borrowers to commit
fraud for property in order to qualify for a mortgage
loan. Also, mortgage fraud perpetrators likely seized
the opportunity to take advantage of the relaxed lending
practices to commit fraud for profit.
The most common form of mortgage fraud is illegal property
flipping which entails false appraisals and other fraudulent
loan documents (see figure 1). Combating mortgage fraud
effectively requires the cooperation of law enforcement
and industry entities. No single regulatory agency is
charged with monitoring this crime. The FBI, Department
of Housing and Urban Development-Office of Inspector
General (HUD-OIG), Internal Revenue Service, Postal
Inspection Service, and state and local agencies are
among those investigating mortgage fraud.
Figure 1: Illegal Property Flipping
Scheme
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Mortgage fraud is a relatively low-risk, high-yield
criminal activity that tempts many. However, according a May
2006 Financial Crimes Enforcement Network (FinCEN) report,
finance-related occupations, including accountants, mortgage
brokers, and lenders, were the most common suspect occupations
associated with reported mortgage fraud2. Perpetrators
in these occupations are familiar with the mortgage loan process
and therefore know how to exploit vulnerabilities in the system.
Victims of mortgage fraud may include borrowers, mortgage
industry entities, and those living in the neighborhoods affected
by mortgage fraud. Lenders are plagued with high foreclosure
costs, broker commissions, reappraisals, attorney fees, rehabilitation
costs, and other related expenses when a mortgage fraud is
committed3. As properties affected by mortgage
fraud are sold at artificially inflated prices, properties
in surrounding neighborhoods also become artificially inflated.
When property values increase, property taxes increase as
well. Legitimate homeowners also find it difficult to sell
their homes as surrounding properties affected by fraud deteriorate.
During boom periods, high mortgage loan volume impacts expedited
quality control efforts which often focus on production. Therefore,
perpetrators may submit loans based on fraudulent information
anticipating that the bogus information will be overlooked.
On the other hand, loan officers, brokers, and others in the
industry are paid by commission and may be tempted to approve
questionable loans when the housing market is down to maintain
current levels of income.
Analysis of mortgage originations indicates a decrease in
demand. As a result of the declining housing market, mortgage
fraud perpetrators may take advantage of eager loan originators
attempting to generate loans for commission. Mortgage loan
originations, including purchases and refinances declined
during 2006 across the United States. The Mortgage Bankers
Association (MBA) estimates that mortgage loan originations
will reach $2.28 trillion during 2007 (see figure 2)4.
According to an MBA December 2006 report, total home sales
during 2006 decreased by approximately 10 percent from 2005
sales. New home sales declined by 17 percent and existing
home sales dipped by 8 percent. In response to a decrease
in demand for housing, builders reduced single-family starts
(through November 2006) which were 14 percent lower than during
the same time period in 2005. The MBA estimates that the oversupply
of housing will continue to affect new home construction,
home sales, and home prices until mid-20075.
Top Areas for Mortgage Fraud
Data was compiled and analyzed from law enforcement
and industry sources to determine those areas of the country
most affected by mortgage fraud during 2006. Information from
the FBI, HUD-OIG, FinCEN, Mortgage Asset Research Institute
(MARI), Federal National Mortgage Association (Fannie Mae),
RealtyTrac Inc. (foreclosure statistics), and Radian Guaranty
Inc., indicate that the top ten mortgage fraud areas for 2006
were California, Florida, Georgia, Illinois, Indiana, Michigan,
New York, Ohio, Texas, and Utah. Other areas significantly
affected by mortgage fraud include Arizona, Colorado, Maryland,
Minnesota, Missouri, Nevada, North Carolina, Tennessee, and
Virginia (see figure 3).
Analysis of available information indicates that mortgage
fraud is most concentrated in the north central region of
the United States. The north central region is followed by
the southeast and west regions.
Regional analysis of FBI pending mortgage fraud-related investigations
as of FY 2006 reveals that the north central region of the
United States led the nation with the most pending investigations.
The north central region was followed by the southeast, west,
south central, and northeast, respectively (see figure 4).
The aggregate amount of ARM loans containing
fraudulent misrepresentations is unknown. However, since
mortgage fraud perpetrators hope to inflate the value
of their properties and quickly sell them, they would
likely gravitate towards mortgage loans that offered low
and short-term interest rates such as those offered by
ARMs. |
Delinquency, Default, and Foreclosure: Potential Fraud
Indicators
Mortgage loans based on fraudulent information usually result
in delinquency, default, or foreclosure in a bear market.
According to the MBA, both delinquency and foreclosures rates
increased during 2006 and were largely concentrated in adjustable
rate mortgage (ARM) loans, especially sub-prime ARMs. This
is partly attributable to the recent rise in interest rates,
placing a strain on ARMs borrowers6.
BasePoint Analytics, a fraud analytics company, analyzed
more than 3 million loans and found that between 30 and 70
percent of early payment defaults (EPDs) are linked to significant
misrepresentations in the original loan applications7.
Radian Guaranty, Inc. is a leading provider of mortgage insurance
which protects lenders against loan default. Of the top ten
states Radian Guaranty Inc. ranked highest for mortgage fraud,
seven of them also ranked in the company’s top ten for
EPDs. This suggests that EPDs are a good mortgage fraud indicator.
During 2006 there were more than 1.2 million foreclosure
filings nationally, which represents a 42 percent increase
from 2005 figures. The foreclosure rate for 2006 was one foreclosure
filing for every 92 households8. Foreclosures for
2006 surpassed foreclosures for 2005 during every month of
the year9.
Emerging Schemes
Foreclosure Fraud
Recent statistics suggest that 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.
While foreclosure scams vary, they may be used in combination
with other fraudulent schemes. For instance, perpetrators
may view foreclosure-rescue scams as a new method for fraudulently
acquiring properties to facilitate illegal property-flipping
and equity-skimming.
Home Equity Lines of Credit
According to a DOJ press release, Mi Su
Yi and her husband, Paul Amorello, were sentenced in California
in July 2006 for operating a $3 million bust-out scheme
involving business lines of credit and HELOCs. The couple
accessed lines of credit that had been obtained by others
and paid the balances with worthless checks. They subsequently
withdrew cash from the lines of credit before the checks
were returned for insufficient funds. The couple laundered
their proceeds through bank accounts opened under three
false identities. In an attempt to avoid detection, the
couple deposited cash amounts of less than $10,000 into
these accounts. |
-US DOJ, “New Jersey Residents Sentenced
to Prison for Running a $3 Million ‘Bust-Out’
Scheme,” Press Release, 25 July 2006, available
at http://www.usdoj.gov |
Individuals and criminal groups are exploiting the home equity
line of credit (HELOC) application process to conduct multiple-funding
mortgage fraud schemes, check fraud schemes, and potentially
money laundering-related activity. HELOCs differ from standard
home equity loans because the homeowner may borrow against
the line of credit over a period of time using a checkbook
or credit card. HELOCs are aggressively marketed by lenders
as an easy, fast, and inexpensive means to obtain funds. HELOC
funds are normally withdrawn on an as-needed basis to conduct
home repairs or to pay bills, but fraud perpetrators may withdraw
the entire amount within a short time period. Lenders typically
focus on property equity prior to funding HELOCs. As such,
many lenders do not demand a full property appraisal or a
full property title search.
Perpetrators apply for multiple HELOCs to different
lending institutions for a single property within a short
time period. Prior to providing the funding, lenders conduct
searches to determine if the property is encumbered by a lien.
However, liens on a property may not be recorded for several
days or months and thus cannot be immediately verified. Consequently,
lenders do not discover that they hold a third, fourth, or
fifth lien on a property (rather than the expected second
lien) until later. The money obtained from the multiple HELOCs
totals more than the original property purchase price, exceeding
the out-of-pocket expenses incurred to secure the property.
Perpetrators conducting check fraud schemes may manipulate
HELOC accounts and cause lenders to incur losses. For example,
a perpetrator secures a HELOC and withdraws the entire allotted
amount. A fraudulent check is then used to pay the balance
owed on the HELOC. However, the perpetrator quickly withdraws
the check amount from the HELOC before the bank realizes the
check is worthless. When the check is returned for insufficient
funds, the line of credit surpasses its maximum limit and
the lender experiences a loss. HELOC accounts have also been
used in common check frauds where perpetrators stole HELOC
checks, fraudulently completed them, and deposited the funds
into their own personal accounts.
HELOCs may also be used as a means of depositing and withdrawing
laundered proceeds to further conceal the original funding
source. As long as withdrawals from the HELOC do not exceed
the line of credit limit, payments deposited into the account
may be withdrawn later.
FBI and Industry Respond to Escalating Mortgage Fraud
The FBI is proactively working with the mortgage industry
in an effort to curb mortgage fraud crimes. On March 8, 2007,
the FBI signed a memorandum of agreement with the MBA to promote
the FBI’s Mortgage Fraud Warning Notice (see figure
5). The Notice states that it is illegal to make any false
statement regarding income, assets, debt or matters of identification,
or to willfully inflate property value to influence the action
of a financial institution. Under the agreement, the MBA and
the FBI will make the notice available to mortgage lenders
to use voluntarily as a means of educating consumers and mortgage
professionals of the penalties and consequences of mortgage
fraud.10
1Mortgage Asset Research Institute, “Eighth
Periodic Mortgage Fraud Case Report to MBA,” p. 3, 11,
12, April 2006.
2FinCEN, “The SAR Activity Review Trends,
Tips and Issues,” p. 15, May 2006, available at http://www.fincen.gov/sarreviewissue10.pdf
3Bits Financial Round Table, “Fraud Production
Strategies for Consumer, Commercial, and Mortgage Loan Documents,”
A Publication of the Bits Fraud Reductions Steering Committee,
p. 7, January 2005.
4Mortgage Bankers Association Mortgage Finance
Forecast, 13 March 2007, 8 November 2006, 7 December 2005,
and MBA 1-4 Family Mortgage Originations 1990-2005.
5Mortgage Bankers Association, “Year in Review:
Normalization of the Housing Market,” 29 December 2006.
6Mortgage Bankers Association, “Year in Review,
Normalization of the Housing Market, 29 December 2006.
7BasePoint White Paper, “New Early Payment
Default-Links to Fraud and Impact on Mortgage Lenders and
Investment Banks,” p. 2, 2007.
8RealtyTrac Staff, “More Than 1.2 Million
Foreclosures Reported in 2006,” RealtyTrac Inc. Press
Release, 25 January 2007
9RealtyTrac Incorporated, 2005 and 2006 Percent
of Households in Foreclosure, data provided 17 January 2007.
10Mortgage Bankers Association, “MBA Signs Memorandum
of Agreement with FBI to Promote Use of FBI’s Mortgage Fraud
Warning Notice,” Press Release, 8 March 2007.
Criminal Investigative Division, Criminal Intelligence
Section
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