Mortgage Fraud Defined
Mortgage fraud is a material misstatement,misrepresentation, or omission relied upon by anunderwriter or lender to fund, purchase, or insure aloan. Mortgage loan fraud is divided into twocategories: fraud for property and fraud for profit.Fraud for property/housing entailsmisrepresentations by the applicant for the purposeof purchasing a property for a primary residence.This scheme usually involves a single loan.Although applicants may embellish income andconceal debt, their intent is to repay the loan. Fraudfor profit, however, often involves multiple loans andelaborate schemes perpetrated to gain illicitproceeds from property sales. Grossmisrepresentations concerning appraisals andloan documents are common in fraud for profitschemes, and participants are frequently paid fortheir participation. Although there is no centralizedreporting mechanism for mortgage fraudcomplaints or investigations, numerous regulatory,industry, and law enforcement agencies collaborateto share information used to assess the currentfraud climate.Source: FBI Financial Crimes Section, FinancialInstitution Fraud Unit, Mortgage Fraud: A Guide forInvestigators, 2003.Mortgage fraud continued to increase in 2009 despite modest improvements in various economic sectors. While recent economic indicators report improvements invarious sectors, overall indicators associated with mortgage fraud, such as foreclosures, housing prices,contracting financial markets, and tighter lending practices by financial institutions, indicate that the housingmarket is still in distress. In addition, the discovery of mortgage fraud via mortgage industry loan reviewprocesses, quality control measures, regulatory and industry referrals, and consumer complaints lag behindthese indicators, often up to two years or more.U.S. housing inventory increased from 127 million units to 130 million units from 2007 to 2009,
U.S. propertiesin foreclosure increased more than 120 percent,
and U.S. home prices declined each consecutive year since2007.
Meanwhile unemployment increased from 7.7 percent in January 2009 to 10 percent in December 2009.
The ongoing discovery of the lack of due diligence in historical subprime loans, loan modification re-defaults,
increasing prime fixed-rate loan delinquencies,
and the expected increases over the next three years
in theinterest rates on Alternative A-paper (Alt-A)
and Option Adjustable Rate Mortgage(ARM)
loans raise the chancefor future mortgage defaults. During the next two years, a total of $80 billion of prime and Alt-A loans and a total of$50 billion subprime loans are due to recast.
These factors combine to fuel a mortgage fraud climate rife withopportunity. Consequently, mortgage fraud perpetrators are continuing to take advantage of the opportunitiesprovided in a distressed housing market.Mortgage fraud continued through 2009 despite increased government-mandated scrutiny of mortgage loanapplications and institutions and recent government stimulus interventions. From 2008 through 2009, the U.S.Congress passed various stimulus packages
aimed at stabilizing the current economic climate and releasingenormous funds into the economy, but each has potential fraud vulnerabilities. Additionally, the FBI, HUD, FederalTrade Commission, Federal National Mortgage Association (Fannie Mae), Federal Home Loan MortgageCorporation (Freddie Mac), and other entities have taken steps to increase mortgage fraud awareness andprevention measures, including posting mortgage fraud warnings and alerts on their websites and offeringtraining and educational opportunities to consumers, law enforcement, regulatory, and industry partners.Federal programs and initiatives resulting from the American Recovery and Reinvestment Act (ARRA)––includingthe Hope for Homeowners Program, the Home Affordable Modification Program, and the Home Price DeclineProtection Program––will likely assist a majority of vulnerable homeowners with refinancing and loanmodifications needed to remain in their homes. This should help to reduce the pool of potential scam victims and minimize the number of homeowners entering intoforeclosure.Additionally, other programs implemented by Congress as a result of the Emergency Economic Stabilization Act (EESA) and the Housing and Economic Recovery Act(HERA) (Congress authorized $25 million to be allocated each year from FY 2009 through 2013 to provide FHA with improved technology and processes and to helpreduce mortgage fraud)
that were designed to stimulate the economy have the potential to provide new targets for mortgage fraud activity as perpetrators vie forbillions of dollars provided by these programs.
Vulnerabilities associated with these and similar programs include the lack of transparency, accountability, oversight, and enforcement that predisposes them to fraudand abuse. These vulnerabilities could potentially lead or contribute to an increase in government, mortgage, and corporate frauds, as well as public corruption.Several mortgage fraud schemes, especially foreclosure rescue schemes, have the potential to spread if the current distressed economic trends and associatedimplications continue through and beyond 2010, as expected. Increases in defaults and foreclosures, declining housing prices, and decreased housing demandplace pressure on lenders, builders, and home sellers to maintain the productivity and profitability they enjoyed during the boom years. These and other marketparticipants are perpetuating and modifying old schemes, including property flipping, builder bailouts, short sales, debt eliminations, and foreclosure rescues.Additionally, they are facilitating new schemes, including credit enhancements, property thefts, and loan modifications in response to tighter lending practices.Consequently, mortgage fraud perpetrators are continuing to take advantage of the opportunities provided in a distressed housing market. When the market is downand lending is tight, perpetrators gravitate to loan origination schemes involving fraudulent/manufactured documents. When the market is up they gravitate to inflatingappraisals and equity skimming schemes. According to MARI reporting, “Collusion among insiders, employees, and consumers is highly effective in times ofrecession because everyone has something to gain in times of desperation.”
Victims of mortgage fraud activity may include borrowers, mortgage industry entities, and those living in neighborhoods affected by mortgage fraud. As propertiesaffected by mortgage fraud are sold at artificially inflated prices, properties in surrounding neighborhoods also become artificially inflated. When this occurs, propertytaxes also artificially increase. As unqualified homeowners begin to default on their inflated mortgages, properties go into foreclosure and neighborhoods begin todeteriorate, and surrounding properties and neighborhoods witness their home values depreciating. As this happens, legitimate homeowners find it difficult to selltheir homes.Additionally, the decline in U.S. home values has a direct correlation to state and local governments’ ability to provide resources for schools, public safety, and othernecessary public services that are funded in large part from property tax revenue.
According to the National League of Cities (NLC), the municipal sector likely faces acombined estimated shortfall of $56 to $83 billion from 2010 to 2012. The NLC expects that revenue from residential and, more recently, commercial property taxcollections will see a significant decline from 2010 to 2012. City managers are responding with layoffs, furloughs, payroll deductions, delays and cancellations ofcapital infrastructure projects, and cuts in city services.
According to the National Association of Realtors, local tax formulas and assessment cycles do not reflectrapid home price declines. This results in high property taxes for homeowners as median home prices continue to decline 22.3 percent from 2006 to 2009.
The schemes most directly associated with the escalating mortgage fraud problem continue to be those defined as fraud for profit. Prominent schemes include loanorigination, foreclosure rescue, builder bailout, short sale, credit enhancement, loan modification, illegal property flipping, seller assistance, bust-out, debt elimination,mortgage backed securities, real estate investment, multiple loan, assignment fee, air loan, asset rental, backwards application, reverse mortgage fraud, and equityskimming. Many of these schemes employ various techniques such as the use of straw buyers, identity theft, silent seconds, quit claims, land trusts, shell companies,fraudulent loan documents (including forged applications, settlement statements, and verification of employment, rental, occupancy, income, and deposit), double soldloans to secondary investors, leasebacks, and inflated appraisals.
Mortgage Fraud Perpetrators
Mortgage fraud perpetrators are industry insiders, including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlementattorneys, land developers, investors, builders, and bank and trust account representatives. Perpetrators are also known to recruit ethnic community members asvictims and co-conspirators. FBI reporting indicates numerous ethnic groups are involved in mortgage fraud either as perpetrators or victims. This type of mortgagefraud is known as affinity fraud. Ethnic groups involved in mortgage loan origination fraud include North Korean, Russian, Bulgarian, Romanian, Lithuanian, Mexican,Polish, Middle Eastern, Chinese, and those from the former Republic of Yugoslavian States. Street gangs such as the Conservative Vice Lords, Black P. Stone Nation,New Breeds, Four Corner Hustlers, Bloods, and Outlaw Motorcycle Gang are also involved in various forms of mortgage loan origination fraud as a means to laundermoney from illicit drug proceeds. Additionally, African, Asian, Balkan, and Eurasian organized crime groups have also been linked to various mortgage fraud schemes.
4/18/2011FBI — Mortgage Fraud Report 2009fbi.gov/…/mortgage-fraud-20092/21