We have talked a lot about deceptive or predatory lending practices and other
types of mortgage fraud aimed at homeowners. With the advent of MBA's
website it is probably time to state that lenders themselves may be even bigger
victims of mortgage fraud than the borrowers they serve.
In the four years ending last September, The Federal Bureau of Investigation's "Operation Continued Action" identified more than 245 subjects in 158 investigations of financial institution fraud. These investigations resulted in 11,466 indictments, 11,362 convictions, and $8.1 billion in restitution orders. While many of the instances of fraud against lenders are small in scope, financial institution fraud is a very big deal. The FBI recently tallied the results of some of the fraud it is investigating:
- North Carolina: an undercover investigation of seven groups led to identification
of fraudulent loans which exposed financial institutions
and mortgage companies to potential losses of $130 million.
- Denver, Colorado: five persons arraigned and changed with roles in obtaining
loans employing stolen identities then using those loan proceeds to purchase
substandard houses possibly to flip. Losses estimated at $19 million.
- Kansas City, Missouri: three persons arraigned for their role in a ring which utilized straw purchasers of properties which were then foreclosed upon. They did this approximately 300 times resulting in losses in excess of $15 million.
And borrowers are often dragged along in the wake of such fraud.
Some mortgage fraud schemes are pretty bush-league (but they work) and others are very sophisticated. At the very low end of the scale is misrepresentation of fact on a mortgage application. If you say you are planning to live in a property when your intent is to rent it out that is financial institution fraud; not likely to be prosecuted or even noticed as long as your payments are made on time, but fraud all the same.
Another example of the amateur hour variety is identity theft. The instances I have encountered usually involved an innocent and totally clueless wife.
It is amazing how many married men have girl friends who look enough like their wives to pass muster at a mortgage closing. (And maybe a lot of married women have boyfriends that resemble hubby, but it doesn't often seem to work that way.) The husband needs money for business purposes, to cover urgent debt, or to finance a new life with the girlfriend. He applies for and receives a mortgage or home equity loan on the marital home and shows up with the girlfriend who has a false ID and a sharp pencil. Loan docs signed and proceeds received, hubby either takes off for Aruba, or hopes that he can maintain payments on the new loan so his wife never uncovers his duplicity. When or if the loan defaults, the lender is left with paper that gives them the right to foreclose, at most, on 1/2 of the property. There will also be a furious wife who may or may not be able to prove her victimization but can still create a public relations nightmare.
Moving up the sophistication scale; flipping involves repeatedly buying and selling or refinancing the same piece of property over a short period of time, always claiming a higher property value. Flipping may be a team effort or it may involve an innocent with good credit but a little greed in his soul.
For example, Buyer #1 buys a home for $60,000 and obtains a 95 percent mortgage from Lender #1 for $57,000 Immediately after obtaining the deed, he sells the property for $90,000 to either a collaborator or to an innocent who has been convinced he can buy the property for nothing down and cover his payments with rent from a tenant provided by the seller (and he may be offered a little commission on the deal.) Buyer #2 goes to a different lender and arranges for a mortgage of $85,500 on a property that was only worth $60,000 a few months before and probably is still worth $60,000. Naturally there has to be an appraisal, but an honest appraiser will probably have no trouble finding comps that, on the exterior, appear reasonably similar to the subject property and appraisers will admit and are now publicly complaining that they are often under pressure from lenders to produce appraisals that justify the purchase price. Then, of course, the appraiser might be in on the deal. Maybe a few weeks or months later Buyer #2 sells the property back to Buyer #1 for $110,000 and a third lender is approached or maybe Buyer #1 disappears with the cash from the previous two transactions leaving his other victim, Buyer #2 with a loan he cannot repay and ruined credit. In any case, the last lender is left with a house that is not worth the money it lent on its purchase.
Sometimes flipping is implemented without a deed even changing hands until the last round. Buyer #1 and his accomplice will "flip" the sales contract back and forth, inflating the sales price on paper until it reaches a desired level and then obtaining a mortgage on the final amount. This way the crook doesn't even need the cash for a down payment.
In areas undergoing revitalization flipping is random and some is completely legit. Many reputable investors and builders do buy property, quickly rehab it, and sell it again at an honest price for at a healthy profit. It is difficult for lending institutions to know what kind of sale they are dealing with.
Sometimes it is just the garden variety grifter who implements a fraud, but the FBI is seriously going after mortgage fraud that involves insiders; real estate agents, loan originators, appraisers, home builders, and closing attorneys.
Insiders are in a position to perpetrate more sophisticated types of fraud involving false or altered documentation. This can mean falsifying income, hiding debt, or inflating appraisal information to make a borrower or a property more credible candidates for a loan. Another scam is issuing a double set of settlement statements, one for the property seller reflecting the actual sales price and a second for the lender with a higher price reflecting the amount upon which the lender funded the loan. The loan amount is probably more than the property value and the crooks end up with the excess funds.
Many financial institutions are federally chartered and/or federally insured. Even the mortgage company in the strip mall on State Road 17 is tied into the federal system if it packages a fraudulent loan for sale to Freddie, Fannie or the VA.. Therefore, most lender fraud is a federal crime and the Feds don't mess around. In addition to the FBI, the IRS is now involved which puts an interesting twist on the subject. In February the tax guys announced that they were actively pursuing real estate tax fraud and that criminal prosecutions and prisons terms were sharply increasing. These prosecutions are not for the initial crimes, but for failing to declare and pay taxes on the ill-gotten gains. Therefore, if you are inclined to rip off the First National Bank of Coffee County, at least be sure you include the proceeds on your Form 1040, Schedule C. Sort of funny, but don't forget that the IRS is very good at this type of prosecution. They were, after all, the only ones who were able to nail Al Capone.
In addition to the Mortgage Bankers Association, other big players in the mortgage
industry are taking steps to stamp out fraud against financial institutions
and we will take a look at some of these programs and procedures at a later