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MORTGAGE FRAUD

I. General Overview

The increased reliance by both financial institutions and non-financial institution lenders on third-party brokers has created opportunities for organized fraud groups, particularly where mortgage industry professionals are involved.

Combating significant fraud in this area is a priority, because mortgage lending and the housing market have a significant overall effect on the nation's economy. All Mortgage Fraud programs were recently consolidated within the Financial Institution Fraud Unit, even where the targeted lender is not a financial institution. This consolidation provides a more effective and efficient management over Mortgage Fraud investigations, the ability to identify and respond more rapidly to emerging Mortgage Fraud problems and a clearer picture of the overall Mortgage Fraud problem.

Each Mortgage Fraud scheme contains some type of "material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase or insure a loan." The Mortgage Bankers Association projects $2.37 trillion in mortgage loans will be made during 2006. The FBI compiles data on Mortgage Fraud through Suspicious Activity Reports (SARs) filed by federally-insured financial institutions and Department of Housing and Urban Development Office of Inspector General (HUD-OIG) reports. The FBI also receives complaints from the mortgage industry at large.

A significant portion of the mortgage industry is void of any mandatory fraud reporting. In addition, as initial mortgage products are repackaged and sold on secondary markets, the sale of the mortgages, in many cases conceal or distort the fraud, causing it not to be reported. Therefore, the true level of Mortgage Fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. However, based on various industry reports and FBI analysis, Mortgage Fraud is pervasive and growing.

The FBI investigates Mortgage Fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and Mortgage Fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.

Fraud for Housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan.

The defrauding of mortgage lenders should not be compared to predatory lending practices which primarily affect borrowers. Predatory lending typically effects senior citizens, lower income and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, sub-prime or higher interest rates and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on his mortgage payment and undergoing foreclosure or forced refinancing.

Although there are many Mortgage Fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders. The FBI is engaged with the mortgage industry primarily in identifying fraud trends and educating the public. Some of the current rising Mortgage Fraud trends include: equity skimming, property flipping, and mortgage related identity theft. Equity skimming is a tried and true method of committing Mortgage Fraud. Today's common equity skimming schemes involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors. Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers and shell companies, along with industry insiders to conceal their methods and override lender controls.

Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially valued properties are then repurchased several times for a higher price by associates of the "flipper." After three or four sham sales, the properties are foreclosed on by victim lenders. Often flipped properties are ultimately repurchased for 50 to 100 percent of their original value.

Since 1999, the FBI has been actively investigating Mortgage Fraud in various cities across the U.S. The FBI also focuses on fostering relationships and partnerships with the mortgage industry to promote Mortgage Fraud awareness. To raise awareness of this issue and provide easy accessibility to investigative personnel, the FBI has provided points-of-contact to relevant groups including the Mortgage Bankers Association (MBA), the Mortgage Asset Research Institute, the Mortgage Insurance Companies of America, Fannie Mae, Freddie Mac, and others.

The FBI has also been working to establish broader SAR reporting requirements for mortgage lenders who do have adequate protection under the current safe harbor provisions. The FBI is collaborating with the mortgage industry and Financial Crimes Enforcement Network (FinCEN) to create a more productive reporting requirement for Mortgage Fraud. The FBI has also been working with the FinCEN to promote an efficient and effective method of identifying and reporting fraudulent mortgage activity affecting non-federally insured mortgage institutions.

The FBI works closely with individual lenders, as well as national associations such as the MBA, the Appraisal Institute, the National Association of Mortgage Brokers, and the National Notary Association, to define and combat the Mortgage Fraud problem.

In addition, on a case-by-case basis, the FBI receives close cooperation from lenders. An example of this is the usage of Real Estate Owned properties from lender inventories to facilitate Mortgage Fraud undercover operations (UCO). In December 2003, the FBI initiated an UCO to address the massive amount of Mortgage Fraud in the Jacksonville area. On September 16, 2004, as a result of this investigation, seven search warrants were executed and two arrests were made. Mortgage broker J.R. Parker and closing attorney Dale Beardsley, were arrested, charging them with bank fraud for their role in this scheme. On or about October 2005, Parker and Beardsley were convicted of conspiracy, mail fraud, and wire fraud. In addition, seizures in the case included two homes valued at over $1million each, six luxury cars and a money judgment in the amount of $14 million. This UCO was made possible by the close cooperation of a local financial institution. This type of cooperation happens around the country and is a key component in the FBI's approach to this growing crime problem.

Regional analysis of suspicious activity reports (SARS) indicating Mortgage Fraud violations indicates the West region of the U.S. led the nation with 35.9 percent of Mortgage Fraud-related SARs filed during FY 2006. The Central, Southeast, and Northeast regions had 24.7, 22.6 and 16.9 percent respectively of Mortgage Fraud related SAR filings. However, FBI pending cases indicated that the Central region had the majority of Mortgage Fraud cases with 33.3 percent during 2006. The West, Southeast, and Northeast had 26.7, 27.2 and 12.8 percentages respectively. FBI pending cases by region are consistent with Mortgage Asset Research Institute (MARI) reporting which indicated that five of the top ten Mortgage Fraud affected states in 2006 were located in the Central region. The chart below is reflective of the Number of Violations of Mortgage Related Fraud SARs (Number of SARs received)

Mortgage Fraud:
Fiscal Year 2002 - 5,623
Fiscal Year 2003 - 6,936
Fiscal Year 2004 - 17,127
Fiscal Year 2005 - 21,994
Fiscal Year 2006 - 35,617

Commercial Loan Fraud:
Fiscal Year 2002 - 1,764
Fiscal Year 2003 - 1,850
Fiscal Year 2004 - 1,724
Fiscal Year 2005 - 2,126
Fiscal Year 2006 - 2,409

False Statement:
Fiscal Year 2002 - 3,711
Fiscal Year 2003 - 4,569
Fiscal Year 2004 - 6,784
Fiscal Year 2005 - 11,611
Fiscal Year 2006 - 21,203

The chart below is reflective of Dollar Losses Reported in Mortgage Related Fraud SARs (Dollar Losses Reported in Millions)

In Mortgage Fraud:
Fiscal Year 2002 - $293
Fiscal Year 2003 - $225
Fiscal Year 2004 - $429
Fiscal Year 2005 - $1,014
Fiscal Year 2006 - $946

In Commercial Loan Fraud:
Fiscal Year 2002 - $1,010
Fiscal Year 2003 - $1,060
Fiscal Year 2004 - $1,163
Fiscal Year 2005 - $711
Fiscal Year 2006 - $540

In False Statement:
Fiscal Year 2002 - $469
Fiscal Year 2003 - $388
Fiscal Year 2004 - $458
Fiscal Year 2005 - $998
Fiscal Year 2006 - $1,402

Mapping data from FY 2005 SARs, FBI pending Mortgage Fraud cases, Federal Housing Authority (FHA)-insured loans defaulting between October 1, 2003 and September 30, 2001 and 2005 MARI data, reveals the top 16 states for Mortgage Fraud activity. The map below shows states documented by three or four sources include California, Colorado, Florida, Georgia, Illinois, Michigan, and Texas. The map below shows states documented by two sources include North Carolina, Ohio, Utah, and Missouri, and states documented by one source include: Arizona, Indiana, Louisiana, New York, and South Carolina.

II. Overall Accomplishments

Through FY 2006, 818 cases investigated by the FBI resulted in 263 indictments and 204 convictions of Mortgage Fraud criminals. The following notable statistical accomplishments are reflective in FY 2006 for Mortgage Fraud: $388.9 million in Restitutions, $1.4 million in Recoveries, and $231 million in Fines. The chart below is reflective of the number of pending cases from FY 2003 through FY 2006.

Fiscal Year 2003 - 436
Fiscal Year 2004 - 534
Fiscal Year 2005 - 721
Fiscal Year 2006 - 818

III. Significant Cases

AMERIFUNDING (DENVER):
Amerifunding was a Mortgage Brokerage owned and operated by Gerald Small in Colorado, which maintained two "warehouse" lines of credits, each at a large federally-insured financial institution in the U.S. In order to support a lavish lifestyle, Small created fictitious loans to live off of the lines of credit. The borrower information, name, and social security number, were invented. Eventually, one of the creditors asked for verification of identification thereby defeating the "invention" process. To deal with this, Small placed an advertisement for a $100,000+ Account Representative position at his company. Applicants eagerly completed applications inclusive of names, social security numbers and copies of driver's licenses which Small wasted no time in utilizing for more fictitious loans. Investigation determined that Small had kited over $200 million in fraudulent mortgage loans and used the stolen identities of 47 job applicants to obtain mortgage funding for fictitious home loans, or "air loans" totaling over $21.5 million during a 24-month period.

Gerald Small engaged with others in a massive Kiting and Mortgage Fraud scheme in Colorado resulting in the conviction of six individuals, the seizure of almost $20 million in cash and assets, the restitution of two private jet aircraft, and losses to federally- insured financial institutions of approximately $35 million.

MIDTOWNE RESTORATION LLC (KANSAS CITY):
Brent Michael Barber led the Mortgage Fraud ring holding himself and company Midtowne Restoration LLC as a real estate investment company. "Straw Buyers" were solicited in schemes where they were paid $2,000 for use of their identity and credit profiles to obtain mortgage financing for properties predominately in low income areas of Kansas City, Missouri. In other schemes, investors were recruited for properties which were represented to be refurbished and appraised at amounts far in excess of their true value. The investors were assured by Barber that renters would be found to service the mortgage and maintenance costs of the properties so there would be no risk.

On February 23, 2006, Barber pled guilty to 104 counts contained in two federal indictments, and was convicted by a jury for a fraud covered by a third federal indictment.

Also convicted in the schemes were eight individuals which involved about 300 fraudulent mortgage loans worth approximately $19.6 million and caused losses to federally-insured financial institutions of approximately $11.8 million. On October 27, 2006, Barber was sentenced to 12 years and 7 months federal incarceration, and ordered to pay restitution in the amount of $11,206,419.

MORTGAGE FRAUD INDICATORS

· Inflated Appraisals

· Exclusive use of one appraiser

· Increased Commissions/Bonuses - Brokers and Appraisers

· Bonuses paid (outside or at settlement) for fee-based services

· Higher than customary fees

· Falsifications on Loan Applications

· Buyers told/explained how to falsify the mortgage application

· Requested to sign blank application

· Fake Supporting Loan Documentation

· Requested to sign blank employee or bank forms

· Requested to sign other types of blank forms

· Purchase Loans Disguised as Refinance

· Purchase loans that are disguised as refinances
  · requires less documentation/lender scrutiny

· Investors-Short Term Investments with Guaranteed Re-Purchase

· Investors used to flip property prices for fixed percentage

· Multiple "Holding Companies" utilized to increase property values

COMMON MORTGAGE FRAUD SCHEMES

Property Flipping - Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.

Silent Second - The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.

Nominee Loans/Straw Buyers - The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee's name and credit history to apply for a loan.

Fictitious/Stolen Identity - A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant's name, personal identifying information, and credit history are used without the true person's knowledge.

Inflated Appraisals - An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Foreclosure Schemes - The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner.

Equity Skimming - An investor may use a straw buyer, false income documents, and false credit reports, to obtain a mortgage loan in the straw buyer's name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.

Air Loans - This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.

Mortgage Fraud Prevention Measures

General Fraud Tips

Mortgage Fraud is a growing problem throughout the U.S. People want to believe their homes are worth more than they are, and with housing booms going on throughout the U.S., there are people who try to capitalize on the situation and make an easy profit.

Tips to protect you from becoming a victim of Mortgage Fraud:

Get referrals for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county, or city regulatory agencies.

· If it sounds too good to be true, it probably is. An outrageous promise of extraordinary profit in a short period of time signals a problem.

· Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques.

· Look at written information to include recent comparable sales in the area, and other documents such as tax assessments to verify the value of the property.

· Understand what you are signing and agreeing to--If you do not understand,

· Re-read the documents, or seek assistance from an attorney.

· Make sure the name on your application matches the name on your identification.

· Review the title history to determine if the property has been sold multiple times within a short period--It could mean that this property has been "flipped" and the value falsely inflated.

· Know and understand the terms of your mortgage--Check your information against the information in the loan documents to ensure they are accurate and complete.

· Never sign any loan documents that contain blanks--This leaves you vulnerable to fraud.

· Check out the tips on the Mortgage Bankers Association's (MBA) website at for additional advice on avoiding Mortgage Fraud.

Mortgage Debt Elimination Schemes

· Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card, and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport.