Mortgage Fraud
One element of mortgage fraud is known as abusive lending. Here are ten Red
Flags that might indicate something dishonest has occurred.
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A
lending representative encourages you to include false information on a loan
application.
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The
lending representative has you leave certain line items blank, and enters
the requested information for you after you have signed all of the forms.
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Are
there missing disclosures? (Good faith estimate, HUD-1 Settlement statement,
Truth in Lending information or Special Information Booklet)
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Unexpected settlement costs at the end of the process.
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Is
the amount of the loan higher than the true value of the home?
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Have
you refinanced several times, each time encountering higher and higher fees
and an increased payment? Is it ever represented as a "brand new loan
product?"
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Has
the monthly payment come in higher than what you were told?
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Is
there special language covering late payments that requires you to pay a
"daily interest rate?"
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If
you were sold a balloon loan, was your ability to handle the lump sum
payment taken into consideration, or were you just led to believe that
getting you another loan to cover that lump sum will be a piece of cake?
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Did the
lender require high priced "credit insurance" as a condition of the loan?
Here's what the FBI had to say about Mortgage Fraud in 2005:
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 better
picture of the overall mortgage fraud problem.
Each mortgage fraud scheme contains some type of "material misstatement,
misrepresentation, or omission relied upon by an underwriter or lender to fund,
purchase or insure a loan." The Mortgage Bankers Association projects $2.5
trillion in mortgage loans will be made during 2005. 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, mortgage fraud in the secondary market is often under
reported. Therefore, the true level of mortgage fraud is largely unknown. The
mortgage industry itself does not provide estimates on total industry fraud.
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 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
- 100 percent of their original value.
Since 1999, the FBI has been working to actively investigate mortgage fraud in
various cities across the United States. 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-contacts 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 to create a more productive reporting
requirement for mortgage fraud. The FBI has also been working with the mortgage
industry through the MBA to promote a more efficient and effective method of
identifying and reporting fraudulent mortgage activity, otherwise known as, the
Suspicious Mortgage Activity Report (SMARt Form) concept.
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 via complaint, charging them with bank fraud for their
role in this alleged scheme. 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.
A recent analysis of mortgage industry fraud surveys identified 26 different
states as having significant mortgage fraud problems. Although every survey
identified Georgia and Florida as having significant mortgage fraud related
investigations, the survey also identified nine other states in the South and
Southwest, seven states in the West and five states in the Midwest as having
mortgage fraud problems.
MORTGAGE FRAUD INDICATORS
Inflated Appraisals
Increased
Commissions/Bonuses - Brokers and Appraisers
Falsifications on Loan Applications
Fake
Supporting Loan Documentation
Purchase
Loans Disguised as Refinance
Investors-Short Term Investments with Guaranteed Re-Purchase
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,
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 United States. 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
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Get
referral for real estate and mortgage professionals. Check the licenses of
the industry professionals with state, county, or city regulatory agencies.
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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.
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Be wary
of strangers and unsolicited contacts, as well as high-pressure sales
techniques.
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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.
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Understand what you are signing and agreeing to--If you do not understand,
re-read the documents, or seek assistance from an attorney.
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Make
sure the name on your application matches the name on your identification.
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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.
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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.
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Never
sign any loan documents that contain blanks--This leaves you vulnerable to
fraud.
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Check
out the tips on the Mortgage Bankers Association's (MBA) website at http://www.StopMortgageFraud.com
for additional advice on avoiding mortgage fraud.
Mortgage
Debt Elimination Schemes
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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.
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There is
no magic cure-all to relieve you of debts you incurred.
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Borrowers may end up paying thousands of dollars in fees without the
elimination or reduction of any debt.
Foreclosure Fraud Schemes
Perpetrators mislead the homeowners into believing that they can save their
homes in exchange for a transfer of the deed, usually in the form of a
Quit-Claim Deed, and up-front fees. The perpetrator profits from these schemes
by remortgaging the property or pocketing fees paid by the homeowner without
preventing the foreclosure. The victim suffers the loss of the property as well
as the up-front fees.
Predatory
Lending Schemes
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Before
purchasing a home, research information about prices of homes in the
neighborhood.
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Shop for
a lender and compare costs. Beware of lenders who tell you that they are
your only chance of getting a loan or owning your own home.
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Beware
of "No Money Down" loans--This is a gimmick used to entice consumers to
purchase property that they likely cannot afford or are not qualified to
purchase. Be wary of mortgage professional who falsely alter information to
qualify the consumer for the loan.
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Do not
let anyone convince you to borrow more money than you can afford to repay.
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Do not
let anyone persuade you into making a false statement such as overstating
your income, the source of your down payment, or the nature and length of
your employment.
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Never
sign a blank document or a document containing blanks.
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Read and
carefully review all loan documents signed at closing or prior to closing
for accuracy, completeness and omissions.
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Be aware
of cost or loan terms at closing that are not what you have agreed to.
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Do not
sign anything you do not understand.
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Be
suspicious if the cost of a home improvement goes up if you accept the
contractor's financing.
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If it sounds too good
to be true--it probably is!
For the
complete version go to: http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm#d1