Types of Mortgage Fraud
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  • Really insightful. As a prior mortgage underwriter, I am always wanting to stay fresh and away from potential schemers out there!
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Types of Mortgage Fraud Presentation Transcript

  • 1. Bear Stearns “Types of Mortgage Fraud” John L. Gray Fraud Prevention
  • 2. Georgia (First State to make Mortgage Fraud a Felony)
    • September 28, 2007 Friday Main Edition
    • My favorite prison sentence of the week: Phillip E. Hill, a white-collar criminal, was sentenced by a federal judge to 28 years in prison and ordered to pay more than $41 million in restitution for running a massive mortgage scheme that generated $112 million in fraudulent loans. His take from the scheme, involving inflated sales prices to straw borrowers who paid him kickback, was $14 million. If my band of right-wingers need to work a few hours overtime to pay for his prison upkeep, send the bill. I hate armed robbers, child abusers and white-collar crooks. Armed robbers have made up their minds that they'll kill you before they walk in the door.
  • 3. Definitions Of Mortgage Fraud
    • Institutional Fraud - cases in which Brokers/TPO (third party originators), Branches/Loan Officers or organized groups of individuals (realtors/title agents/sellers, etc) commit fraud
    • Financial Fraud - air loans and double sold notes/loans and others
    • Loan Level Frauds – puffing, flips, straw-buys, builder bail-outs and others
  • 4. New Trends“Puffing”, Investment Straw Buys (Clubs), Shot-gunning and Foreclosure Bail-outs
            • Puffing-Seller List Property for Real Value $100,000
            • Purchaser/Borrower says I want to Purchase Home but will Purchase it for $150,000 and wants the $50,000 difference ($150,000 Inflated Value-$100,000 Real Value) need an appraiser to inflate value to $150,000
            • Similar to “Flip” but only One Loan, This Type of Fraud is Useful to Perpetrators in Slow Market
  • 5. Investment Straw Buys (Clubs)
            • “ Get Rich Schemes” where Borrowers Think They are Joining an Investment Group or Club
            • They are Promised They will be Paid at Closing (normally $5,000 to as High as $15,000 a Loan)
            • The Facilitator will Manage the Properties and Make the Mortgage Payments
            • Dividends or Sale of Property at a Later date will Make Everyone “Rich ”
  • 6. Shot-gunning
    • Perpetrator obtains subject property through variety of different ways, foreclosure fraud , "flip", quit claim deed
    • Perpetrator applies or has "straw-buyer" apply to obtain Equity Lines (2 nd mtgs) on subject property all at the same time (as many as 8-10 applications for Equity lines to different lenders)
    • There are numerous inquiries on Credit Report but there is a letter in file stating "I am shopping for the best rate".
    • Numerous lenders approve their Equity Lines
    • Lenders do not find out until later that they are in 6 th or 8 th or even 10 th lien position on a piece of property that cannot conceivably cover the amount of liens recorded with its market value
  • 7. Foreclosure Bail-out
    • Consumer normally in Foreclosure or going into Foreclosure (scheme works better in Judicial foreclosure states)
    • Perpetrator tells consumer he will take care of everything, has consumer quit claim property back to perpetrator
    • Foreclosure Bail-out Specialist puts tenant in property or does lease buy back with consumer telling consumer that they can get house back 2 or sometimes 3 years later.
    • Perpetrator reinstates loan and sells property without telling consumer and then evicts consumer. Sometimes if there is enough equity, perpetrator will do equity skimming of the property.
  • 8. Seller/Correspondent/Broker Approval Process
    • “You must know who you are doing business with in today’s market”
    • Review Financials
    • Conduct Criminal/Civil background search (Lexis/Nexis, Accurint, ChoicePoint, online public records) on entity and principals of the entity
    • Review Resumes
    • Check Business Reports/Newspaper searches
  • 9. Fraud Program
    • Prevention
    • Fraud Training to All Employees
    • Pre-Funding Fraud Detection (manual reviews of high risk loans or use of systems such as Interthinx or Data-verify)
    • Fraud Hotline
    • Exclusionary List
    • Detection
    • 1. FPD/EPD Team
    • 2. Data-mining
  • 10. Fraud Program continued
    • Resolution
    • Suspensions/Terminations of Sellers/Brokers
    • Repurchases/Indemnifications
    • Civil Referrals When Appropriate
    • Criminal Referrals “SARS”
  • 11. Financial Frauds- Devastating
    • “Air Loans”
    • Double Sold Notes
    • Non Remittance of Payoff Funds
    • Theft of Escrows
    • Alteration of Public Records
    • Title Scams
  • 12. Amerifunding “Air Loan” Case
    • January 2007
    • The alleged mastermind of the scheme, Gerald P. Small III, was sentenced in March 2006 by a judge in the Federal District Court of Colorado to 101 months in jail and to pay over $37 million in restitution. The companies involved in the scheme were Amerifunding and 20th Century Mortgage Inc. Amerifunding placed help-wanted ads, but used the applicants' information to fraudulently obtain mortgage loans. Besides Mr. Small, six others have been convicted in this case. Four were sent to prison and one other is awaiting sentencing.
    • The alleged mastermind of the scheme, Gerald P. Small III, was sentenced in March 2006 by a judge in the Federal District Court of Colorado to 101 months in jail and to pay over $37 million in restitution. The companies involved in the scheme were Amerifunding and 20th Century Mortgage Inc. Amerifunding placed help-wanted ads, but used the applicants' information to fraudulently obtain mortgage loans. Besides Mr. Small, six others have been convicted in this case. Four were sent to prison and one other is awaiting sentencing.
  • 13. “ Air Loans”
    • Mortgages sold to in which there is no house (no collateral)
    • Large losses-entire unpaid principal balance is charged off
    • Various methods to perpetrate this type of fraud
  • 14. Double Sold Mortgages
    • Authentic looking copies made of 1 original mortgage
    • As many as 5-7 mortgage copies sold into marketplace at the same time (investors do not talk to each other)
    • As long as payments are made, fraud goes undetected
    • Identical to “Air Loans,” no collateral, entire balance must be charged off
  • 15. CHL
    • October 25, 2006 Wednesday FINAL Edition
    • A San Ramon man was sentenced Tuesday to more than five years in prison for generating millions in fraudulent loans. Laurence Seidenfeld, 63, must serve 67 months in federal prison and an additional year behind bars because of a previous fraud conviction, U.S. District Judge Saundra Brown Armstrong said during a hearing in Oakland. Armstrong also ordered Seidenfeld to pay $281,992 in restitution. Seidenfeld was convicted of conspiracy, bank fraud and income-tax evasion. He previously served a day in prison in a separate federal bank-fraud case in which he altered and submitted false credit reports to obtain loans for people with bad credit, records show. Seidenfeld and his company, CHL Mortgage Group Inc. of San Ramon, fraudulently obtained mortgage loans on property without the owner's consent, FBI agent Christine Hemje wrote in an affidavit filed in U.S. District Court in Oakland. The mortgage loans were then sold multiple times to warehouse banks, lenders and investors without their knowledge, authorities said. More than $20 million in fraudulent loans was generated, according to the FBI, although the precise figure is being calculated .
  • 16. Detection of “Air Loans” and Double Sold
    • Check the party making the payments (perpetrator, CEO/President of Company usually makes the payments)
    • Check MERS and Title Records for correct 1 st or 2 nd lien position (especially Double-Sold cases)
    • Check www.zillow,com or www.earth.google.com for satellite pictures to prove existence of subject property (especially “Air Loans”)
    • Run data-mining report for all properties in your own portfolio for property addresses in which you have more than 1 first lien on same property. (Double-Sold)
  • 17. "Flips"
    • Property purchased for a low sales price (foreclosure sale)
    • New purchase/sale to new buyer for inflated amount (100-500% higher)
    • Both transactions closed at the same time or within 30-60 days
    • No rehabilitation done on property, appraisal falsified/inflated
  • 18. Example of Flipping Buyer A buys property from HUD for $10,000 Buyer B buys property from “A” for $100,000 (no rehab) Split $80,000 Bear Res reviews appraisal, Charges off $80,000 Property only worth $10,000 Bear Res approves buyer B for 90 LTV loan
  • 19. Baltimore “Flipping” Case
    • March 25, 2000, Saturday ,FINAL
    • SECTION: LOCAL ,1B LENGTH: 798 words HEADLINE: FBI agents seize records in 'flip' probe; Warrants target five mortgage and realty companies; 2nd action in a month; Investigators focus on quick turnaround of city properties BYLINE: John B. O'Donnell SOURCE: SUN STAFF BODY: FBI agents investigating property flipping in Baltimore searched five locations in Anne Arundel and Prince George's counties yesterday seizing financial and other records as part of a probe of more than 100 real estate transactions in the city. Two Pasadena title companies, a Lanham mortgage brokerage firm, an Accokeek real estate company and the Davidsonville headquarters of a web of corporations that buy and sell properties were targets of the search-and-seizure warrants. The searches marked the second major action this month in a stepped-up federal effort to combat property flipping in Baltimore. Two weeks ago, in a case investigated by postal inspectors, a federal grand jury indicted five people in an alleged mortgage fraud scheme involving Baltimore houses that were purchased and then resold at greatly inflated prices. State records show that more than 2,000 city properties have been bought in the last four years and quickly resold for at least twice the purchase price -- sometimes for an increase of 1,000 percent. The deals often are accompanied by inflated appraisals and falsified paperwork. Usually, the properties are in poor condition and sometimes are uninhabitable.
  • 20. Straw Buyer
    • Straw Buy: To substitute a person’s credentials for someone else’s. Straw buying is not only used in mortgages but in stocks, corporate transfers and other financial transactions
    • Two Types of Straw Buys:
      • Relative/friend/employer who is trying to help someone who may lack positive credit to get their own loan
      • The paid straw buyer who is normally associated with “flips,” builder bail-outs and other schemes
  • 21. Builder Bailout
    • Market has slowed and the builder has a construction loan on a condo project
    • The Builder is also the seller and the appraiser uses other units in the development as comps and Builder either goes into default or comes up with “ingenious financing”
      • Advertises “buy a unit, no money down, get rental income”
      • increases values
    • The “No Money Down” becomes a silent 2nd (normally a 3 or 5 year balloon)
    • Borrowers go to refinance the balloon at a later date
      • Value not supported
      • Project defaults
  • 22. Foreclosure Bail-out and Builder Bail-out
    • Nov. 19--HOLIDAY FEAST OF HOUSING HOAXES: With the holiday season's arrival this Thursday, let's welcome a festive break from the housing doldrums. But before we do, let's assemble a list of the rogues and dupes who have made the real estate market such an unwholesome place for the holidays. You're behind on your house payment. A postcard arrives in the mail. A company promises to fix your foreclosure for $1,200. One condition: Don't call your lender. The foreclosure fixers will handle everything. Who could refuse such an offer? The company must have spent at least a quarter on postage. Many people forked over $1,200. How did it work out? Let's say quite a few homeowners are now not-so-happy renters. The TV show Inside Edition savaged one of those self-proclaimed rescuers, Clearwater's Foreclosure Assistance Solutions. Nothing says subtlety like the juxtaposition of homeless customers with the owner's $2-million waterfront mansion. A special niche in the rogue's gallery goes to the people who manipulated the market at The Club at Brickell, a 43-story condo tower in Miami. They committed deception on such a scale that bankers are calling it a national epicenter of mortgage fraud. Phony appraisals and lax underwriting let crooks arrange sales of $400,000 condos for $800,000. The cheaters paid the sellers $400,000 per condo, cashed out the remaining $400,000 and let the empty condo fall in foreclosure. Investigators said about 200 of the deals were shady. Wonder why Florida leads the nation in mortgage fraud?
  • 23. Detecting a Straw-buy
    • Borrower buying down
    • No realtor involved in transaction
    • Other party on purchase agreement but not on 1003
    • Additional name to be added on legal Down payment from someone other than borrower
    • documents
    • Credit Bureau in file for someone other than borrower
    • Unrealistic distance for job commute
  • 24. Detection of a “FLIP”
    • Excessive down payment on 1003
    • Seller not in title (refer to Title Commitment, Schedule B)
    • Seller recently took title (refer to Title Commitment, Schd B)
    • Recent sales with much lower amounts
      • HUD transfer (refer to Title Commitment, Schedule B and Appraisal Report, Page 2 - transfers in last 12 months)
    • Large amounts for recent deposits on VOD's or Bank Statements
    • Large gift funds or gifts of equity
    • Large seller concessions
    • Numerous loans to one borrower in same neighborhood
    • Loans with same borrower, loan officer, realtor, appraiser, seller, closing agent/attorney
  • 25. Detection of a Builder Bail-out
    • Excessive down payment
    • Sometimes owner occupied in investment market
    • Gifts
    • Condo sales in slow to medium market
    • Usually all 80% LTVs
    • Inflated values
    • All comps are in same condo project
    • Numerous loans to one borrower
    • Sometimes loans to builder’s employees
  • 26. Closing Comments and Questions
    • Should Your Bank Have a Fraud Unit?
    • Are They Aware of All The Schemes and Trends?
    • Are You Pursuing Civil Remedies?
    • Any Questions??