The FBI identified mortgage fraud as a “pervasive and growing” problem in the United States and has listed it as a “significant priority” in its Financial Crimes Report (FY 2006).
What is mortgage fraud?
While there are a number of methods by which people commit mortgage fraud, 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.”
How does law enforcement learn about potential mortgage fraud?
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.
What does law enforcement look for to detect possible mortgage fraud?
According to the FBI’s Financial Crimes Report (FY 2006) “red flags” that the FBI looks for in detecting mortgage fraud include:
- Appraisals that appear to value a property at an unrealistically high level
- Exclusive use of one appraiser
- Increased commissions to brokers and appraisers
- Bonuses paid (outside or at settlement) for fee-based services
- Higher than customary fees
- Buyers are requested to sign blank application or other types of blank forms
- Purchase Loans “disguised” as refinance
- Investors used to flip property prices for fixed percentage
- Multiple “Holding Companies” used to inflate property values
What type of mortgage fraud is law enforcement most concerned about?
The FBI investigates mortgage fraud in two distinct areas: Fraud for Profit and Fraud for Housing. The FBI has stated that it will focus its efforts on the fraud for profit area.
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.
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 typically involves a borrower who lies about his income or employment history in order to qualify for a loan .
What types of real estate or mortgage activity does law enforcement investigate for potential fraud?
Some of the current rising mortgage fraud trends identified in the FBI’s Financial Crimes Report (FY 2006) include.
Property Flipping – Law enforcement may suspect a “flipping” scheme when someone purchases a property, has the property appraised at a higher value than the purchase price, and then sells the property in a short period of time. This type of conduct is illegal if the appraisal information is fraudulent. In a typically property flipping scheme the property is 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
Silent Second Mortgage – Law enforcement may suspect mortgage fraud when the buyer of a property borrows the down payment for that property from the seller through the issuance of a second mortgage. This is illegal if the mortgage lender is misled into believing that the borrower has invested his own money in the down payment, when in fact, it is borrowed.
Straw Buyers – This occurs when the identity of the borrower is concealed through the use of a third person who allows the borrower to use the third person’s name and credit history to apply for a loan.
Identity Theft – A stolen identity may be used on the loan application. The name, personal identifying information, and credit history are used without the knowledge of the person whose identity was stolen.
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 simply invents borrowers and properties, then establishes accounts for payments, and maintains custodial accounts for escrows.
What should I do if I am charged with mortgage fraud or if I believe I am being investigated?
Mortgage fraud is a serious charge with severe consequences. An indictment of mortgage fraud will be based upon a significant and detailed investigation. It is important to discuss your rights, potential defenses and case strategies with an experienced white collar defense attorney as soon as you are indicted or if you believe that you may be under investigation. If law enforcement has contacted you regarding a real estate transaction, you may be a target of a mortgage fraud investigation. You should consult with a white collar defense lawyer immediately. Most white collar defense lawyers should consult with you at no charge.