Mortgage Fraud Tool?

Lender was stuck with a

$250,000 loan.

Mortgage Fraud Reality!

CT Mortgage Fraud Task Force

• FBI

• IRS CID

• USPIS

• HUD IG

• FDIC

• CT State Banking

• US Attorney’s

• HQ at FBI Bridgeport

• CT Dept of Revenue• Social Security Admin• CT Consumer Protection

Mortgage Fraud Defined

Mortgage Fraud is a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.

Mortgage Fraud

• Fraud for Property/Housing– Misrepresentations by Applicant– Intent to Repay Loan

• Fraud for Profit– Gain Illicit Proceeds from Property Sales– No Intent to Repay Loan

Loan Origination

Home Buyer

Apply for

Loan Credit Union

Bank Fund Loan

Hold in Portfolio/Collect

Payments

UNCLASSIFIED//FOUO/LES

The Pre Sub-Prime Mortgage Loan Process

The Sub-Prime Loan Process

Secondary Market

Investment Bank, Brokerage House, or Real Estate Investment Trust

Hold in portfolioLoan Origination

Mortgage Broker

Loan Origination

Mortgage Broker

Broker Loan Mortgage

Banker

BankSell Loan

InvestorsSecuritiz

e loan and

sell to investors

Cre

ate

spec

ial

purp

ose

entit

ies

Special Purpose EntitiesSell ownership

interest to investors

Pension FundsLife Insurance CompaniesOther Commercial Banks

State & Local GovernmentsCentral Banks

Fund ManagersThe Public

Brokerage Firms

Impact of Sub-Prime “Crisis”Problems Related to Credit Contraction• Economy slows• Reduced available credit for new development• More difficult for people to obtain mortgages• Refinancing opportunities are less available• Financing becomes more expensive• Reduced interest from foreign investors in MBSs

Problems Related to Poor Underwriting• Increased number of foreclosures• Depreciating real estate values• No room for equity withdrawals

Problems Related to Write-downs• Stock market declines• Reductions in dividends• Increased need for capital infusions: (sources include sovereign wealth funds)

UNCLASSIFIED//FOUO

$1 trillion as of Jan. 2009

Incentives for Mortgage Fraud

• Low Risk High Yield Returns

• Shift Risk to Others– Sub-Standard Loans for Unqualified Buyers– Knew Based on Fraudulent information– Pool Loans and Sale to Secondary markets– Knew Markets would React– Would React and Purchase

Escalation of Mortgages

• Less Quality Control

• Take Advantage of No Industry Oversight of Scrutiny

• Due Diligence Completely Lacking

Fraud for Property Schemes

• Occupancy Fraud

• – borrower states on the loan application that they will occupy the property as a primary residence.

• Income Fraud

• – borrower overstates their income to qualify for a mortgage.

Fraud for Property Schemes

• Employment Fraud

• – borrower claims self-employment in non-existent company or claims a higher position in a real company to justify fraudulent income.

• Failure to disclose liabilities

• – borrower conceals liabilities such as mortgages on other properties or newly acquired debt. This artificially lowers debt-to-income ratio.

Backwards Application Scheme

• Incomes Inflated

• Assets created

• Credit Reports Altered

• Previous Residences Altered

Fraud for Profit Schemes

• Appraisal Fraud

• Property Flipping

• Foreclosure Rescue

• Short Sale Fraud

• Loan Modification

• Builder Bailout

• Reverse Mortgage

Asset Rental Scheme

• Temporarily Transfer Funds into account under borrower’s name

• Account used as Asset on Loan Application

• Can be verified by Lender for 30 days

Property Flipping

• Fraudulent Appraisal

• Greater Loan

• Property Purchased at Inflated Rate

• Proceeds to Fraudster– Difference between what paid for property– Final Purchase Price

• Property Changes Ownership Frequently

$

Property-flipper purchases a property for $200,000

Property-flipper has the property fraudulently appraised for $400,000.

Property-flipper sells the property for $400,000, and walks away with a $200,000 profit.

Home usually results in foreclosure The bank is left with

an $400,000 mortgage on a $200,000 home for a loss of $200,000. If the loan was FHA insured, the government absorbs the loss.

Most Common Type of Mortgage Most Common Type of Mortgage Fraud Origination SchemeFraud Origination Scheme

The classic property "flip."

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Foreclosure Rescue Schemes

• Save homes from Foreclosures• Deed Transfers• Up-Front Fees• Transfers to Fraudster’s name

– Promises to make Mortgage payments– Former Owners stays in house – pays rent– Re-Mortgages Property and/or Pockets fees– Original loan Not Paid – Foreclosure delayed

Types of Foreclosure Rescue ScamsTypes of Foreclosure Rescue Scams

• Phantom help – The rescuer charges exorbitant fees for telephone calls and paperwork the homeowner could have handled and promises services that never materialize.

• Bailout – The rescuer bails out the homeowner by helping “dispose” of the house. The homeowner surrenders the title and believes they can stay on as a renter and repurchase later. The terms are so onerous that repurchase is impossible and they permanently lose possession. The rescuer ends up with the home’s equity.

Types of Foreclosure Rescue ScamsTypes of Foreclosure Rescue Scams

• Bait and switch – Rescuers tell victims they will obtain a new loan but in reality they sign documents that give the scammers ownership of the home while the victims remain responsible for the mortgage. Many victims believed they were signing documents for a new loan and had no intention of giving up their homes.

Re-emerging Scheme: Foreclosure Rescue Re-emerging Scheme: Foreclosure Rescue ScamsScams

Short Sale FraudShort Sale Fraud

• Short Sale

• a pre-foreclosure sale in which the lender agrees to sell a property for less than the mortgage owed.

Types of Short Sale Fraud

• Homeowner involved – perpetrator uses a straw buyer to purchase a home with the intention of defaulting.

• Often uses an inflated appraisal or fictitious improvements.

• Prior to foreclosure the perpetrator offers to purchase in a short sale.

• The lender agrees not knowing that the short sale was premeditated.

Short Sale FraudShort Sale Fraud

Types of Short Sale Fraud

• Homeowner not involved – recruit or are real estate agents who solicit homeowners in foreclosure.

• They have a true offer for the property but negotiate with the bank for a lesser offer from a co-conspirator.

• The co-conspirator purchases the property and then flips to the ultimate buyer for a profit unbeknownst to the lender and homeowner.

HUD-1 First Closing

6/6/2008 $102,375

HUD-1 Second Closing

$132,500

6/6/2008

Vision Appraisal