In the four years ending last September, The Federal Bureau of Investigation's
"Operation Continued Action" identified more than 245 subjects in 158
investigations of financial institution fraud. These investigations resulted in
11,466 indictments, 11,362 convictions, and $8.1 billion in restitution orders.
While many of the instances of fraud against lenders are small in scope,
financial institution fraud is a very big deal. The FBI recently tallied the
results of some of the fraud it is investigating:
- North Carolina: an undercover investigation of seven groups led to
identification of fraudulent loans which exposed financial
institutions and mortgage companies to potential losses of $130 million.
- Denver, Colorado: five persons arraigned and changed with roles in obtaining
loans employing stolen identities then using those loan proceeds to purchase
substandard houses possibly to flip. Losses estimated at $19 million.
- Kansas City, Missouri: three persons arraigned for their role in a ring
which utilized straw purchasers of properties which were then foreclosed upon.
They did this approximately 300 times resulting in losses in excess of $15
million.
And borrowers are often dragged along in the wake of such fraud.
Some mortgage fraud schemes are pretty bush-league (but they
work) and others are very sophisticated. At the very low end of the scale is
misrepresentation of fact on a mortgage application. If you say you are planning
to live in a property when your intent is to rent it out that is financial
institution fraud; not likely to be prosecuted or even noticed as long as your
payments are made on time, but fraud all the same.
Another example of the amateur hour variety is identity
theft. The instances I have encountered usually involved an innocent
and totally clueless wife.
It is amazing how many married men have girl friends who look enough like
their wives to pass muster at a mortgage closing. (And maybe a lot of married
women have boyfriends that resemble hubby, but it doesn't often seem to work
that way.) The husband needs money for business purposes, to cover urgent debt,
or to finance a new life with the girlfriend. He applies for and receives a
mortgage or home equity loan on the marital home and shows up with the
girlfriend who has a false ID and a sharp pencil. Loan docs signed and proceeds
received, hubby either takes off for Aruba, or hopes that he can maintain
payments on the new loan so his wife never uncovers his duplicity. When or if
the loan defaults, the lender is left with paper that gives them the right to
foreclose, at most, on 1/2 of the property. There will also be a furious wife
who may or may not be able to prove her victimization but can still create a
public relations nightmare.
Moving up the sophistication scale; flipping involves repeatedly buying and
selling or refinancing the same piece of property over a short period of time,
always claiming a higher property value. Flipping may be a team effort or it may
involve an innocent with good credit but a little greed in his soul.
For example, Buyer #1 buys a home for $60,000 and obtains a 95 percent
mortgage from Lender #1 for $57,000 Immediately after obtaining the deed, he
sells the property for $90,000 to either a collaborator or to an innocent who
has been convinced he can buy the property for nothing down and cover his
payments with rent from a tenant provided by the seller (and he may be offered a
little commission on the deal.) Buyer #2 goes to a different lender and arranges
for a mortgage of $85,500 on a property that was only worth $60,000 a few months
before and probably is still worth $60,000. Naturally there has to be an
appraisal, but an honest appraiser will probably have no trouble finding comps
that, on the exterior, appear reasonably similar to the subject property and
appraisers will admit and are now publicly complaining that they are often under
pressure from lenders to produce appraisals that justify the purchase price.
Then, of course, the appraiser might be in on the deal. Maybe a few weeks or
months later Buyer #2 sells the property back to Buyer #1 for $110,000 and a
third lender is approached or maybe Buyer #1 disappears with the cash from the
previous two transactions leaving his other victim, Buyer #2 with a loan he
cannot repay and ruined credit. In any case, the last lender is left with a
house that is not worth the money it lent on its purchase.
Sometimes flipping is implemented without a deed even changing hands until
the last round. Buyer #1 and his accomplice will "flip" the sales contract back
and forth, inflating the sales price on paper until it reaches a desired level
and then obtaining a mortgage on the final amount. This way the crook doesn't
even need the cash for a down payment.
In areas undergoing revitalization flipping is random and some is completely
legit. Many reputable investors and builders do buy property, quickly rehab it,
and sell it again at an honest price for at a healthy profit. It is difficult
for lending institutions to know what kind of sale they are dealing with.
Sometimes it is just the garden variety grifter who implements a fraud, but
the FBI is seriously going after mortgage fraud that involves insiders; real
estate agents, loan originators, appraisers, home builders, and closing
attorneys.
Insiders are in a position to perpetrate more sophisticated types of fraud
involving false or altered documentation. This can mean falsifying income,
hiding debt, or inflating appraisal information to make a borrower or a property
more credible candidates for a loan. Another scam is issuing a double set of
settlement statements, one for the property seller reflecting the actual sales
price and a second for the lender with a higher price reflecting the amount upon
which the lender funded the loan. The loan amount is probably more than the
property value and the crooks end up with the excess funds.
Many financial institutions are federally chartered and/or federally insured.
Even the mortgage company in the strip mall on State Road 17 is tied into the
federal system if it packages a fraudulent loan for sale to Freddie, Fannie or
the VA.. Therefore, most lender fraud is a federal crime and the Feds don't mess
around. In addition to the FBI, the IRS is now involved which puts an
interesting twist on the subject. In February the tax guys announced that they
were actively pursuing real estate tax fraud and that criminal prosecutions and
prisons terms were sharply increasing. These prosecutions are not for the
initial crimes, but for failing to declare and pay taxes on the ill-gotten
gains. Therefore, if you are inclined to rip off the First National Bank of
Coffee County, at least be sure you include the proceeds on your Form 1040,
Schedule C. Sort of funny, but don't forget that the IRS is very good at this
type of prosecution. They were, after all, the only ones who were able to nail
Al Capone.
In addition to the Mortgage Bankers Association, other big players in the
mortgage industry are taking steps to stamp out fraud against financial
institutions and we will take a look at some of these programs and procedures at
a later date.