MORTGAGE FRAUD

1. Stephen Locher Assistant United States Attorney United States Attorney’s Office Southern District of Iowa 110 E. Court Ave., Ste. 286 Des Moines, IA 50309 (515) 473-9300 MORTGAGE FRAUD

2. A material misstatement, misrepresentation, or omission made in connection with the purchase, financing, or insuring of real estate. What is Mortgage Fraud?

3. Estimated annual loss resulting from mortgage fraud: $4 to $6 Billion • 66% of pending FBI mortgage fraud investigations involve losses > $1 million • 1,571 mortgage fraud cases opened in fiscal year 2009 (compared to 136 in 2004) • 3,000+ pending FBI mortgage fraud investigations (through 6/17/10) Just the facts…

5. Recent National Mortgage Fraud Initiatives

6. Primary types of fraud investigated • Lending fraud • Foreclosure rescue scams • Mortgage-related bankruptcy scams • Results • 144 criminal cases • 406 defendants • >$1 billion in losses Operation Malicious Mortgage (March – June 2008)

7. Broader range of fraudulent schemes investigated • Expanded use of civil enforcement tools • Results • 673 criminal cases • 1,215 criminal defendants • $2.3 billion in losses • 191 civil enforcement actions • Approximately 400 civil defendants Operation Stolen Dreams (March – June 2010)

8. Everyone • Buyers • Sellers • Real Estate Agents • Mortgage Brokers • Closing Agents • Attorneys • Appraisers • Title Companies • Bank employees • Etc… Who are the targets?

9. Flipping • Silent Second Mortgages • Foreclosure Rescue Scams • Chunking • Asset Rental • Origination Fraud • Asset Rental • Double Selling • Double Financing • Short Sale Fraud • Reverse Mortgage • Short Sale Fraud • Builder Bailouts Common Mortgage Fraud Schemes

10. Property is purchased then resold (often quickly) at inflated price. • Common characteristics • Fraudulent appraisals • False loan documentation • Straw buyers • Kickbacks Flipping

11. House used in flipping scheme May 2007

13. Victims: homeowners who can no longer afford mortgage payments. • Some have equity, some don’t. • Perpetrators convince homeowners they can save their homes • Homeowners transfer deed to perpetrator • Homeowners pay upfront fees to perpetrator • Perpetrator takes out mortgage loan • Homeowners may make monthly payment to perpetrator Foreclosure Rescue Scams

14. Scheme typically results in foreclosure • Perpetrator may take equity and disappear • Perpetrator may collect monthly payments for a while but not forward them to new lender • Perpetrator may “flip” property to straw buyers to extend duration of scheme Foreclosure Rescue Scams (continued)

15. Down payment money comes via second mortgage • Existence of second mortgage is concealed from primary lender • Often involves two closings in rapid succession • Closing agent almost always involved • Recurring question: why did real estate agent, attorney, mortgage broker, etc. let this happen? Silent Second Mortgages

19. Asset Rental • Money is temporarily put into borrower’s account to give appearance of creditworthiness • Money later given back • Origination Fraud • False statements regarding income, assets • False statements regarding intention to use house as primary residence Common Mortgage Fraud Schemes (continued)

20. Double Selling • Mortgage loan originator accepts legitimate application and documentation from buyer but sends loan package to multiple warehouse lenders to each fund the loan. • Double Financing • Buyer takes out two mortgages from two lenders on same date • Or, buyer refinances at new bank but fails to use proceeds to pay off prior mortgage Common Mortgage Fraud Schemes (continued)

21. Chunking

22. Perpetrator convinces uninformed victim to invest in real estate. • Victim applies for one loan • Perpetrator takes out additional loans for other properties in victim’s name without victim’s knowledge • Perpetrator keeps some or all loan proceeds; victim is stuck with loan obligations Chunking

23. Borrower purposely withholds mortgage payments, forcing loan into default • Accomplice submits “straw” short-sale offer at a purchase price less than the borrower’s loan balance. • Fraudster may approach distressed homeowner with this scheme. • Fraudster may obtain kickback or become outright owner of home. Short Sale Fraud

24. Builders with excess inventories make “too good to be true” offers to buyers • No money down • False promises to subsidize monthly payments or make subsequent improvements to property at no cost • Builders may set up shell corporations to “purchase” the properties • Sales price often exceeds market value • Corporation may later disappear or go bankrupt Builder Bailout Schemes

25. Often involve two purchase agreements – one “real” agreement and one “for the bank.” • The agreement “for the bank” contains inflated price. • Seller kicks back funds to borrower. • Real estate agents often involved. Kickback Schemes

26. Insistence on use of particular appraiser, closing agent, etc. • Unusual bonuses/fees • Transaction is inconsistent with market • Kickbacks • False statements/omissions on bank documents • Buyer may be assured these are “harmless” • Requests to sign blank documents • Parties appear to be affiliated Red Flags

27. Red Flags (continued)

28. Full disclosure throughout the transaction • Purchase Agreement, loan documents, HUD-1 • Look for discrepancies • Ask questions/verify Best Practices

29. Wire Fraud • Mail Fraud • Bank Fraud • Bank Bribery • False Statement to Bank • Penalties • Up to 30 years’ imprisonment per count of conviction • Up to $1 million fine per count of conviction Mortgage Fraud and Federal Law

30. Process used by criminals to conceal or disguise the proceeds of their crimes or convert those proceeds into goods or services. • Makes “dirty” money look “clean.” Money Laundering

31. Placement • Initial introduction of criminal proceeds into the stream of commerce • Most vulnerable stage of process • Layering • Distancing the money from its criminal source • Movements of $ into different accounts/countries • Increasingly difficult to detect • Integration • Laundered proceeds are distributed back to the criminal • Creates appearance of legitimate wealth • May happen years after original crime Three Stages of Money Laundering

32. Money Laundering & Real Estate

33. Purchase of real estate with proceeds from illegal activity (drugs, theft, fraud, etc.) • Use of real-estate related business to launder proceeds • e.g., kickbacks flowing through legitimate business • Purchasing personal real estate in name of third-party individual or company Examples of Money Laundering via Real Estate Transactions

34. Money Laundering Red Flags

35. Desire to keep individual transactions below $10,000 • Use of third-party to make payment • Refusal/inability to explain source of proceeds • Transactions not in conformity with standard practice • e.g., seller willing to accept surprisingly low price for property Money Laundering Red Flags (continued)

36. U.S. Department of Justice • www.justice.gov • Federal Bureau of Investigation • www.fbi.gov • Internal Revenue Service • www.irs.gov • U.S. Department of Housing & Urban Development • www.hud.gov • Federal Deposit Insurance Corporation • www.fdic.gov • Federal Financial Institutions Examination Council • www.ffiec.gov Resources