Amazing Breakthrough Identifying Mortgage Fraud
Current mortgage industry pain is credited to extensive mortgage loan defaults has causes escalating pressure on federal prosecutors to boost investigations into incidents of mortgage fraud across the nation. CNN reported that the FBI forewarned that mortgage fraud was becoming so out of control that the resulting “epidemic” of fraud could generate a massive financial crisis.
Mortgage fraud has now become so widespread that the United States Department of Justice and the Federal Bureau of Investigation have been forced to create an entirely new category for tracking these cases. According to a CBS news report, the number of FBI agents assigned to mortgage related crimes increased by 50 percent from 2007 to 2008. Prosecutors and investigators on both the state and local levels are also zealously organizing task forces and creating real estate fraud departments to counteract this burgeoning wave of crime.
CRIME and PUNISHMENT
The main focal point of these investigations seems to be on home buyers, investors, loan officer, appraisers and Realtors. Several of the charges levied against these perpetrators have integrated making false statements on loan applications, bank fraud, mail fraud, wire fraud, conspiracy to launder funds and a number of applicable state laws.
Nevertheless, the primary legal vehicle implemented by federal prosecutors has been section 1014 of Title 18 of the United States Code which declares mortgage fraud as a federal crime surrounding anyone who willfully overvalues any land or property, or knowingly makes any false statement, for the intention of influencing a financial institution upon a loan application, purchase agreement or other related documents. A violation of the federal mortgage fraud law (18 U.S.C. § 1014) alone is punishable by up to thirty years imprisonment and a one million dollar fine.
MORTGAGE FRAUD PLOTS
The most successful way to steer clear of prosecution for mortgage fraud is to identify mortgage fraud conspiracies before to any tangible participation. The majority mortgage fraud crimes fall into one of two general categories: “fraud for housing” and “fraud for profit”. Fraud for housing often involves fraudulent acts committed by a borrower, frequently coached by his or her loan officer or Realtor, to attain a loan for the ultimate goal of buying a home.
These fraudulent details generally concern to the fabrication of information and documents throughout the loan application process to facilitate the borrower to obtain financing that he or she would otherwise not be qualified to obtain. On the other hand, fraud for profit typically involves a more rigorous plan to abuse the entire real estate transactional process for financial gain.
FRAUD FOR HOUSING
Income Fraud
This goes down when a borrower exaggerates his or her income to qualify for a loan or a larger loan amount. Even though recent reductions in the use of “stated income” or “no-doc liar loans” has somewhat limited income fraud, bold borrowers are increasingly generating more fraudulent documents to falsify income. Information technology and photocopy tools have become so sophisticated that very persuasive documentation, such as income statements, savings accounts and tax returns, can be produced on demand.
Employment Fraud
In order to validate overstated income in a loan application, borrowers will claim self-employment in a non-existent company or endorse having a higher position in a business than the borrower actually holds.
Failure to Disclose Liabilities
The debt to income ratio is a significant part of the loan underwriting decisive factor used to decide a borrower’s eligibility for mortgage loans. Therefore, home buyers will hide financial responsibilities like recently acquired credit card debt, other mortgages, and private loans to falsely reduce their debt to income ratios.
Occupancy Fraud
Commonly occurs when a home buyer states on a loan application that he or she intends to occupy a home as a primary residence to lock a lower interest rate when the home buyer in fact intends to get the loan to obtain an investment property.
FRAUD FOR PROFIT
Equity Skimming and Cash-Back Schemes
A straw buyer is typically implemented as the buyer of the property due to his or her creditworthiness and resulting ability to obtain favorable financing. Unknowing straw buyers can be manipulated by mortgage brokers and real estate agents to purchase a property as a primary residence with the broker or agent later serving as a property manager to collect anticipated rental income. After the escrow closes and the mortgage and real estate brokers collect their commissions, they proceed to collect rental income and fail to make the mortgage payments.
Complex schemes can involve a knowing straw buyer, an appraiser who intentionally overstates the property’s value, a dishonest seller that intentionally inflates the selling price, and a dishonest settlement officer that makes undisclosed disbursements from the loan proceeds. All of these conspirators collaborate to collect portions of the proceeds of an inappropriately large loan before eventually letting it go into default.
Appraisal Fraud or Price Inflation
This fraud occurs when a dishonest appraiser intentionally overstates the value of a property or when an existing appraisal is altered to reflect a higher value. When a home is overvalued, more money can be obtained by the seller in a purchase transaction or by the borrower in a cash-out refinance.
The New Appraisal Fraud: Price Deflation
When done legitimately, a short sale occurs when a borrower that owes more than his or her property is worth sells the property below market value and the lender agrees to accept the lower repayment amount and forgive the difference. A new hybrid of fraud has emerged where an appraiser or a real estate agent drastically devalues the property in an appraisal or broker’s price opinion (BPO) so that the home will sell with ease at a price well below market value. Of course the new buyer is in collaboration with the seller, agent and appraiser, so all of the conspirators proceed to sell the home at a higher price for a big profit.
Identity Theft
Identity theft fraud occurs when a victim’s identity is assumed by another to obtain a mortgage without ever intending to make any payments on the loan. The perpetrators often abscond with a portion of the loan proceeds and sometimes are daring enough to lease the property and collect some deposits and rental income before disappearing.
The Buy and Bail
This completely new scheme is perpetrated by a home owner who cannot sell the home because more is owed on the property than its worth. Because no lender will provide the owner a loan for a second primary residence, the owner tells the lender that he or she plans to rent out the current home despite having no intention of doing so. Sometimes a falsified rental agreement is used to further support the falsehood. Once the second home is purchased, the owner “bails” on the original home and fails to make any further mortgage payments.
AVOIDING & PREVENTING FRAUD
Mortgage fraud frequently emanates from groups that complete an abnormal amount of similar transactions or churn out many offers to purchase at once. These outfits may appear disorganized or unprofessional due to the large amount of transactions they are attempting to manage. It is also no coincidence that mortgage fraud has significantly increased as housing values have decreased since most fraud schemes involve a financially distressed or otherwise vulnerable seller. It is equally important to remember that agents owe a very strict fiduciary duty to act in their clients’ best interests. So before reporting a client to your local authorities, speak with legal counsel or your state real estate licensing department to ensure that your proposed actions don’t constitute a breach of your fiduciary duty to your client.
Real estate agents are in a unique position that enables them to identify and even prevent the occurrence of fraud by recognizing the red flags, asking appropriate questions, and giving the principals in their transactions the full picture of what consequences are associated with participating in mortgage fraud. While a lot of damage has been done in the real estate market, we can prevent more of the same from occurring in the future.
Tags: federal bureau of investigation, home improvement loan, HUD Homes, mail fraud, mortgage fraud, mortgage industryRelated posts
Posted by Carlos Sagastume on February 28, 2009. Filed under HUD Homes.
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