Mortgage Fraud – Trends and Schemes

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In last month’s edition of the AppraisalPort newsletter, I covered some of the appraisal guidelines that were discussed at the National AI Connect Conference in Indianapolis, July 23-25, 2013. This month, I want to discuss another session that dealt with mortgage fraud. I learned a lot about how people are trying to get rich through fraud in this very interesting breakout session.

The session, “Residential Mortgage Fraud Enforcement: Trends and Identifying Schemes,” included presentations from Housing and Urban Development’s (HUD) Special Agent Eric Mascari, Interthinx’s Ann Fulmer, and Gary Crabtree, SRA, owner of Affiliated Appraisers.

The session focused on the small group of people from all sides of the real estate mortgage industry that try to pull off some very bold, and illegal, transactions. The group discussed many types of fraud. Some types involved an appraiser, who was part of the scam, but most types don’t directly involve an appraiser in the scam, although the appraiser may unknowingly become part of it. In most cases, these unwitting appraisers do not have any action taken against them, but it is good to be aware of the scams and their warning signs.

Mascari, who works in HUD’s Office of the Inspector General, began by explaining that HUD is now involved in a much larger percentage of the mortgage market and that leads to more opportunity for fraud. For example, in 1990 they had about a 15% share of the market but by 2006 that had dropped to 3%. The number has now climbed back up to 30% of the market.

Mascari reported that Home Equity Conversion Mortgages (HECM), better known as a “reverse mortgage”, have been an area ripe with fraud. Apparently many fraudsters see seniors as easy targets. One common scam is for the perpetrator to record a fake mortgage note against the property and then sell the owner a HECM. At loan closing all the remaining debt is paid on the property and the perpetrator is paid off on the fake mortgage, leaving the property owners with fewer funds than expected.

Other forms of HECM fraud include financial professionals convincing the borrower to invest in financial products such as annuities that don’t really suit their needs in order for the financial professional to receive large commissions and fees. Another big problem concerns family members who continue to receive the HECM payments after the borrower dies or permanently leaves the residence. This is difficult to detect if the family has had to move the borrower to a facility such as a nursing home and does not report it to the lender.

Mascari went on to discuss the well-known problem of fraudulent flipping. This is an area of fraud that more commonly involves an appraiser. The practice involves the perpetrator buying a property (usually a foreclosure) and then quickly reselling it at a substantial profit. However, to make that happen, the flipper may need an appraiser to inflate the value and a fake buyer to take out a loan on the property. The group then keeps all the money and the loan immediately defaults leaving the lender and HUD on the hook for an inflated loan.

Even with this flipping issue plaguing HUD, Mascari explained that the agency has actually passed a temporary waiver that eases some of the HUD regulations related to the quick resale of properties. HUD has traditionally prohibited the use of FHA Mortgage Insurance for a subsequent resale within 90 days of property acquisition. Some recent FHA research finds that in today’s market, acquiring, rehabilitating and the reselling of foreclosure properties to prospective homeowners often takes less than 90 days. It was believed that this rule was having a detrimental impact on investors who were trying to legitimately rehabilitate properties and return them to the open market. In fact, many of these properties that were ready for market had to sit for months waiting to be placed for sale and were then vandalized and damaged. So the 90-day rule is being temporarily waived in hopes that more first-time home buyers, who need to get an FHA insured loan, will be able to purchase these formerly foreclosed properties. This seems to be working to help the housing market and the waiver has been extended to at least 2014.

Mascari then discussed various forms of appraisal fraud that range from identity theft to what some would just consider sloppy work. Here is a list Mascari presented:

  • Appraiser does not look at previous sales
  • Comparables are used for multiple files (when not appropriate)
  • Figures are backed into contract price
  • Pictures vary widely from comparables
  • House appraised “as is” when contingent upon stipulations
  • Appraising a house the appraiser owns by hiding ownership interests
  • Appraiser ID theft

Mascari also covered loan modification fraud. He didn’t get into great detail but these are the warning signs to be considered when seeking help with a loan modification:

  • Claimed 99% success rate
  • Charging fees up front
  • Money back guarantee
  • Attorney-based legal team

Fulmer, vice president of Interthinx industry relations, stated that their research indicates that, since the recession, fraud has been focused on distressed properties. Interthinx specializes in analytics and provides risk intelligence for lenders and investors. They generate nationwide statistics that examine the patterns of various types of fraud by geographic area. Here are the top five states for mortgage fraud risk in the second quarter of 2013:

  1. Nevada
  2. California
  3. Florida
  4. New Jersey
  5. Illinois

As with most statistics, some interpretation is necessary. In the above example, Nevada has the most fraud by percentage of transactions, but California leads the pack with respect to the total number of fraudulent deals.

Fulmer also presented the numbers on other types of fraud. She stated that falsifying the information about the borrower’s income and employment is a common practice. Here are the top five Metropolitan Statistical Areas (MSAs) for that type of fraud:

  1. Stockton, CA
  2. Las Vegas–Paradise, NV
  3. Vallejo-Fairfield, CA
  4. Modesto, CA
  5. Fresno, CA

Well, it looks like California also wins in that category! The next type of fraud Fulmer covered is called “occupancy fraud,” which occurs when the borrower misrepresents that the property being used as collateral is their primary residence. This is done to get a more favorable interest rate along with additional owner-occupied benefits. Here are the top five MSAs for occupancy fraud:

  1. Memphis, TN
  2. Provo-Orem, UT
  3. Charleston, SC
  4. Columbia, SC
  5. San Antonio, TX

Fulmer also covered property valuation fraud. Again, an appraiser is often involved in this type of fraud (see above discussion). Here is a list of the top five MSAs for property valuation fraud. Notice some of these are repeats from the above lists, which means we can conclude that these haven’t been very healthy markets for real estate:

  1. Las Vegas–Paradise, NV
  2. Modesto, CA
  3. Albuquerque, NM
  4. Bakersfield, CA
  5. Jacksonville, FL

Crabtree, an SRA and long-time appraiser in Bakersfield, CA (note that Bakersfield made number four on the list of areas with the most valuation fraud), stated that he has been doing what he can as an expert witness to help authorities combat fraud in the area. His presentation consisted of in-depth analysis of some fraud cases where he had first-hand experience. I don’t have the space to cover all these amazing and complex conspiracies in this article, but I’ll give you a few highlights from one of them.

Carbtree referred to this case as the “Father, Mother, and Daughter Team”. This was a real family affair with the father posing as a straw buyer using falsified loan applications while the mother and daughter were real estate agents handling all the transactions. They would approach distressed sellers and offer $60-$100K above list price. After the close of escrow, the seller would pay the father (buyer) the extra $60-$100K out of the loan proceeds. Then, to add even more profit, the family would rent the property as long as possible (until foreclosure) without making a payment. They managed to accomplish this on five different properties for a total of $430,000 in kickbacks. They were caught and prosecuted by the district attorney who offered them a plea bargain. The result was six years jail time for the mother and daughter and four years for the father and no restitution to be paid. Their appraiser partner voluntarily surrendered the license and was not prosecuted.

This was just one small example of what Crabtree says is widespread fraud in the industry. Here’s his advice if you want to report mortgage fraud:

  • Be prepared to educate local law enforcement and prosecutors.
  • Be prepared to present “solid” evidence or the case won’t be considered.
  • Don’t expect state licensure agencies to be interested or helpful.

This session was a real eye-opener for me. I always knew fraud existed, but apparently it really took off during the housing crash and has seemed to linger into the recovery period. I had also never thought of all the different classifications of fraud that were discussed. It shows that appraisers can easily become an unaware accomplice to deals involving certain types of fraud (income or occupancy). Of course, the type that will most likely involve the appraiser is valuation fraud. The objective of this session was to let appraisers know that as long as they do the best job possible and are not influenced by any outside sources, they will have nothing to fear from fraudulent transactions.

~ Source By Steve Costello, AppraisalPort Relationship Manager
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