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INFORMATION ON MORTGAGE FRAUD
I. General Overview The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market. Investors may lose faith and require higher returns from mortgage backed securities. This may result in higher interest rates and fees paid by borrowers and limit the amount of investment funds available for mortgage loans. The increased reliance by both financial institutions and non-financial institution lenders on third-party brokers has created opportunities for organized fraud groups, particularly where mortgage industry professionals are involved. Combating significant mortgage industry fraud is a priority, because mortgage lending and the housing market have a significant overall effect on the nation's economy. All retail mortgage fraud investigations are managed within the Economic Crimes Unit II. A significant portion of the mortgage industry is void of any mandatory fraud reporting. In addition, as initial mortgage products are repackaged and sold on secondary markets, the sale of the mortgages in many cases conceal or distort the fraud, causing it not to be reported. Therefore, the true level of mortgage fraud is largely unknown. However, based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing. For example, SARs in Fiscal Year 2005 were over 35,000; Fiscal Year 2006 were over 46,000; and the 1st Quarter of Fiscal Year 2007 were 14,916, which extrapolates to 60,000 SARs. The FBI investigates mortgage fraud in two distinct areas: fraud for profit and fraud for housing. Fraud for profit is sometimes referred to as "Industry Insider Fraud," and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders. Fraud for housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan. The defrauding of mortgage lenders should not be compared to predatory lending practices that primarily affect borrowers. Predatory lending typically effects senior citizens, lower income, and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, subprime or higher interest rates, and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on his mortgage payment and undergoing foreclosure or forced refinancing. Although there are many mortgage fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders. The FBI is engaged with the mortgage industry primarily in identifying fraud trends and educating the public. Some of the current rising mortgage fraud trends include: equity skimming, property flipping, and mortgage related identity theft. Equity skimming is a tried and true method of committing mortgage fraud. Today's common equity skimming schemes involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors. Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers, shell companies, along with industry insiders, to conceal their methods and override lender controls. Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially valued properties are then repurchased several times for a higher price by associates of the "flipper." After three or four sham sales, the properties are foreclosed on by victim lenders. Often flipped properties are ultimately repurchased for 50 to 100 percent of their original value. Since 1999, the FBI has been actively investigating mortgage fraud in various cities across the U.S. The FBI also focuses on fostering relationships and partnerships with the mortgage industry to promote mortgage fraud awareness. To raise awareness of this issue and provide easy accessibility to investigative personnel, the FBI has provided points of contact to relevant groups including the Mortgage Bankers Association (MBA), the Mortgage Asset Research Institute (MARI), the Mortgage Insurance Companies of America, Fannie Mae, Freddie Mac, and others. The FBI also works closely with individual lenders, as well as national associations such as the MBA, the Appraisal Institute, the National Association of Mortgage Brokers, and the National Notary Association, to define and combat the mortgage fraud problem. In addition, on a case-by-case basis, the FBI receives close cooperation from lenders. An example of this is the usage of Real Estate Owned properties from lender inventories to facilitate mortgage fraud undercover operations. SAR Identified Mortgage Assignment Fraud A SAR and follow up liaison contacts with the filing bank initiated an investigation into the fraudulent sale of purported investments in mortgage assignments. The SAR noted unusual and large wire transfer deposits into the subjects accounts and unusual withdrawal activity. Further investigation revealed that the subject solicited and received $3.4 million from investors/victims for investments in mortgage assignments. The investigation also showed the subject used this money for personal use and benefit, for such things as trips, a home, motorcycles, and lulling payments to victims. Two bank accounts totaling over $60,000 and a motorcycle were seized and forfeited during the investigation. After pleading guilty to charges of wire fraud and money laundering, the subject was sentenced to 46 months imprisonment and ordered to pay restitution to victims in the amount of over $2.6 million.
Regional analysis of SARS indicating mortgage fraud violations indicates that the Western region of the U.S. led the nation with 37 percent of mortgage fraud related SARs filed during Fiscal Year 2007. Southeastern, North Central, Northeastern, and South Central regions had 23, 19, 12, and nine percent respectively of mortgage fraud related SAR filings. However, FBI pending cases indicated that the North Central region had the majority of mortgage fraud cases ( 29 percent) during 2007. The Western, Southeastern, South Central, and Northeastern had 24, 21, 17, and nine percentages respectively. FBI pending cases by region are consistent with MARI reporting which indicated that five of the top ten mortgage fraud affected states in 2006 were located in the Central region.
Mapping data from Fiscal Year 2007 SARs, FBI pending mortgage fraud cases, HUD-OIG, FinCEN, 2006 MARI, Federal National Mortgage Association (Fannie Mae), Realty Trac Inc., and Radian Guaranty Inc., reveal that the top 10 states for mortgage fraud activity during 2006 are: California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas, and Utah. Other areas significantly affected by mortgage fraud include: Arizona, Colorado, Maryland, Minnesota, Missouri, Nevada, North Carolina, Tennessee, and Virginia. (See map below).
II. Overall Accomplishments Through Fiscal Year 2007, 1,204 cases resulted in 321 indictments and 260 convictions of mortgage fraud criminals. The following notable statistical accomplishments are reflective in Fiscal Year 2007 for mortgage fraud: $595.9 million in restitutions, $21.8 million in recoveries, and $1.7 in fines. The chart below reflects mortgage fraud pending cases from Fiscal Year 2003 through Fiscal Year 2007 as follows: Fiscal Year 2003 - 436 cases; Fiscal Year 2004 - 534 cases; Fiscal Year 2005 - 721 cases; Fiscal Year 2006 - 818 cases; and Fiscal Year 2007 - 1,204 cases.
III. Significant Cases RAYMOND JOSEPH COSTANZO, JR.(ATLANTA): From late 2004 to early 2006, Raymond Joseph Costanzo, Jr., an attorney, participated in closing millions of dollars in fraudulently inflated mortgage loans for unqualified straw borrowers. These straw borrowers were paid as much as $600,000 from fraudulently obtained loan proceeds through shell companies. Costanzo himself obtained mortgage loans totaling over $1.5 million by providing the lender with false qualifying information and falsified down payments. Costanzo received $250,000 in scheme proceeds from this transaction and arranged for disbursements of fraudulently obtained loan proceeds to co-conspirators from this and other loans. On February 1, 2008, Costanzo was sentenced to three years, five months in prison to be followed by four years supervised release and ordered to pay $7,843,184 in restitution. On October 17, 2006, Costanzo pleaded guilty to these charges and surrendered his license to practice law. GHANDI BEN MORKA (DALLAS): Gandhi Ben Morka, a real estate appraiser who was convicted at trial of several offenses related to his involvement in a mortgage fraud scheme, was sentenced January 23, 2008, by U.S. District Court for the Northern District of Texas, to 60 months in prison and ordered to pay more than $2.3 million in restitution. Morka was arrested in May 2007 and indicted along with seven others for various offenses related to a mortgage fraud scheme to defraud Countrywide Home Loans, doing business as America Wholesale Lender (Countrywide). Morka conspired with co-defendants to defraud Countrywide by locating single family residences in and around the Dallas area and recruiting straw purchasers and borrowers to purchase the targeted residences. Morka would prepare appraisals DARRYL L. COOPER (ATLANTA): On January, 11, 2008, Darryl L. Cooper of Decatur, Georgia was sentenced to one year, six months in federal prison, followed by three years of supervised release, for a scheme to defraud mortgage lenders by creating fraudulent appraisals that reflected completed construction. Cooper was recruited by builder/co-conspirator Jeffrey Allen Teague to prepare fraudulent appraisals reflecting photographs and $5 million in appraisal valuations for 15 completed houses in the Greenleaf Subdivision of Forsyth County, when Teague had not completed the construction of these homes. A California lender relied on Cooper's fraudulent appraisals that reflected completed construction to make $4.7 million in mortgage loans secured by these properties, which in fact had no value at all. U.S. Attorney David E. Nahmias said of the case, "This case highlights the problems created by mortgage fraud in which the appraiser conspired with the builder to misrepresent that construction on homes was complete, compounded by out-of-state 'investors,' who sign for loans without inspecting the properties. The partially built houses in this case may be subject to condemnation, as the portions completed were not built to code, leaving mortgage lenders with little security for their loans, 'investors' with nothing to resell, and neighborhoods full of vacant and uninhabitable houses." Cooper pleaded guilty to a one-count criminal information on November 7, 2007, on a charge of mortgage fraud conspiracy and has been ordered to pay $4,720,500 in restitution. Teague was sentenced on October 26, 2007, to 15 years, eight months in prison and ordered to pay $7,803,701 in restitution for his part in the fraud. CHRISTOPHER CRAIG (SACRAMENTO): In May 2007, Christopher Craig of Auburn, California pled guilty to bank fraud charges related to a foreclosure scheme. Craig approached homeowners who were on the verge of foreclosure and promised to loan them money. Instead, he created documents deeding away their properties to straw buyers, then applied for home equity loans from Washington Mutual Bank. Washington Mutual disbursed $1.2 million in loan proceeds to Craig based on the false loan applications. Craig was sentenced in the Eastern District of California to five years in federal prison and ordered to pay $974,452 in restitution. Property and cash was also seized for asset forfeiture from Craig including a 2007 GMC, Hummer SUV. MORTGAGE FRAUD INDICATORS Inflated Appraisals Increased Commissions/Bonuses - Brokers and Appraisers Falsifications on Loan Applications Fake Supporting Loan Documentation Purchase Loans Disguised as Refinance Investors-Short Term Investments with Guaranteed Re-Purchase COMMON MORTGAGE FRAUD SCHEMES Property Flipping - Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme. Silent Second - The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender. Nominee Loans/Straw Buyers - The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee's name and credit history to apply for a loan. Fictitious/Stolen Identity - A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant's name, personal identifying information, and credit history are used without the true person's knowledge. Inflated Appraisals - An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value. Foreclosure Schemes - The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner. The three most used foreclosure schemes are identified as: phantom help; bust-out; and the bait and wwitch. Equity Skimming - An investor may use a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer's name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later. Air Loans - This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes. General Fraud Tips Mortgage fraud is a growing problem throughout the United States. People want their home's equity to be greater than the mortgage loan on the home, and with housing booms going on throughout the U.S., there are people who try to capitalize on the situation and make an easy profit. Tips to protect you from becoming a victim of Mortgage Fraud Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card, and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a Quit-Claim Deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner, without preventing the foreclosure. The victim suffers the loss of the property, as well as the up-front fees. Be aware of offers to "save" homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Before purchasing a home, research information about prices of homes in the neighborhood. http://www.fbi.gov/hq/mortgage_fraud.htm (reference) |
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