Fraud For Profit. Fraud for Property. Rescue Schemes

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2 Fraud For Profit Most Prosecutions- Large Dollar losses High foreclosure rates, neighborhood impact Fraud for Property Liar s Loans High foreclosure rates Rescue Schemes Vulnerable victim

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4 Types of Mortgage Fraud We re Seeing Builder Bailouts & Condo Conversions Fraudulent Property Flipping Foreclosure Rescue Scams Short Sales/REO Fraud Theft of Funds Deed Theft 4

5 Rescue Schemes

6 Emerging / Re-Emerging Schemes Foreclosure Rescue Scams Homeowners in low-income neighborhoods report being solicited for their deeds or up-front fees to prevent foreclosure. Perpetrators targeting homeowners in default or other stage of the foreclosure process. Property transferred to perpetrator through a quit claim deed. Homeowner is paying rent on property he believes he still owns.

7 RESCUE SCHEMES 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 upfront fees. The perpetrator profits from these schemes by re-mortgaging 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.

8 Emerging / Re-Emerging Schemes Reverse Mortgages (HECM) Two Types of Schemes (1) Remove Equity from Existing Home (2) Use to Purchase Property Equity Scheme Purpose of Reverse Mortgage is to generate income. Borrower normally has substantial equity in the property. During loan, borrower continues to own & reside in property. Do not usually require any repayment. Tax-free income to pay expenses, including healthcare. When borrower no longer uses home as primary residence or dies, the entire amount of loan comes due. If borrower uses all equity in property, then heirs cannot inherit. Inflated appraised value exceeds equity in home. Excessive & Hidden fees (suppose to be limited to $6,000).

9 HECM Fraud Flow Chart Investor is deeded, purchases foreclosed or previously flipped home & advertises home as a free, rehabbed AARP/HUD sponsored home for seniors. Home is minimally or not rehabbed. Recruiter identifies, contacts, and counsels seniors who don t own homes and are currently renting. Seniors are on fixed incomes of $600 $1,000 per month. Investor orders appraisal. Home is over appraised. Appraisal amount derived from use of the HUD website HECM Calculator to achieve desired HECM principal limit. Investor executes a quit claim deed & lien (in the form of a promissory note or private loan normally due within one year) with senior. The lien(s) amount is about equivalent to the principal limit derived from the home s over appraised value. The lien(s) is placed on the HECM application and becomes a lien commitment so the investor can collect payment at closing. The lien(s) created by the promissory note must be satisfied in order for the senior to own the home. Lender places order for HECM in senior s name. Senior Victim sometimes receives HECM Counseling from uncertified counselor

10 HECM Fraud Flow Chart The promissory note that was previously executed between the investor and the senior victim is now on the HECM loan as outstanding liens. Lender schedules closing and brings recruiters take senior to HECM closing. When loan funds, the liens from the 1st closing (promissory note, private loan) is paid off. Liens are in favor of the investor and receives the HECM proceeds. The senior victim is usually not concerned or even aware of the fraud. They are happy to have received a home for free. Investor then gives the recruiter (during or after HECM closing) approx $1,500-$2,000 for his services. Fraud discovered months or years later. When senior learns the home is in unlivable conditions or HUD HOC conducts a review.

11 Emerging / Re-Emerging Schemes Reverse Mortgages (HECM) Difficult to Detect HUD Reports HECM loan originations insured by FHA rose from 7,923 in (FY) 1999 to 112,013 in FY 2008 HECM loan limits increased from $362,790 to $625,500. Concerns Increasing senior victim population currently worth $4 trillion in home equity estimated to grow by 10,000 people per day through 2011 Program vulnerabilities, such as the lack of income, credit, or employment qualification As of January 2009, a provision in the Housing and Economic Recovery Act provides the option for seniors to purchase a home and obtain an HECM in one transaction.

12 Emerging / Re-Emerging Schemes Short Payoff/Short Sale Fraud Over the last two years, short sale volume at Freddie Mac has grown more than 1000% ( ). Attempt to avoid foreclosure through short sale. Fraud is any misrepresentations or deliberate omission of fact that induces lender to agree to terms of short sale. Such as: true buyer of short sale property, lack of arms length relationship between seller & buyer, pre-arraigned subsequent sale of property at higher sale price, and/or selling borrower s hardship story to support need of short sale.

13 Emerging / Re-Emerging Schemes Stimulus Funds Fraud. On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009, which includes $1.5 billion for a Homelessness Prevention Fund. Program is called the Homelessness Prevention and Rapid Re-Housing Program (HPRP). Purpose is to help homeless or stop immediate threat of becoming homeless. Funds administered by grantees and subgrantess, i.e. non-profit organizations. Conspirators fake pending eviction in order to get stimulus funds to cover rent. Zero tolerance prosecution approach.

14 Emerging / Re-Emerging Schemes Stimulus Funds Fraud. Loan Modification and Refinance Fraud Borrower submits false income information and/or false credit reports to persuade a financial institution to modify or refinance a loan on more favorable terms. Once loan refinanced, home sold at profit and lending company not advised of potential buyer. Simply use false information on documents to obtain better loan terms or have significant amount of principal forgiven.

15 Emerging / Re-Emerging Schemes Stimulus Funds Fraud. Mortgage Servicing Fraud Mortgage servicing typically includes: billing the borrower; collecting principal, interest, and escrow payments; management of escrow accounts; disbursing funds from the escrow account to pay taxes and insurance; and forwarding funds to an owner or investor (if the loan has been sold in the secondary market). Mortgage servicing fraud generally involves the diversion or misuse of principal and interest payments, loan prepayments, and/or escrow funds for the benefit of the service provider.

16 Emerging / Re-Emerging Schemes Stimulus Funds Fraud. Mortgage Servicing Fraud cont. Sells a loan it services, but not forward funds to the owner of the loan. The servicer continues to make principal & interest payments on the loan so the owner is not aware the loan had been sold. Diverts escrow payments for taxes & insurance for own use. Fails to forward principal & interest payments to holder of note, then reports loan as past due for a short period of time until can use proceeds from other loans to bring that loan current.

17 Emerging / Re-Emerging Schemes Credit Enhancement Schemes Employer identification numbers (EINs) used in place of the borrower s social security number on mortgage loan documents. Home equity lines of credit opened with EINs to improve credit scores. Evidence that perpetrators transferred personal funds into straw buyers accounts. Borrower is unlikely to have sufficient funds for a down payment. Presence of a seller assistance scheme. Counterfeit Checks Written against Escrow Accts

18 Coordination with Civil Enforcement U.S. Attorney Office s Civil Unit Federal Trade Commission East Central Region Federal Trade Commission 1111 Superior Avenue, Suite 200 Cleveland, OH FTC-HELP ( ) Ohio Attorney General s Office

19 Federal Trade Commission Foreclosure Rescue Schemes Forensic audits - checking a homeowner s loan documents for law violations that would give them leverage in negotiating with lenders to obtain a loan modification or a short sale (sale of a house for an amount less than the mortgage balance). Ads stated, We have found that between 80-90% of all loans that we have audited have some form of rights violations and collected $995 in advance for each audit. The action is part of an ongoing crackdown on scams that target consumers who are behind in their mortgage payments or at risk of foreclosure.

20 Helpful Websites DOJ: Federal Trade Commission: Financial Fraud Enforcement Task Force: Federal Financial Institutions Examination Council: Non-profits, Freddie Mac & Fannie Mae:

21 QUESTIONS?