716 West Ave Austin, TX USA

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Barnaby Ford
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1 UNDERSTANDING THE BASICS OF MORTGAGE FRAUD GLOBAL HEADQUARTERS the gregor building 716 West Ave Austin, TX USA

2 TABLE OF CONTENTS I. INTRODUCTION A Short History of Mortgages... 1 Evolution to Today... 2 The Evolution of Mortgage Lenders... 6 The Evolution of Mortgage Brokers... 7 Factors Affecting Mortgage Fraud Today... 8 High Volumes of Mortgage Loans The Subprime Market Legislation and Regulation in the Mortgage Industry Federal Legislation State Legislation Mortgage Industry Regulation State Regulation The Mortgage Fraud Problem Today Geographical Hot Spots The Impacts of Mortgage Fraud Financial Institutions Neighborhoods and Cities Consumers Economy Mortgage Fraud in the Future A Stabilizing or Decreasing Real Estate Market Foreclosures Credit Crunch Conditions Are Ripe for Future Mortgage Fraud Mortgage Relief Scams Summary of Key Points Review Questions II. THE LIFE CYCLE OF A MORTGAGE LOAN Introduction Expectations of a Property Seller Expectations of a Real Estate Listing Agent Fraud Trends Involving Real Estate Listing Agents Expectations of a Borrower Fraud Trends Involving Borrowers Real Estate Buyer s Agent Fraud Trends Involving Real Estate Buyer s Agents Lender Fraud Trends Involving Lenders Third-Party Originators (TPO) Mortgage Broker Correspondent Lender Fraud Trends Involving TPOs Loan Originators i

3 II. THE LIFE CYCLE OF A MORTGAGE LOAN (CONT.) Retail Loan Officer Wholesale Loan Originator Expectations of a Loan Officer Fraud Trends Involving Loan Officers Loan Processor Fraud Trends Involving Loan Processors Underwriter The Three Cs of Underwriting Automated Underwriting Systems Three Possible Underwriting Outcomes Expectations of an Underwriter Fraud Trends Involving Underwriters Appraiser Uniform Standards of Professional Appraisal Practice Fraud Trends Involving Appraisers Title Insurer/Escrow Agent Title Insurers The Escrow Agent Types of Closings Typical Duties of an Escrow Agent Expectations of an Escrow Agent Fraud Trends Involving Escrow Agents Fraud Trends Involving Notaries Transfer to Servicing and Secondary-Market Investors Transfer to Servicing Sale to Secondary Market Mortgage-Servicing Companies (Loan Servicers) Payment Services and Remittance to Investor Collections of Past-Due Loans and Workouts Fraud Trends Involving Servicing Companies Loan Modification Programs The Making Home Affordable Program Foreclosure Avoidance Fraud Trends Involving Mortgage-Servicing Companies Loan Resolution Fraud Trends Involving Loan Resolution Summary of Key Points Review Questions III. THE THREE Cs OF UNDERWRITING Introduction Credit Credit Reports How Credit Drives Fraud Schemes Assessing the Collateral Risk Types of Property Value of the Collateral ii

4 III. THE THREE Cs OF UNDERWRITING (CONT.) Summary of Key Points Appraisal Report Checklist Capacity Capacity to Repay Debt-to-Income Ratios How Capacity Drives Fraud Schemes Employment Assets Summary of Key Points Review Questions IV. CLOSING Introduction Steps in the Closing Process Pre-Closing Closing Post-Closing Fraud in the Closing Process Misrepresenting the Liens Listed on the Title Commitment HUD-1 Settlement Statement The HUD-1 Settlement Statement in Purchase Transactions The HUD-1 Settlement Statement in Refinance Transaction Reviewing the HUD-1 Settlement Statement for Fraud Review Questions V. MORTGAGE FRAUD SCHEMES Introduction Types of Mortgage Fraud Property Flipping The One-Transaction Flip Builder Perpetrated Schemes Short Sale Schemes Home Equity Conversion Mortgages (Reverse Mortgages) Schemes Chunking Shotgunning Identity Fraud and Theft of Property Schemes Churning (Loan Flipping) Loan Modification Schemes Summary of Key Points Review Questions VI. IDENTIFYING AND INVESTIGATING RED FLAGS Introduction Loan File Documentation Lender s or Investor s Credit Loan File Mortgage Broker File Lender s or Investor s Quality Control File iii

5 VI. IDENTIFYING AND INVESTIGATING RED FLAGS (CONT.) Loan Servicing Records The Loan Servicer s Real Estate Owned Department Lender s Database Private Mortgage Insurer File Borrower s Records Property Seller s Records Real Estate Agent s Documentation Appraiser s Work File Title Company s Files Investigative Techniques Public Records Online Resources Resources Available for a Fee Resources Requiring Authorization or Waiver from a Loan Party Telephone Inquiries Bank Records Utility Records Summary of Key Points Review Questions VII. LEGAL ASPECTS AND REMEDIES Introduction Common Goals of Mortgage Fraud Investigations Insurance Settlement Demand that Lenders Repurchase Loans License Revocation Terminate a Business Relationship Remedies Through Civil Litigation Convince the Government to Bring a Criminal Action Criminal Actions Preparing a Mortgage Fraud Case for Prosecution or Litigation Other Remedies Working with Law Enforcement Understand the Department of Justice s Threshold Requirements Consider Other Law Enforcement Agencies Identify the Victim Calculate the Losses Take Steps to Facilitate Prosecution Summary of Key Points Review Questions VIII. APPENDIX: RED FLAGS OF MORTGAGE FRAUD Red Flags of the One-Transaction Flip Red Flags of Builder Bailout Schemes Red Flags of Foreclosure Rescue Scams Red Flags of Fraudulent Short Sales Red Flags of Identity Theft iv

6 VIII. APPENDIX: RED FLAGS OF MORTGAGE FRAUD (CONT.) Red Flags of Churning Schemes Credit Red Flags Red Flags in Loan Applications Red Flags in Credit Reports Red Flags of Straw Borrower Schemes Red Flags of Identity Theft Schemes Collateral Red Flags Red Flags of Legal Ownership and First Lien Position Red Flags of Misrepresentations of Property Type Red Flags of Occupancy Misrepresentations Red Flags of Equity Contribution Misrepresentations Red Flags of Purchase Transactions Disguised as Refinance Capacity Red Flags Red Flags of Altered or Fabricated Documents Red Flags of Employment Misrepresentations Red Flags in the Verification of Employment Red Flags of Schemes Involving Misrepresentations of a Borrower s Self-Employment Status Red Flags in Pay Stubs and W-2s Red Flags in Tax Returns Self-Employment and Income (Including Rental Income) Red Flags in Lease Agreements Red Flags of Misrepresentations in Stated Income Loans Red Flags of Debt Misrepresentation Red Flags in Loan Applications Red Flags in Verification of Deposits Red Flags in Bank Statements or Investment Fund Account Statements Closing Red Flags Red Flags of Vested Owner Misrepresentations Red Flags of Suspicious Liens and Disbursements Red Flags of Borrower ID Misrepresentation Red Flags in Closing Conditions Red Flags of HUD-1 Settlement Statements IX. GLOSSARY OF ACRONYMS AND ABBREVIATIONS X. SOLUTIONS TO REVIEW QUESTIONS I. Introduction Review Questions II. The Life Cycle of a Mortgage Loan Review Questions III. The Three Cs of Underwriting Review Questions IV. Closing Review Questions V. Emerging Schemes Review Questions VI. Identifying and Investigating Red Flags Review Questions VII. Legal Aspects and Remedies Review Questions XI. FINAL EXAMINATION... E-1 XII. INDEX... I-1 v

Linda Marshall Senior Litigation Counsel U.S. Attorney s Office Western District of Missouri

Linda Marshall Senior Litigation Counsel U.S. Attorney s Office Western District of Missouri FY 2008 (first 3 quarters) Losses to Bank Robbery, Burglary, and Larceny - $41 Million ($9,086 per robbery)