According to the Federal Bureau of Investigation, mortgage fraud is one of the fastest growing white-collar crimes in the United States. The FBI reports a 40 percent increase in mortgage fraud over the past few years and is currently working on over 1,500 cases that involve national companies. Mortgage fraud is defined as a material misstatement, misrepresentation, or omission that is relied upon by an underwriter or lender to fund, purchase, or insure a loan. While mortgage fraud does not necessarily involve foreclosed properties, as a real estate professional, you should be aware of these schemes to ensure that you or those you advise doing not inadvertently become involved in these schemes. The penalties for mortgage fraud can include loss of livelihood, severe fines, and even prison sentences. Two primary types of mortgage fraud are recognized: 1. Fraud for property 2. Fraud for profit
1. Fraud for Property
Fraud for the property, also known as fraud for housing, usually involves the borrower of a single loan. The borrower wants the property and makes misrepresentations in order to obtain the property. These misrepresentations are usually regarding personal income, assets, personal debt, employment history, and the value of the property. Very often, the borrower fully intends to repay the loan. The FBI reports that fraud for property accounts for 20 percent of all mortgage fraud. Fraud for property can also involve the following situations: Backward Applications – In this situation, a borrower “adjusts” his or her income to meet the bank’s criteria to qualify for a loan. Nominee Loans – The identity of the borrower is concealed through the use of a “nominee.” In this situation, the borrower uses the nominee’s name and credit history in order to qualify for a loan.
2. Fraud for Profit
Fraud for profit includes both individuals and banking and real estate professionals who, through inflated appraisals, identity fraud, and other misrepresentations, can illegally pocket millions of dollars. Fraud-for-profit schemes can include such things as:
- House Flipping
- Air loans
- Equity Skimming
The FBI focuses the majority of its mortgage fraud efforts on fraud for profit.
House Flipping, The most common form of mortgage fraud, is illegal property flipping, which entails false appraisals and other fraudulent loan documents. The FBI is actively engaged in pursuing individuals involved with “flipping” schemes.
House Flipping Scams
In a house flipping scam, a buyer of an owned property or a foreclosure pays for a false appraisal that raises the property’s value. A mortgage is then taken out for the new value. The scammers walk away, leaving the lender with a property that is truly worth less than the loan. According to the FBI, this type of fraud is often committed by individuals who are experienced with real estate and mortgages. Accountants, mortgage brokers, and loan officers are typical of some who get involved in house flipping because they know how to “exploit vulnerabilities in the system.” Damages are real and widespread. Houses appraised and then sold at inflated values raise property assessments throughout a neighborhood. Local governments, in turn, raise taxes, and residents are forced to pay at higher rates. Also, the costs to lenders are enormous considering the cost of foreclosure and loss of working capital.
Air loans are non-existent property loans where there is usually no collateral. An example 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 being used as the employer, appraiser, credit agency, or other organization for verification purposes. A major criminal case involving air loans involved the Amerifunding company in Colorado. Amerifunding was a mortgage brokerage that was owned and operated by Gerald Small in Colorado. Small maintained two “warehouse” lines of credits, each at a large federally-insured financial institution in the U.S. In order to support a lavish lifestyle; Small created fictitious loans to live off of the lines of credit. The borrower information, name, and social security number were all invented. Eventually, one of the creditors asked for verification of identification, thereby defeating Small’s elaborate setup. To deal with this, Small placed an advertisement for an account representative at his company for a salary of over $100,000. Applicants eagerly completed applications that included names, social security numbers, and copies of driver’s licenses. Small immediately used this personal information to obtain even more fictitious loans.
Small ultimately obtained over $200 million in fraudulent mortgage loans and used the stolen identities of 47 job applicants to obtain mortgage funding for air loans that totaled over $21.5 million during a 24-month period. Small was arrested in March 2004, and in April 2004, a grand jury in Denver indicted Small and five others for scheming to obtain hundreds of millions of dollars in bogus mortgages and multi-million dollar lines of credit by falsifying documents. Small was ultimately sentenced to serve 101 months in federal prison and to pay over $37,000,000 in restitution.
In the scam known as equity skimming or equity stripping, an investor may use a straw buyer to obtain a mortgage using false income documents, false credit reports, and other deception. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed that relinquishes all rights to the property and provides no guaranty to title. Often, this investor rents the property back to the original homeowner. In other cases, the investor obtains second mortgages to squeeze even more profit. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later. Equity skimming can also refer to corrupt insiders who persuade unsophisticated borrowers to refinance their mortgages every few months. On November 21, 2005, in a speech before the Institute of Internal Auditors Fraud Seminar, Grant D. Ashley, the Executive Assistant Director, Law Enforcement Services of the FBI described equity skimming as follows: Corrupt employees [of lending institutions] target people with high mortgage interest rates and convince them to refinance at slightly lower rates. A few months later, they repeat the scheme with a slightly lower rate, but a higher loan amount is generated each time to pay the origination fees. In essence, the perpetrators strip the remaining equity from the properties and line their pockets with origination fees. Eventually, the loans become too large for the borrowers, who are forced to default. In June 2007, Synthia Ippolito of Hudson, Florida, was convicted of equity fraud. Ippolito and her ex-husband (who was convicted in a separate trial) had defrauded over 20 homeowners who had a large amount of equity in their properties through equity skimming.
Ippolito would purchase properties by convincing sellers to lend at least half of the purchase price in exchange for promises of monthly payments that would be followed by a balloon payment. After obtaining title to these properties, Ippolito would look for private lenders who would lend them the remaining balance of the purchase price. These lenders, who were unaware of the seller financing, would record their liens in the first position. As a result, if a default occurred, this lender would take control of the property and not the sellers who had built up the equity in the first place. Many homeowner sellers completely lost their properties or had to pay thousands of dollars to get them back.