Federal Bureau of Investigation Criminal Investigative Division

Deputy Assistant Director Michael C. Mines

BKA HERBSTTAGUNG

November 12, 2008 MortgageMortgage FraudFraud Tool?Tool? Mortgage Fraud Reality!

Lender was stuck with a $250,000 loan. MostMost CommonCommon TypeType ofof MortgageMortgage FraudFraud OriginationOrigination SchemeScheme

The classic property "flip."

Home Property- usually $ flipper has results in the property foreclosure The bank is left with Property- fraudulently Property- an $400,000 mortgage appraised for flipper flipper sells the on a $200,000 home for $400,000. purchases a property for a loss of $200,000. If the loan was FHA property for $400,000, and insured, the $200,000 walks away government absorbs with a $200,000 the loss. profit. The Current State of the old Mortgage Fraud “Tools” House recently sold for $1.75 on eBay (Sold in October 2008 - Saginaw, Michigan) ReRe--emergingemerging Scheme:Scheme: BuilderBuilder--BailoutBailout EmergingEmerging Scheme:Scheme: ShortShort--SaleSale FraudFraud ReRe--emergingemerging Scheme:Scheme: ForeclosureForeclosure RescueRescue ScamsScams Mortgage Related Fraud SARS Fiscal Years 2003 – 2008 (10/1/2002 – 9/30/2008) Nationwide

100,000

d

e

v

i

e

c 63,713

e

r

s

R 50,000 46,717

A 37,622

S 35,617

28,692 f 21,994

o 21,023

17,127

r

e 11,611 4,189 6,936 b 3,240 2,409 1,850 2,126 1,724 4,569 6,784 m 0

u

N Mortgage Fraud Commercial False Statement Loan Fraud

Fiscal Year 2003 Fiscal Year 2004 Fiscal Year 2005 Fiscal Year 2006 Fiscal Year 2007 Fiscal Year 2008 Dollar Losses Reported of Mortgage Related Fraud SARS Fiscal Years 2003 – 2008 (10/1/2002 – 9/30/2008) Nationwide

Dollar Losses in Millions $3,000 $2,463

$2,000 $1,925 $1,491 $1,402 $1,163 $998 $1,060 $946

$1,000 $813 $1,014 $711 $1,044 $798 $540 $458 $388 $429 $225 Rounded to nearest millionth to nearest Rounded $0 Mortgage Fraud Commercial False Statement

Dollar Losses Reported in Millions Losses Dollar Loan Fraud

Fiscal Year 2003 Fiscal Year 2004 Fiscal Year 2005 Fiscal Year 2006 Fiscal Year 2007 Fiscal Year 2008 The Sub-Prime Loan Process

Hold in portfolio Loan Origination Secondary Market Bank Mortgage Broker Sell Loan Investment Bank, Brokerage House, or Mortgage Broker Loan Real Estate Investment Trust Banker d n an oa s e l tor itiz es ur nv ec o i S ll t Investors se Pension Funds Create special

Life Insurance Companies purpose entities Other Commercial Banks State & Local Governments Central Banks Sell ownership Special Purpose Entities Fund Managers interest to investors The Public Brokerage Firms

UNCLASSIFIED//FOUO SUB-PRIME COLLAPSE

„ 80.2% of securitized sub-prime loans originated during 2005 had adjustable rates; 74.9% of these loans were 2/28 adjustable-rate loans. „ These ARMS had fixed mortgage rates for the first two years after origination and were subject to reset in 2007. Source: First American CoreLogicCoreLogic’s LoanPerformance TheThe MarketPulseMarketPulse

TheThe AftermathAftermath ofof MortgageMortgage FraudFraud Foreclosed/AbandonedForeclosed/Abandoned HomesHomes

Impact of Sub-Prime “Crisis”

Problems Related to Credit Contraction • Economy slows • Reduced available credit for new development • More difficult for people to obtain mortgages • Refinancing opportunities are less available • Financing becomes more expensive • Reduced interest from foreign investors in MBSs

Problems Related to Poor Underwriting • Increased number of foreclosures • Depreciating real estate values • No room for equity withdrawals

Problems Related to Write-downs • Stock market declines • Reductions in dividends • Increased need for capital infusions: (sources include sovereign wealth funds) $500 billion as of Sept ‘08 UNCLASSIFIED//FOUO Sub-Prime Meltdown Timeline

20042004 June Federal Reserve began a series of Fed Funds Rate increases. By June 2006, there will have been 17 consecutive increases raising the rate from 1% to 5.25%. 20062006 December The weakest Sub-Prime mortgage originators begin to fail; by December 2007, over 110 mortgage origination companies will have closed their doors. 20072007

April New Century (2nd largest originator of Sub-Prime loans) filed for bankruptcy.

UNCLASSIFIED//FOUO Sub-Prime Meltdown Timeline

20072007 July Bear Stearns announced that investors in their Sub-Prime hedge funds would receive little or no recovery; the two funds had lost 90% of their value.

August RealtyTrac announced that foreclosures had risen 93% in one year.

November Goldman Sachs forecasted Sub-Prime losses for the financial sector would reach $400 billion. 20082008 Sub-Prime losses reached $232 billion and the IMF April estimated that financial institutions world-wide may face losses of $945 billion over the next two years.

UNCLASSIFIED//FOUO Sub-Prime Meltdown Timeline

20082008

June Ralph Cioffi & Matthew Tannin are indicted and arrested on Securities Fraud and Insider Trading charges related to the failure of the Bear Stearn’s Sub-Prime based hedge funds.

July IndyMac Bank, located Pasadena, California, became the second largest Thrift in U.S. history to fail and be assumed by the FDIC.

August Investment houses begin to settle Auction Rate Securities cases with a number of state regulators.

September Wall Street is radically transformed: Fannie Mae & Freddie Mac are taken over, Lehman Brothers declares bankruptcy, Bank of America purchases Merrill Lynch & a $700 billion Bailout is proposed. UNCLASSIFIED//FOUO FBIFBI StatementStatement toto CongressCongress inin 20042004

„ ““TheThe potentialpotential impactimpact ofof mortgagemortgage fraudfraud onon financialfinancial institutionsinstitutions andand thethe stockstock marketmarket isis clear.clear. IfIf fraudulantfraudulant practicespractices becomebecome systematicsystematic withinwithin thethe mortgagemortgage industryindustry andand mortgagemortgage fraudfraud isis allowedallowed toto becomebecome unrestrained,unrestrained, itit willwill ultimatelyultimately placeplace financialfinancial institutionsinstitutions atat riskrisk andand havehave adverseadverse effectseffects onon thethe stockstock market.market.””

„ Chris Swecker, Former FBI Assistant Director, Criminal Investigative Division, Introductory Statement: House Financial Services Subcommittee on Housing and Community Opportunity, October 7, 2004. FBI Resources

Corporate & Mortgage Fraud Investigations

5000 Agents Assigned to 4000 Corporate and Financial Institution Fraud 3000 Mortgage & Corporate Fraud Investigations 2000

1000 Mortgage Related Suspicious Activity 0 Reports (in 10s) FY 03 FY 04 FY 05 FY 06 FY 07

- Forecast: Current trend analysis projects the total number of Mortgage Fraud related SARS to exceed 63,000 by the end of fiscal year 2008 - Mortgage Fraud Cases (329 Classification): 1,550 - Sub-Prime Corporate/Securities Fraud Cases (318 Classification) : 31 (521 Corporate Fraud Cases)

UNCLASSIFIED//FOUO/LES Top 10 Mortgage Fraud Hot Spots Emerging Problematic Mortgage Fraud Areas ts as identified ts as identified Source: FBI 2007 Mortgage Fraud Report Fraud Mortgage 2007 FBI Source:

Where is the crime problem? Where is the crime problem? 14 FBI field offices reside in the top ten mortgage fraud hotspo through intelligence from multiple source indicators. through intelligence from multiple source 14 FBI field offices reside in the top ten mortgage fraud hotspo through intelligence from multiple source indicators. through intelligence from multiple source OperationOperation MaliciousMalicious MortgageMortgage MarchMarch 1,1, 20082008 toto JuneJune 18,18, 20082008

500 406 $1.07 Billion 287 in estimated losses 250 173 81

0 Arrests Defendants Convictions Sentencings Charged SeizedSeized AssetsAssets fromfrom OperationOperation MaliciousMalicious MortgageMortgage SeizedSeized AssetsAssets fromfrom OperationOperation MaliciousMalicious MortgageMortgage PendingPending MortgageMortgage FraudFraud CasesCases FiscalFiscal YearsYears 20032003 toto 20082008

2000 Steady Growth in Pending Cases 1,644

1,204

1000 881 721 534 436

0 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008

Cases Pending

FY 2003 -2004 CPI Codes; FY 2005-2006 - 29L& 29Ms; Data Source: Compass & MAR & FY 2007 – present - 329 Classifications Only updated 10/10/2008 FBIFBI MortgageMortgage FraudFraud Indictment/InformationIndictment/Information StatisticsStatistics FiscalFiscal YearsYears 20052005 -- 20082008 2,000 1,524 1,204 1,000 881 721 470 321 260 236 138 93 123 60 0 FY 2005 FY 2006 FY 2007 FY 2008 (as of 7/31/08) Convictions/PTD Informations/Indictments Cases Pending

Data Source: Compass updated 8/18/2008 FBI Sub-Prime Fraud Investigations

Brokerage Houses

Mortgage Brokers Mortgage Lenders

Sub-Prime Investigations Hedge Funds Investment Banks

Real Estate Investment Trusts Builders/ Developers

UNCLASSIFIED//FOUO Positive Results

BearBear Stearns:Stearns: RalphRalph CioffiCioffi && MatthewMatthew TanninTannin ArrestsArrests High-Profile Corporate Fraud Cases

Bear Stearns National Century Managers: Ralph CEO: Lance Poulsen Cioffi, Matthew Tannin

Status: Charged with Status: Found insider trading & Sec. guilty; Sentencing Fraud Pending.

Peregrine Systems Brocade Communications CEO: Gregory L. Reyes CEO: Stephen Gardner VP of HR: Stephanie Jensen Status: Entered guilty plea; Sentence pending Status: Reyes sentenced to (faces 20 years) 21 months and a $15 million fine; Jensen sentenced to 4 months and a $1.25 million fine High-Profile Corporate Fraud Cases

Enron Qwest

CEOs: Jeffrey Skilling, CEO: Joseph Nacchio Kenneth Lay (deceased) Status: Convicted at trial, overturned on Status: Skilling sentenced appeal, gov’t to appeal 24 years, 4 months decision

Worldcom Hollinger International

CEO: Bernard Ebbers CEO: Conrad Black Status: Sentenced 25 Status: Sentenced to years 6 years, 6 months Major Cases

„ National Century Financial Enterprises: The financial loss attributable to fraudulent activities is estimated to be approximately $1.9 billion. On 3/13/2008 five executives were found guilty and on 3/17/2008 former CEO Lance Poulsen was convicted of Obstruction of Justice and Witness Tampering.

„ Bayou Management: This Securities Fraud investigation resulted in the conviction of two hedge fund managers and a Chief Financial Officer for providing investors with false earnings and fraudulent financial statements from almost the fund's inception; resulting in client losses in excess of $400 million.

„ Broadcom: On 6/4/2008, a Federal Grand Jury indicted Broadcom co-founder Henry Nicholas and former CFO, William Ruehle.