MORTGAGE FRAUD FACT SHEET For Victim Service Providers and Attorneys Understanding Mortgage Fraud Schemes

NATIONAL CRIME PREVENTION COUNCIL Mortgage fraud crimes have a in lending practices. The current significant adverse impact on economic decline has resulted in homeowners, families, communities, an increase in schemes targeting businesses, and the economy. vulnerable homeowners. Awareness plays a critical role in combating and mitigating the harm of mortgage fraud activities. Affinity Fraud Individuals should understand what These scams exploit the trust and mortgage fraud entails, as well as the friendship developed in groups various types of schemes. of people who share affinity with The FBI defines mortgage one another. These groups have a fraud as the employment of “some common interest or bond. Examples type of material misstatement, of such groups are religious, misrepresentation, or omission professional, or age-related groups. relating to a real estate transaction, This fraud is commonly perpetrated which is relied on by one or against senior citizens. more parties to the transaction.” Mortgage fraud schemes are varied. Red flags: Large gift funds are Data reported by the FBI based provided by group members as the on opened cases reveal that the source of down payment; use of most prevalent mortgage fraud straw borrowers, falsified gift funds, schemes identified in fiscal year and altered income, employment, or 2010 included loan origination asset documentation. schemes, followed by settlement- related schemes, real estate Air Loans investment schemes, short sale schemes, commercial real estate loan This is a nonexistent property loan frauds, foreclosure rescue schemes, where there is usually no collateral. advance fee schemes, builder bailout Air loans involve brokers who schemes, and bankruptcy fraud. The invent borrowers and properties, schemes have evolved to adapt to establish accounts for payments, economic changes and modifications and maintain custodial accounts Understanding Mortgage fraud schemes for escrows. They may establish an the lender, the straw buyers’ income are found in residential real estate office with a bank of telephones, and asset information are often are also present in commercial loan each one used as the fake employer, inflated in order for them to qualify fraud. appraiser, credit agency, to for properties that they otherwise Red flags: Leases are not supported fraudulently deceive creditors who would be ineligible or unqualified to by business licenses and other attempt to verify information on purchase. records; inflated appraisal; no record loan applications. Red flags: The borrower is barely of commercial improvements; Red flags: Associated parties such qualified or unqualified; builders’ neighborhood where property is as the borrower, employer, or marketing materials advertise “rent located experienced a decrease lender have generic or fictitious credit” to investors or payment or no appreciation in real estate character names; the application is credit; the purchase and sale value consistent with the leases and completed by someone other than agreements contain unusual credits; inflated appraisal values. the borrower; the borrower is not personal property is included in concerned about the type of loan, the purchase; inflated appraisal; interest rate, fees, or other items that all comparables have inflated sales Equity Skimming have an impact on the bottom line; prices or value based on cash sales; In this scheme the equity is drained significant discrepancies regarding appraisal photos do not match from the property. An investor personal, employer, or similar unit number; neighborhood where may use a straw buyer, false income information exist between the credit property is located experienced a documents, and false credit reports report and loan application. sudden spike in volume and price to obtain a mortgage loan in the after lagging sales. straw buyer’s name. Subsequent to Builder Bailout/Condo Conversion closing, the straw buyer signs the Commercial Real Estate Loans property over to the investor in a Builders facing rising inventory quitclaim deed, which relinquishes and declining demand for newly Owners of distressed commercial all rights to the property and constructed homes employ bailout real estate obtain financing by provides no guaranty to title. schemes to offset losses. Builders creating bogus leases and using The investor does not make any find buyers who obtain loans for these fake leases to exaggerate mortgage payments and rents the the properties. The buyers then the building’s profitability, thus property until foreclosure takes allow the properties to go into inflating their appraisal values using place several months later. foreclosure. In a condo-conversion the income-method approach. scheme, apartment complexes These false leases and appraisals Red flags: Borrower quitclaims purchased by developers during a trick lenders into extending loans property title to a third party; housing boom are converted into to the owner. As cash flows are borrower is low-income and condos. When the market declines, restricted to the borrower, property typically uninformed. developers have an excess inventory repairs are neglected. By the of units. Developers recruit straw time the commercial loans are in Foreclosure Rescue Schemes buyers with cash-back or additional default, the lender is oftentimes incentives and inflate the value of left with dilapidated and unusable The perpetrators identify the condos to obtain a larger sales or difficult-to-rent commercial homeowners who are in foreclosure price at closing. In addition to property. Many of the methods of or at risk of defaulting on their failing to disclose the incentives to committing mortgage fraud that mortgage loans. The perpetrators

3 Mortgage Fraud Fact Sheet for victim service providers and attorneys

then mislead the homeowners into sum payment. Perpetrators recruit also purport to reduce or eliminate believing the perpetrators can save seniors through local churches, the debt. The scammers, however, their homes from foreclosure or investment seminars, and television, demand large fees up front and can guarantee a loan modification radio, billboard, and mailer often negotiate unfavorable terms with a reduced mortgage payment. advertisements. The scammers then for the clients, or do not negotiate They deceive the homeowners into obtain a HECM in the name of the at all. Usually, the homeowners transferring the deed or putting the recruited homeowner to convert ultimately lose their homes. This property in the name of an investor. equity in the homes into cash. The scheme is similar to a foreclosure The perpetrators profit by selling scammers keep the cash and pay a rescue scam. the property to an investor or straw fee to the senior citizen or take the Red flags: Third-party company borrower, creating equity using a full amount unbeknownst to the acts as intermediary for borrower; fraudulent appraisal, and stealing senior citizen. No loan payment company charges excessive upfront the seller proceeds or fees paid by or repayment is required until the fees; borrowers are directed to avoid the homeowners. The homeowners borrower no longer uses the house contact with their mortgage servicers are sometimes told they can pay rent as a primary residence. In the for at least a year and repurchase scheme, the appraisals on the home or lenders; the borrower quitclaims the property once their credit are vastly inflated and the lender property title to a third party. has been reestablished. However, does not detect the fraud until the homeowner dies and the true value the perpetrators fail to make the Loan Origination Fraud Schemes mortgage payments and usually the of the property is discovered. property goes into foreclosure. The loan application and Red flags: Property is quitclaimed to supporting materials contain the senior just before submission Red flags: Third-party company acts as information that is intentionally the intermediary for the borrower; of the reverse mortgage loan misrepresented in order to qualify borrowers are directed to avoid application; the senior is persuaded for a loan. Such information can contact with their mortgage servicers to assign power of attorney on cover assets, employment, income, or lenders; borrower quitclaims behalf of the senior prior to the and occupancy (identifying a property title to a third party. reverse mortgage loan application, second home or investment and communication with originator property as a primary residence). or underwriter is requested only to The misrepresentation includes Home Equity Conversion be done through the person with submission of altered or forged Mortgage (HECM) power of attorney. documentation. Mortgage loan A HECM is a reverse mortgage origination fraud is divided into loan product insured by the Loan Modification and Advanced two categories: fraud for property/ Federal Housing Administration Fee Schemes housing and fraud for profit. to borrowers who are 62 years or Fraud for property/housing older, own their own property (or Perpetrators purport to assist entails misrepresentations by the have a small mortgage balance), homeowners who are delinquent in applicant to purchase a property occupy the property as their their mortgage payments and are for primary residence. It usually primary residence, and participate on the verge of losing their homes involves a single loan and the intent in HECM counseling. It provides by offering to renegotiate the terms to repay the loan. Fraud for profit homeowners access to equity in of the homeowners’ loans with generally involves multiple loans their homes, usually in a lump their lenders. Perpetrators may and elaborate schemes perpetrated

4 Understanding Mortgage fraud schemes to gain illicit proceeds from loan officer or some other third reflect payment of taxes or hazard property sales. Loan origination party involved in the mortgage insurance on property not listed on fraud schemes come in many forms, transaction; occupation does not the loan application. including backwards application align with reported income; number (fabrication of borrower’s income of professional years or current Short Sale Schemes and assets to qualify for loan), position years in employment does credit enhancement, fraudulently not align with reported income; A real estate short sale is a type of inflated appraisals, illegal property W-2, paystubs, or 1099 do not pre-foreclosure sale in which the flipping (purchase and quick resale match with IRS tax return records; lender agrees to sell a property for of property at greatly inflated prices employer and employee names less than the mortgage owed. The based on fraudulent appraisal), and are not printed on paychecks or scam occurs when false statements silent second or other undisclosed paystubs; SSI, Medicare, and are made to loan servicers or lenders debt (intentional omission on tax deductions do not calculate regarding hidden relationships or mortgage application of undisclosed properly; property is a significant agreements that are in place to resell second mortgage from seller to buyer or unrealistic commute distance the property (typically for a period for down payment or other debt). from employer; appraisal report of 90 days). Red flags: Assets do not align with uses comparable sales or listing Red flags: Comparables have deflated reported income; account lists other from properties involving the same sales prices or are based on poor undisclosed owners in addition seller or real estate broker as the selection of comparable properties; to borrower; bank statements subject property; appraisal report appraisal is significantly low in value are not in the borrower’s name; omits better matched comparables; compared to neighborhood; back- bank statements do not reflect seller has owned the property for to-back or multiple real estate agent withdrawal of earnest money a short period of time; seller is a closings; LLC or trust serves as party deposit; employment information trust or LLC; long list of cosmetic to transaction; no record of short does not match across different loan property improvements; additional sale deed of trust; perpetrator refuses documents or previous applications; credit inquiries on the credit report to allow broker or appraiser to access employer’s name is similar to within the past 90 days; open trade property without perpetrator’s borrower’s name; area code of lines appear on the credit report presence; long list of estimated employer does not match with but not on the loan application; repairs. geographic location of given address; other unknown addresses associated Sources Internet search of employer’s phone with the borrower appear on the www.FBI.gov and Corelogic Mortgage Fraud number references back to broker/ credit report; financial records Prevention and Detection Resource Guide.

5 Mortgage Fraud Fact Sheet for victim service providers and attorneys

Tools and Resources for Victims To Obtain General Information or Counseling

To Report Scams and Make Complaints 77 Consumer Financial Protection Bureau Website: www.consumerfinance.gov 77 Consumer Financial Protection Bureau Phone: 855-411-CFPB (2372) Website: www.consumerfinance.gov; Online 77 Financial Fraud Enforcement Task Force Complaint Form Website: www.stopfraud.gov/protect-mortgage.html Phone: 855-411-CFPB (2372) Phone: 202-514-2000 77 Federal Bureau of Investigation Email: [email protected] Phone: 800-CALLFBI (225-5324) 77 Federal Bureau of Investigation Online Tips: FBI Tips and Public Leads Form Website: www.fbi.gov/about-us/investigate/white_ To file a complaint with the FBI, contact the nearest collar/mortgage-fraud/mortgage_fraud FBI field office. Locations are listed at www.fbi.gov/ Phone: 800-CALLFBI (225-5324) contactus.htm or https://tips.fbi.gov/ or for major 77 Federal Trade Commission cases you can also report information by calling toll- Website: www.ftc.gov/bcp/edu/microsites/ free number 800-CALLFBI (225-5324). moneymatters/your-home.shtml 77 Housing and Urban Development (HUD) Office 77 HOPE NOW Alliance Counseling Organizations of the Inspector General Hotline Website: www.hopenow.com Phone: 800-347-3735 Phone: 888-995-HOPE (4673) Fax: 202-708-4829 77 Making Home Affordable from the Departments Email: [email protected] of Treasury and Housing and Urban Development Address: HUD OIG Hotline (GFI), 451 7th Street, Website: www.MakingHomeAffordable.gov SW, Washington, DC 20410 Phone: 888-995-HOPE (4673) or for hearing impaired 77 Loan Modification Scam Prevention Network 877-304-9709 Website: www.PreventLoanScams.org; http:// 77 Loan Modification Scam Prevention Network complaint.preventloanscams.org (complaint form) Website: www.PreventLoanScams.org Phone: 888-995-HOPE Phone: 866-459-2162 77 Federal Trade Commission (FTC): Complaint Assistant Other Resources WebSite: www.ftccomplaintassistant.gov WebSite (Spanish): www.ftccomplaintassistant.gov/ 77 Home Loan Learning Center by the Mortgage Consumer_HomeES.htm Bankers Association Phone (for complaints against companies, organizations, Website: www.homeloanlearningcenter.com or business practices): 877-FTC-HELP (382-4357) Phone: 800-793-6222 Phone (for complaints about identity theft): 77 Home Ownership Preservation Foundation 877-ID-THEFT (438-4338) Website: www.995Hope.org Email (for complaints about spam or phishing): Phone: 888-995-HOPE (4673) [email protected] 77 Loan Modification Scam Alert Website: www.loanscamalert.org Phone: 888-995-HOPE (4673) 77 NeighborWorks America Website: www.nw.org Phone: 202-220-2300

6 Understanding Mortgage fraud schemes

GLOSSARY Equity - The difference between the Reverse Mortgage - A mortgage appraised value of a home and any that allows especially an elderly Appraisal - A report that helps outstanding loans recorded against person to convert home equity into to determine the market value of the house. available funds through a line of a property. An appraisal can be credit, cash advance, or periodic done in various ways, as required Earnest Money Deposit - A deposit disbursements to be repaid with by a lender, from simply driving made to a seller showing the buyer’s interest usually when the borrower by a property to ordering a full- good faith in a transaction. Often dies, moves, or sells the home. blown inspection, complete with used in real estate transactions, full-color photographs of the earnest money allows the buyer Straw Buyer - A person who makes property. Appraisals compare additional time when seeking a purchase on behalf of another similar homes in the area to financing. Earnest money is typically person. A straw buyer is used when substantiate the value of the held jointly by the seller and buyer the real buyer cannot complete the property in question. in a trust or escrow account. transaction for some reason. It is not necessarily illegal to use a straw Broker - An agent who negotiates Escrow - A financial account set buyer, except where the transaction contracts of purchase and sale (as up by a lender to collect monthly involves fraud or purchasing of real estate, commodities, or installments for annual tax bills and/ goods for someone who is legally securities). or hazard insurance policy renewals. barred from making the purchase Comparable - Comparable sales Income Method Approach - A real themselves. are that part of an appraisal report estate appraisal method that allows Glossary Sources that lists recent transfers of similar investors to estimate the value of Investopedia (www.investopedia.com) properties in the immediate vicinity the property based on the income Mortgage Fraud 101: Second Edition by of the house being bought. produced. David Reed

7 2001 Jefferson Davis Highway This document was produced by the National Crime Prevention Council under cooperative agreement 2011-VF- 8 NATIONAL CRIME GX-K021, awarded by the Office for Victims of Crime, Office of Justice Programs, U.S. Department of Justice. PREVENTION Suite 901 n Arlington, VA 22202 The opinions, findings, and conclusions or recommendations expressed in this document are those of the COUNCIL 202-466-6272 n www.ncpc.org contributors and do not necessarily represent the official position or policies of the U.S. Department of Justice.