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Warning Signs of Fraudulent Transactions Kelly Rickenbach, Esq. Stewart Title Guaranty Company Region C IRS Criminal Investigation Real Estate Fraud Statistics FY2007 FY2006 FY2005 Investigations Initiated 337 309 235 Prosecution 217 198 167 Recommended Indictments/Information's 134 157 127 Convictions 130 131 91 Sentenced 147 96 78 Incarceration Rate 85.7% 87.5% 89.7% Average Months to Serve 35 47 45 Recent Statistics • Nationally, mortgage fraud has jumped by nearly 31% to 46,717 cases during the 2007 fiscal year based on a recent report issued by the FBI. • FBI investigations rose from 818 to 1,380 in 2006. • According to Mortgagedaily.com, fraudulent mortgages topped $4 billion last year from $1.6 billion the prior year. The Federal Bureau of Investigation spent more than $0.5 billion in mortgage fraud restitutions last year. Is Fraud Increasing??? • Dozens of lenders have gone out of business • Thousands of workers have lost their jobs • The subprime market has virtually stopped • Lenders have imposed tighter underwriting guidelines So…that means that mortgage fraud is declining, right???? WRONG! Mortage fraud just takes on different forms. How bad is your area? Top 10 States for Mortgage Fraud • California • Florida • Nevada • Illinois • Arizona • Michigan • New York • Ohio • Virginia • Utah Nevada • According to a recent FBI investigation underway in Nevada, Las Vegas has been nicknamed “Mortgage Fraud Ground Zero”. • People were flocking to the Las Vegas market when real estate was “hot” in 2004, and paying as much as $200,000.00 to $400,000.00 more than the houses warranted. And while the market was hot, a lot of that was being manipulated. • In addition to lender losses, fraud resulted in significant reduced property values and left a large number of homeowners owing more than their properties are worth. Washington WA Attorney General’s Office has been proactive, and recently introduced legislation to help protect homeowners from foreclosure rescue scams where the rescuer agrees to purchase the distressed property then sell or lease it back to the original homeowner. HB 2791 will take effect June 12, 2008. The new law requires the purchaser prove the homeowner can make the payments and must clearly disclose the terms in a written contract. The homeowner has the right to cancel the contract within 5 business days. It also requires that the original homeowner receive at least 82 % of the difference between the property’s fair market value and the underlying mortgage should the home be sold to a third party. Common Real Estate Fraud Schemes Property Flipping Ownership of one property changes several times in a brief period. Flips are often used to artificially inflate the value of the property to obtain larger loans than what might otherwise be possible and to skim the equity off the property. Flips are also used to conceal the identity of the true buyer or seller of the property. What a legal flip should look like What an illegal flip looks like… Red Flags of Flip Transactions • Ownership changes two or more times in a really short period of time • Two or more closings occur almost simultaneously • Property seller is not in title • Parties to the transaction are affiliated • Up and down fluctuations of sales price over short period of time • Purchases disguised as refinances to circumvent a down payment • Property seller is a corporation/entity • Comparable sales on appraisal are previously flipped properties Different Settlement Statements Scheme where one settlement statement is prepared and provided to the seller that accurately reflects the true selling price of the property and then a second fraudulent statement is given to the lender showing a highly inflated different selling price. The lender agrees to provide a loan based on the inflated value of the property, and after the loans are settled, the proceeds are divided amongst the conspirators. Red Flags…what you should do • Be wary of this kind of requests, even if the loan officer is in agreement with the actions being taken. • Do your best to comply with lender requirements, as you should do with all closing instructions. • Do not knowingly issue a settlement statement that misrepresents the source, nature or value of consideration handled by the closer. • Know that if the lender later has to foreclose and suffers a loss, in hindsight it may be claimed that the closer's failure to comply with this lender requirement and/or to provide an accurate settlement statement was the cause for the loan closing with an unqualified borrower. Mortgage Elimination Schemes Common internet schemes that advertise that a homeowner can eliminate his/her mortgage payments in full for a fee. The eliminators rely on untrue and wild theories about why the money used to fund the loan wasn’t really money. For instance, some argue that the bank never advanced money to the borrower, it was simply a transfer of funds, so the loan is illegal and it is illegal for the bank to ask for repayment because they never provided anything of value. This is the term “vapor money”. Homeowner sends money to the mortgage eliminator who agrees to serve as a guide through the process and indicates that he will agree to represent the homeowner in court. Then they instruct the homeowner to file a phony release form (“Discharge of Debt”) with the county auditor/recorder stating that the original loan has been released. Although the mortgage remains in place and the homeowner still owes the money to the bank, if the county clerk records the discharge of debt it gives the appearance that the homeowner owns the property free and clear. If the homeowner appears to own the home free and clear, he/she can apply for one or more additional loans on the property. All of this is usually done with the assistance of the mortgage eliminator. When the loan or loans are approved, the mortgage eliminator and the homeowner split the proceeds, often with the mortgage eliminator walking away with the lion's share. Red Flags • Remember that virtually no one owns a home or property "free and clear." • If you get a title report or you search the record and it shows no current mortgage on the property, double check it to be sure. • If upon rechecking, the record still comes up clear, look at the releases or discharges on the prior mortgages. Any odd form of release should be cause for concern. • Remember debt elimination programs claiming Federal Reserve approval are bogus. Does anyone really fall for this? Recent statistics indicate that as many as 3,500 homeowners were victims of ONE COMPANY participating in these types of scams. (See the Dorean Group Scam). But are they really victims? What would the court say? To be a victim, the homeowner must be able to show the following is true: 1) no knowledge 2) no personal gain 3) direct suffering as a result Falsified Applications Conspirators represent that for a fee, they can help individuals obtain financing for the purchase of real estate. To do so, they mail false, fraudulent loan applications to banks and mortgage lending companies. The applications inflate income and assets and often contain falsified pay stubs, gift letters and bank statements. The applications also falsely represent the source of the down payment, which usually has been loaned by the conspirators. Down Payment Scams A commonly seen lender requirement in closing instructions is that the buyer or borrower bring cash to the closing, as a down payment or to help refinance existing debt. Loan underwriting guidelines may differ between lenders, and in some cases this requirement may be more important to one loan than to another. Sometimes the parties will, usually at the last moment, try to circumvent this requirement by claiming that a payment has been made outside closing, or by substituting some other form of consideration instead of cash. Red Flags • A seller agrees to take a second mortgage instead of a cash payment • A seller agrees to accept other forms of payment, including precious gems, etc., with a stipulated value • Parties request that the closer prepare a settlement statement indicating cash rather than the substituted consideration Silent Second A property buyer borrows a down payment from the seller through a non-disclosed second mortgage. The lender believes the borrower has put his/her own money down as a down payment; however, the money is simply borrowed and the second mortgage may never be recorded, which prevents the primary lender from finding out about it. It fools the primary lender into thinking the borrower has a lower risk, and the ability to make the down payment. But is this really fraud? Some borrowers take the position that if they know about it, the person lending on the “silent second” knows about it, and the bank lending the money for the first mortgage requires the down payment to make the loan, what’s the problem? Red Flags • Date of settlement is delayed without explanation • Reference is made to undisclosed secondary financing or double escrow • HUD-1 contains unusual credits, disbursements, related parties, etc. • Excessive fees • Zero amount due to/from the buyer • More than one mortgage lender is reflected in the file but not on the final documentation • Unusually long or short loan processing times Federal Land Grant A scheme that involves tricking homeowners into believing that they can protect their homes from foreclosure by deeding their property to a Federal Land Grant. The companies require homeowners to pay up to $10,000 to put their property in a so-called land grant which the company claims will prevent foreclosure. The homeowners then sign over the deed to their home & usually agree to pay the company rent. Land grant transfers, used hundreds of years ago when the United States was still acquiring land from other countries, are no longer recognized by any court or county assessor. To make the meaningless grants appear legitimate, the company attached a land survey from when property was transferred to the United States by a foreign entity hundreds of years ago. In San Diego, for example, the company attached a survey from the Spanish Land Grant of 1872 and said that the deed reinstated the Land Grant and would protect homes from foreclosure. Equity Skimming An investor collaborates with a “straw buyer” who purchases property using false documents and fake credit reports. The sellers are usually in a situation close to foreclosure and are convinced they aren’t selling the home but are renting from the investor (a.k.a. the equity skimmer). After closing, the straw buyer signs the property over to the investor by a quitclaim deed which relinquishes all rights to the property and provides no guaranty of title. The investor does not make any mortgage payments on the property but collects rents from the tenants (who are most likely the former owners) until the property enters foreclosure. Red Flags • Quit claim deed used right before or after closing • Investment property represented as owner-occupied • Names have been added to purchase and sale contract • Someone signing on borrower’s behalf • High FICO Score • Power of attorney for borrower • Indication of default by property seller House Stealing A group or an individual finds a vacant home. They look up the deed information. They either assume the current owner’s identity (or create a fake one if the home has been foreclosed on) and create IDs, driver’s licenses, etc. They quickly sell the house, usually for a rock- bottom price to facilitate a quick sale before anyone catches on. • There’s also a variation on that theme where someone with a fake identity promises to help those in mortgage trouble with refinancing, but they end up stealing the title and the money. Red Flags • Beware of excuses for not providing proper identification. They must have identification. • Contrary to popular belief, many forgeries are obvious to a lay person. • Check document authenticity. You can verify by phone with the notary or the person who signed the document that the document is genuine and they approve of the transaction. • Remember, any strong resistance you may get for wanting to check the document is also a red flag. • An important document that has been notarized elsewhere, not at your closing, is always suspect. • Inconsistent borrowers names, phone numbers, addresses or social security numbers. Builder Bailout Scheme In response to the number of unsold homes, lenders wanting to be paid off, and the absence of buyers, some builders attempt to creatively disguise a fraudulent home sale as a legitimate transaction, colluding with real estate appraisers, mortgage loan brokers, and settlement agents in the perpetration of this type of fraud. It generally happens when a builder or developer is motivated to move property quickly in a depressed or depreciated real estate market. Examples • Convincing buyers to purchase a property by offering to pay excessive incentives that aren’t disclosed to the lender. This could include a down payment and/or closing cost assistance (i.e. no money down promotions). • Forming false corporations that purchase inventory at inflated values. Builder finances 100% of closing costs and in some cases gets cash out. Falsely promotes the builder’s ability to sell inventory. • Offering secondary purchase financing in order to create a position of “equity” for the borrower (80/20 loans) Red Flags • The builder is desperate to sell the property • The borrower is barely qualified or unqualified • The sales price and appraisal show signs of inflation • No money down sales are heavily promoted • "Silent" second mortgages are involved • The source of funds is questionable • Incentives such as buy-down funds appear excessive • The source of secondary financing on the HUD-1 or purchase contract is unclear or indeterminable • Parties to the transaction are affiliated, or the transaction does not appear to be an arms length transaction • Indicators of straw buyer activities Shot-gunning A person takes out multiple loans for the same home simultaneously. In this mortgage fraud scenario, scam artists apply for multiple home-equity loans with multiple lenders at the same time. Their credit and loan history are often clean, facilitating a fast-closing process. Due to the delay between the dates the loans are closed and the dates the liens are filed with the county recorder, lenders are not aware of the other liens when making their underwriting decisions. Red Flags • Unusually short loan processing times • Patterns or similarities in loan packages received from a specific broker, loan originator, realtor or property seller • More than one mortgage lender is reflected throughout the file • Excessive fees • Reference to another (double) escrow Can anyone do anything to help? The mortgage industry is responding to this new scheme by finding a way of alerting lenders before they give a loan to someone who may be applying for the same loan elsewhere, as a type of closing alert. A new company CoreLogic proactively delivers notifications to a lender identifying potential multiple closings from other participating lenders. The tool was designed to help lending institutions stop these scams before they can take the cash and run. Inflated Appraisals The scheme involves a borrower presenting a property at an inflated price (based on an appraisal) so the borrower and sometimes the appraiser and broker can obtain loan funds in excess of what would normally be offered. Usually 2 – 3 conspirators involved, who look either for a lender to loan more than the actual value of the property based on the artificially inflated value, or they find an innocent purchaser to buy the property at the inflated value. Sometimes the appraiser is involved directly, but other times, the appraiser simply doesn’t do a thorough investigation of the property and relies on prior transactions/information. Red Flags • Ordered by any party to the transaction other than the lender • Appreciation in stable or declining area • Most recent sale on subject property and comps is missing • Date of appraisal is prior to date of sales contract • New home isn’t large enough for intended occupants • High land value in an urban area • Excessive distance of comps from subject property • Photos don’t match the description of the property • Appraiser is located outside the subject property county • Photos of the subject property or comps look familiar Things to think about… In many of the scams we are talking about, the deeds and mortgages (other than those based on a false loan application) may be perfectly good. The problem exists when the lender has loaned significantly more than the property is worth (in a good market). Sooner than later the loan will be in default and the lender must recognize a big loss. If there is a downturn in real estate values, it gets even worse. Obviously, neither a closer nor a title underwriter should be considered responsible for problems with value or condition of a property involved in a transaction. However… In the past several years, lenders faced with major fraud and forgery losses have asserted claims (specifically targeting closers) based on allegations that the closer knew or should have known of the fraudulent conspiracy. REAL CASE STORIES California April 2008 – Loan Broker Mr. Swift was recently sentenced to 15 months in prison and ordered to pay $38,843 in restitution for bank fraud and money laundering. Swift admitted that he defrauded two homeowners and lenders by fraudulently refinancing two homes in order to receive substantial loan broker commissions. To accomplish this fraud, Swift solicited two homeowners and falsely told them that they would receive loans with favorable terms, such as a lower rate that would not increase above a certain rate cap. He also falsely led the homeowners to believe that their prepayment penalties on their existing mortgages would be returned in the form of a rebate. Colorado Denver 2007 – Amerifunding investigation involving mortgage loans obtained by utilizing stolen identities to facilitate the scheme. The scam involved over $200 million in fraudulent loans over a 24 month period. One of the subjects obtained fraudulent identities by placing "help wanted" advertisements in a local newspaper. Information from the victims applications were used to apply for mortgage loans between $300,000 and $500,000. The proceeds of the scam were used to pay personal expenses of the defendants. To date, six subjects have been indicted. Losses totaled $37.5 million and approximately $16 million in assets have been seized. Nevada 2006 – Bank Manager Mr. Young directed loan officers and processors in the origination of 233 fraudulent FHA loans valued at over $25 million. Mr. Young conspired with other mortgage company employees and with employees of General Realty to manufacture and submit false employment and income documentation for borrowers. The majority of the borrowers were illegal immigrants from Mexico. To date, 58 loans with a total value of $6.2 million have gone into default, with a loss to HUD of over $1.9 million. The Nevada First Residential Mortgage Company is no longer in business. Mr. Young was found guilty on 32 counts of submitting false information. Oregon April 2008 – President and CEO Mr. Rich was sentenced to 20 years in prison and ordered to pay $10.4 million in restitution. Mr. Rich and his company (Pac Equities) solicited investors to invest in real estate development projects and loans promising 10% annual returns and claimed the investments were secured by deeds of trust with at least 30% equity and no more than 70% loan to value ratio. They created the facade of a successful business using investor principal to make monthly payments to investors, claiming that the payments represented interest earned from profitable investment and loan activity, then used this facade to recruit additional investors and retain existing investors, knowing that the only sources of income for Pac Equities were from a few projects and loans. These amounts were insufficient to meet monthly interest obligations which Pac Equities owed its investors. Mr. Rich misrepresented his educational background, his employment history, and the nature and security of the contracts, which caused over 300 people to invest more than $18 million with Pac Equities. More in Oregon April 2008 – Mr. Bonneau was sentenced to 30 months in prison for his role in a mortgage fraud scheme involving two residential real estate transactions in 2004. He was indicted in 2006 along with his co-defendants (real estate loan broker & real estate agent), on charges including wire fraud, false statements to a Federally Insured Bank, money laundering, and engaging in prohibited financial transactions. The 3 devised a scam to defraud the Union Federal Bank of Indianapolis by providing false loan applications in connection with transactions involving 2 properties, one co-owned by the defendants. In each transaction the sales price of the home was significantly inflated so that Mr. Bonneau could apply for a larger mortgage and divert the extra cash to bank accounts he controlled. False appraisals were submitted and false closing statements were signed concealing the fact that the extra cash was being diverted. The bank funded the mortgage loans in reliance on these statements. Alaska October 2007 - Azem Limani was sentenced to 18 months in prison for violations of wire fraud and engaging in monetary transactions in criminally derived property related to a mortgage fraud scheme. In addition to prison time, Mr. Limani was ordered to pay $190,000 in restitution to Countrywide Home Loans and FNMA. According to the information presented to the court, Mr. Limani engaged in a wide ranging mortgage fraud scheme using a number of others to obtain a series of nominee loans that hid the true borrower. Mr. Limani was aided in the scheme by his co-defendant, Kourosh Partow, who was a loan officer and branch manager of Countrywide Home Loans and arranged for fraudulent loans to be issued to the nominees by falsifying their income, assets and other matters on the loan applications. Mr. Partow was previously sentenced to a term of 25 months in prison. CLAIMS Escrow Claim Escrow officer called on a file asking for advice. The sales price per the contract was one amount but the documents provided by the lender listed a different sales price (no one informed the Seller of the difference). The lender told her to show the sales price of one amount and then an acquisition price of another amount, and told her to hold $38,500.00 to be released to the buyer later. These instructions came from the lender, but the escrow officer said the entire escrow has been arranged and driven by the buyer, who works for the lender. The real estate agent is not responding to my requests regarding clarification. What would you do? Pay attention to your gut! The escrow officer called the legal/underwriting staff who confirmed her suspicions and said no way to agree to the phony up pricing. What is the different between the acquisition on the one hand and a sale on the other? Only a point of view, and the numbers should be the same. Money back to the buyer, who appears to have a relationship with the lender, sounds like fraud, unless there is a rehab/refurnish/construction aspect to the loan, and the lender should be very clear about how that is going to work. Title Claim The Jones purchased a home in 2002 and made several improvements to the home. In 2006, they were falling behind in mortgage payments and responded to an Internet Ad for a company entitled “Funding Foreclosures” (FF). After filling out an online application form, the Jones were called by someone from FF indicating that a loan officer would be coming out to their house with a loan application and paperwork. 3 days later, a loan officer arrived with a stack of papers that had already been filled out and only required signatures. They signed the papers and he left. He called and said a notary would be out in a few days to get signatures for the closing documents. A few weeks later, a notary arrived and identified the papers as the loan documents, which the Jones then signed. The Jones were told the loan would cost them $60k, and that they would receive $36k in return. A check for $36k was received in March. The following month, the Jones received a letter from the title office advising that $225,000 had been wired pursuant to the instructions and enclosed a copy of the Sellers Closing Statement. The Jones were told to make payments to Nations Property Management company in the amount of $3,000, after the loan closed in March 2006. They continued to make these payments. In January of 2007, they received a notice of default for a Mr. Thomas at the house, saying his loan was in default. The Jones believed they were current, as they had been making all of their payments per the instructions. However, when they called NW Trustee Services, they were told they were not the record owners. Mr. Thomas purchased the property they sold to him in March of 2006, per the documentation that was brought to the house. Enclosed in the paperwork was a statutory warranty deed that had been signed by the Jones conveying the property to Mr. Thomas. Mr. Thomas has not been found, and the Jones have filed suit to quiet title to the property and void the subsequent transfer to Mr. Thomas and void his two loans currently encumbering the Property. Questions???
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