SAAA WORKSHOP Preparing for the Future

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SAAA WORKSHOP Preparing for the Future 

• Mortgage Fraud
• October 21, 2009

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RECA MANDATE

• Ron Lawson
• Investigations Coordinator
• Researched by Lauren
  Turnquist

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OVERVIEW

• RECA is mandated to protect consumers and to
  provide services that enhance and improve the
  industry and the business of industry
  professionals.
• Real Estate Brokers
• Mortgage Brokers
• Real Estate Appraisers

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RECAS ROLE

• Investigations focus only on the Real Estate
  Act, Rules, Regulations and Bylaws
• Does not investigate mortgage fraud from a
  criminal perspective
• Will report serious cases of Criminal Code
  violations to the Police and/or to other relevant
  organizations.

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WHAT IS MORTGAGE FRAUD?

• The material misstatement, misrepresentation or
  omission relied upon by an underwriter or lender
  to fund, purchase or insure a mortgage loan.
• - Canadian Institute of Mortgage Brokers
  Lenders

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MORTGAGE FRAUD HIGHLIGHTED

• Occurs nationally, but concentrated
• in large urban areas
• 821.4 billion in 2007 in outstanding
• mortgage debt and an increase of
• 16 in AB

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MORTGAGE FRAUD HIGHLIGHTED

• Losses range into the hundreds of millions
  annually
• According to a report released March 13, 2008 by
  the national Mortgage Bankers Association,
  appraisal fraud accounted for about 16 percent of
  all mortgage fraud cases reported in 2007.
• Mortgage fraud continued to be an escalating
  problem in the United States during 2008.
• ARELLO Boundaries August 200 Article FBI
  Report MF Unchecked, Top Twenty States Named,
  New Schemes Emerge

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MORTGAGE FRAUD HIGHLIGHTED

• Sixty-three percent of all pending FBI mortgage
  fraud investigations during FY 2008 involved
  dollar losses totaling more than 1 million.
• More than 3.1 million foreclosure filings were
  reported nationally on approximately 2.3 million
  properties during FY 2008, up 81 percent from FY
  2007 and 225 percent from FY 2006.
• As of FY 2008, the western region of the United
  States had the most pending FBI mortgage fraud
  related investigations.
• ARELLO Boundaries August 200 Article FBI
  Report MF Unchecked, Top Twenty States Named,
  New Schemes Emerge

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MORTGAGE FRAUD HIGHLIGHTED

• Top 4 Mortgage Fraud Provinces
• Quebec
• Ontario
• Alberta
• British Columbia

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MORTGAGE FRAUD HIGHLIGHTED

• 2008 Top Twenty Mortgage Fraud States
• California, Florida, Georgia, Illinois, Michigan,
  Arizona, Texas, Maryland, Missouri, New Jersey,
  New York, Ohio, Colorado, Nevada, Minnesota,
  Rhode Island, Massachusetts, Pennsylvania,
  Virginia the District of Columbia
• ARELLO Boundaries August 200 Article FBI
  Report MF Unchecked, Top Twenty States Named,
  New Schemes Emerge

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MORTGAGE FRAUD HIGHLIGHTED

• A Michigan bank took a real estate appraiser to
  court, claiming he and others conspired to commit
  mortgage fraud. Warner and his wife, Kathleen
  Warner, owned four of the eight properties.
• Judges decision said there was no dispute about
  the fact the couple had purchased the properties
  for relatively low sums and then sold them "mere
  weeks or months later" for significantly higher
  prices, a practice known as flipping.
• The appraiser allegedly prepared the appraisal
  reports on his own properties, overstating the
  fair market value, and had a colleague sign them.
  

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MORTGAGE FRAUD HIGHLIGHTED

• An independent appraiser stated that while the
  person who signed the appraisal is ultimately
  responsible for it, reports must list anyone who
  played a significant role in their preparation.
  It also must be disclosed if an appraiser has any
  interest in a property.
• "Appraisal reports also are required to give
  the property's sales history. The appraiser
  did not. "The quick turn-around would have
  sent up a huge red flag
• The appraiser also did the appraisals on the
  other four properties, which also were allegedly
  flipped.

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MORTGAGE FRAUD TYPES

• Fraud for property
• Individual/One time
• Applicant may provide false information however,
  intent is to occupy the property as their
  residence and repay the loan.

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MORTGAGE FRAUD TYPES

• Fraud for profit
• Fraudster/Scheme
• Multiple loans and elaborate schemes to
  facilitate profit
• Organized crime and money laundering

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SARS
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SCHEMES

• Qualification using False Documents or
  Information
• False Down Payments
• Falsely Inflating Property Value
• Pump and Pay
• Foreclosure Rescue
• Bankruptcy Rescue
• Loan Modification Program Schemes

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SCHEMES

• 5. Identity Theft/Impersonation
• 6. Related Fraud Advance Fee Scheme
• 7. Reverse Mortgage Fraud
• Schemes
• 6. Credit Enhancement Schemes
• 7. Builder-Bailouts
• 8. Short Sale Schemes

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QUALIFICATION USING FALSE DOCUMENTS/INFORMATION

• When borrowers qualify or attempt to qualify for
  a
• mortgage using false documents or information,
  they have
• engaged in the criminal act of mortgage fraud for
  the
• purpose of acquiring housing.
• False documents can include
• employment letters, bank statements,
• false statements about assets,
• income tax assessments,
• municipal business licenses etc.
• Lenders rely on these documents in making a
• determination about whether to grant a mortgage
  to a b
• orrower.

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FALSE DOWN PAYMENTS

• A borrower misleads the lender by making it
  appear they have a down payment, or a larger down
  payment.
• A borrower may do this by entering into a
  purchase contract with an inflated purchase
  price. The contract may include a subsequent page
  that states the vendor reimburses part of the
  purchase price back to the purchaser.
• When purchasers fail to provide the entire
  purchase contract to lenders, mislead lenders
  as to the real price of the property, they have
  engaged in mortgage fraud.

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FALSELY INFLATING PROPERTY VALUE

• Occurs with a property flipping scheme, which
  involves back- to-back sales of a single
  property.
• A fraudster will buy a property from a legitimate
  vendor, and resell it multiple times to straw
  buyers at an inflated price, each time obtaining
  mortgage financing.
• At some point the mortgage value will seriously
  exceed the value of the property, and the
  fraudster will disappear with the mortgage
  proceeds, leaving
• the lender to foreclose on the property.

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FALSELY INFLATING PROPERTY VALUE

• Pump and Pay
• Builders in Florida, North Carolina, Texas and
  other states are working with co-conspirators to
  inflate the appraised value of their property
• False equity is distributed
• Disguised as set-asides for future maintenance,
  insurance and tax payments on the property

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FORECLOSURE RESCUE

• Prey on borrowers who are over extended with
  their mortgage and face imminent foreclosure.
• Rescuer will agree to bail out a distressed
  homeowner by providing a loan to pay off his or
  her mortgage arrears and permit the home owner to
  continue to live in his or her house.
• Fine print in the loan documents the owners have
  signed over the title of their property to the
  foreclosure rescuer or entered into another
  mortgage at exorbitant interest rates or costs
  and then face another foreclosure by the rescuer.

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FORECLOSURE RESCUE

• Phantom help - In this scam, the supposed rescuer
  charges very high fees for basic phone calls and
  paperwork that the homeowner could have done.
• Bailout - Here the scammer bails the homeowner
  out by helping them get rid of the house.
• Bait and switch - This is much worse than the
  bait and switch routines executed by unethical
  car dealers. At least with those scams you still
  get a car.

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BANKRUPTCY RESCUE

• Home owner is in foreclosure and fraudster
  exploits bankruptcy procedures
• Up front fee is charged, fraudster files on
  behalf of the owner and convinces the owner to
  pay the fraudster directly
• Owner is told to cease communication with the
  lender
• Bankruptcy proceedings places the foreclosure in
  abeyance
• Owner told to ignore bankruptcy Court
  communication

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LOAN MODIFICATION

• Home owner is in foreclosure
• Up front fee is charged, fraudster markets they
  will negotiate a reduced fee with the lender
• Loan modification is government funded or related
  program and no fees are required25
• Owner is told to cease communication with the
  lender
• Owner told to ignore lender communication
• Fraudster tells the owner the loan has been
  renegotiated and requests a good faith payment

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IDENTITY THEFT/IMPERSONATION

• A homeowners identity can be
• used by a fraudster who applies for
• a mortgage pretending to be the
• legitimate home owner.
• If there is already a mortgage on
• the property, the fraudster may file
• a false discharge to clear title, and then apply
  for a new
• mortgage.

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IDENTITY THEFT/IMPERSONATION

• Often the fraudster will apply for a mortgage
  which is only half of the property value in order
  to easily qualify with the lender.
• The fraudster then disappears with the mortgage
  proceeds leaving the lender to foreclose on the
  legitimate home owner.

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ADVANCE FEE SCHEME

• Fraudsters who purport to be mortgage or personal
  loan lenders. The fraudsters may have a website
  or print advertisements with fictitious contact
  information and names.
• You contact the fraudsters through an e-mail
  address or a cell phone number, and they promise
  to lend money in exchange for you paying an
  advance fee.
• You pay the fee through an electronic wire
  service, and not to a company, and the loan never
  materializes.

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REVERSE MORTGAGE FRAUD

• Fraudsters obtain a property that is either
  foreclosed, distressed or abandon

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REVERSE MORTGAGE FRAUD

• Use a straw buyer to purchase and obtain a
  financing indicating they will occupy the
  property
• Recruit Senior to purchase the property with no
  exchange of funds
• Overinflate the value of the property false
  appraisal at time stating renovations have
  occurred
• Senior apply for a reverse mortgage and a lump
  sum payment
• Fraudster absconds with the funds and Senior is
  foreclosed on by the lender

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CREDIT ENHANCEMENT

• Fraudsters market propertys to borrowers who
  alone would not likely qualify
• Overinflate the value of the property
• Create false credit by having the
• borrower attach themselves to relatives
• of friends accounts to demonstrate they
• possess sufficient funds or

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CREDIT ENHANCEMENT

• The Fraudster places funds temporarily in the
  borrowers account to give the perception that
  sufficient funds exist or
• The Fraudster gains access to credit bureaus and
  clean the slate for the borrower or amend tax
  returns etc

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BUILDER BAILOUTS

• High builder inventories such as condo
  conversions
• Offer cash back at closing
• Attract investors who will not
• be occupying the properties with
• information that the properties
• are easily rented
• Overinflate the value of the
• property
• Lender is unaware of
• incentives

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BUILDER BAILOUTS

• Overinflated property is purchased and the
  Fraudster pockets the property
• Property often remains vacant and carrying costs
  to the investor increase
• Unable to sell as price was overinflated

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SHORT SALE SCHEMES

• Fraudsters seek out real estate associates to
  approach homeowners who are in foreclosure
  proceedings
• Obtain interest in the property through an
  agreement with the home owner
• Deed is transferred to the short sale company and
  the company negotiates a sale with the lender
• Property value is inflated and sold to a buyer
  who was in existence prior to the negotiating the
  sale with the lender
• Home owner is never aware their property sold for
  more than the mortgage amount owed
• Can involve the use of straw buyers and future
  flip

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RISK FACTORS

• Strong competition between financial
  institutions
• Technological advances
• Economy
• Individuals need to work
• Increased number of properties in foreclosure
• Limited Stakeholder commitment
• Cooperation of mortgage industry insiders
• contribute to 80 of losses

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APPRAISAL FRAUD

• Propertys value is deliberately
• Overstated
• results in more money being obtained, or
• Understated
• to obtain a lower price, or to decrease the
  amount owed on the mortgage in a loan
  modification

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WHY ARE APPRIASALS IMPORTANT?

• Accurate valuations are the cornerstone of the
  lending market
• Lenders want to ensure that the home will sell
  for at least the amount that it is lending
• Buyers want to ensure they are not paying more
  than the home is worth.

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WHY COMMIT APPRAISAL FRAUD?

• Market Pressure
• Mortgage brokers
• Lenders
• Competition
• Personal gain

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• I am a mortgage broker and I had a client with a
  property worth around 700 000. My client is
  looking for someone who may be able to adjust
  that figure to a higher amount closer to the
  range of a million.

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SPECIFIC APPRAISAL FRAUD CONDUCT

• Compensation based on of assessed value
• Accepting an appraisal contingent on a result
• Manipulation of data and processes
• Ignoring best comparables
• Inappropriate adjustments
• Stating incorrect dwelling size
• Using unlike comparables

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COMPENSATION BASED ON ASSESSED VALUE

• Appraisers who are compensated based on the of
  the assessment have an obvious incentive to
  commit fraud. Personal gain is another huge
  factor in the rate of appraisal frauds occurring
  in Canada.
• Having a sliding billing scale connected to the
  value of the home such as the value of the home
  increases the cost of the appraisal billed
  increases, is against the CUSPAP

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ACCEPTING AN APPRAISAL CONTINGENT ON A RESULT

• CUSPAP prohibits an appraiser from billing based
  on the value of the home and accepting an
  appraisal assignment that is contingent on the
  result.
• Conduct of this nature is typical in condo
  conversions and renovation schemes

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MANIPULATION OF DATA AND PROCESSES

• Among other things, appraisers can ignore the
  best comparables, or use superior properties as
  direct comparables this could include using
  properties in better neighborhoods as comparables
  
• Appraisers can influence or push the final value
  through the direct comparison approach using
  inappropriate adjustments made in the comparison
  grid. Comparables selected may be appropriate at
  the outset but the adjustments made through the
  course of the appraisal may create a desired
  outcome.

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SPECIFIC APPRAISAL FRAUD CONDUCT

• Mis-describe a property, such as failing to
  personally measure the property, stating the
  incorrect dwelling size, using comparables with
  superior or inferior land use designations.
• Ex. having a subject property located in a land
  use district designated as R-1 or R-C1 for single
  dwellings and using comparables located on R-2 or
  R-C2 dwelling.
• Sites allowing higher density development are
  typically more valuable for re-development.

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SPECIFIC APPRAISAL FRAUD CONDUCT

• Appraisers may falsely label a commercial
  building as single-family. Or they can fail to
  mention physical problems, in-completed
  renovations or repairs which speak to the
  condition of the home.

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WHO ARE THE VICTIMS?

• Some of the worst abuses seen in North America
  have occurred in the Poconos area of
  Pennsylvania, where one in five mortgaged homes
  have been foreclosed since 1995. In this area
  dishonest appraisers were hand picked by
  developers to sign off on overstated estimates to
  ensure that the mortgage loans would go through.

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IF ONLY WE HAD LISTENED

• Chris Swecker, then assistant director of the
  criminal investigation division, said in October
  2004 before the House subcommittee on housing and
  community opportunity made a chillingly accurate
  prediction of the coming mortgage meltdown and
  financial collapse.

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IF ONLY WE HAD LISTENED

• The potential impact of mortgage fraud on
  financial institutions in the stock market is
  clear. If fraudulent practices become systemic
  within the mortgage industry and mortgage fraud
  is allowed to become unrestrained, it will
  ultimately place financial institutions at risk
  and have adverse effects on the stock market.

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IF ONLY WE HAD LISTENED

"Often mortgage loans sold in secondary markets
are used by financial institutions as collateral
for other investments. ... When loans sold in the
secondary market default and have fraudulent or
material misrepresentation ... these loans become
a nonperforming asset, and in extreme fraud
cases, the mortgage-backed security is worthless.
Mortgage fraud losses adversely affect loan-loss
reserves, profits, liquidity levels and
capitalization ratios, ultimately affecting the
soundness of the financial institution itself."
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INDUSTRY RED FLAGS

• Buyers or sellers in question are
• not personally or professionally related
• Deposit amounts are in the form
• of a gift letter
• The Real Estate Brokerage is
• in dual agency
• The list price and purchase price are unusual for
  the neighborhood
• The renovation value is included in the sale
  price

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INDUSTRY RED FLAGS

• The seller and buyer are represented by
• the same legal counsel
• Immediate possession dates
• The seller and buyer sign on the
• same date
• The purchase agreement states this is a private
  sale
• There is a lack of amendments to the contract
  where conditions of financing were required to be
  waived/removed

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APPRAISAL RED FLAGS

• A client requests the appraiser complete
• appraisals in an unfamiliar market area.
• The client indicates the property
• value expected.
• The person requesting the appraisal
• claims they own the property but the title is
• in another name.

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APPRAISAL RED FLAGS

• The client tries to influence the appraiser
• with the promise of additional work
• if the current appraisal value(s) meet
• their expectations
• The client request the appraiser keep
• everything confidential and not approach
• others involved in the transaction for
  information.
• The person does not intend to move
• into the property when a high-ratio mortgage
• will likely be sought.

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APPRAISAL RED FLAGS

• Information requested is not provided
• (leases, expense information, etc.)
• and indicates it is misplaced, lost or with
• someone who is away and therefore
• cannot be obtained.
• The use of a financial institution with offices
  in a different city.
• Poorly executed documentation regarding listings,
  sales, leases, etc. is provided.

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AVOID FRAUD

• Proofread and review reports before submitting to
  client.
• Drive-by may not be enough Take pictures and
  thoroughly view the property.
• Insist on seeing the sales contract to spot any
  warning signs.
• Include prior sales histories and listings
• By including prior sales histories and listings
  for at least the last 3 years, an appraiser will
  be better able to look for fraudulently flipped
  transactions.

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AVOID FRAUD

• Never overlook the obvious
• Search the property title
• historical land title searches on the property
  will show the history of transfers, and help the
  appraiser become aware of flipped properties
• the history of caveats placed against the title
  of the real estate may become important
• Know who you are working for!!

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THE BROKER MADE ME DO IT

• Ultimately the appraisers responsibility to be
  an objective 3rd party
• Falsifying a value can result in sanctions from
  professional bodies and in serious cases a
  criminal conviction!

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