Title: Mortgage Fraud
1Mortgage Fraud TheAppraiser
- Presented By
- Douglas G. Winner
- Certified General Real Estate Appraiser
- AQB Standards Instructor
- NC Instructor of Real Estate And Appraisal
- A Director, Past President and a Founder of the
- North Carolina Professional Appraisers
Coalition - A Director of the National Association of
Appraisers
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3The Recent Financial Collapse
- Fraud
- Over Valuation of Collateral
- Market Correction
- Loss of Consumer Confidence
- More Market Correction
- Under Valuation of Collateral
- Stricter Lending Requirements
- More Market Correction
- Supply and Demand out of Balance
4Office of Regulatory Analysis
- Financial Crimes Enforcement Network
- An Industry Assessment based upon Suspicious
Activity Report Analysis November 2006
5Introduction
- The US had experienced substantial growth in
mortgage lending markets and of innovative loan
products that expanded consumer access to home
finance. At the same time there was a
significant increase in filings of Suspicious
Activity Reports (SARs) pertaining to suspected
mortgage loan fraud.
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7Loans Increased 33 in 2003
- The Federal Financial Institutions Examination
Council reported an increase in the number of
mortgage loans beginning in 2003 The 2003 data
include a total of 42 million reported loans and
applications, which is an increase of about 33
percent from 2002, primarily due to a significant
increase in refinancing activity (approximately
41 percent).
8Loan Fraud Increased 92
- Suspicious Activity Reports (SARs) on mortgage
loan fraud increased over 92 between 2003 and
2004. - The increase in filings may be attributed to an
increase in overall mortgage lending concurrent
with the decline in interest rates in the 2002
2005 timeframe and a broader awareness of this
fraudulent activity
9Fraud for Property
- Generally committed by home buyers attempting to
purchase homes for their personal use.
10Fraud for Profit
- Often committed with the complicity of industry
insiders such as mortgage brokers, real estate
agents, property appraisers, and settlement
agents (attorneys and title examiners).
11- Typical fraudulent activities associated with
this category in the SAR filing sampling are - appraisal fraud
- fraudulent flipping
- straw buyers
- and identity theft.
12Vulnerabilities
- Filers reported use of the telephone or Internet
in origination of mortgage loans on 106 reports
of mortgage loan fraud (less than one percent).
The following chart depicts the reports of
suspected fraudulent loans originated via
telephone or Internet since 1998. (Note that the
filings for 2006 occurred during the first three
months.)
13Increase in Phone/Internet Apps
14Sub-prime loans in SARs reporting suspected
mortgage loan fraud.
15Mortgage broker originated loans
- The National Association of Mortgage Brokers
reported that as many as two-thirds of mortgage
loans were then originated by mortgage brokers.
There were no national standards for licensing
and oversight of mortgage brokers. Some states
license mortgage brokerage offices, but not
individuals 24 states had no specific
educational or experience requirements for
mortgage brokers and only a few states required
criminal background checks on mortgage brokers
making it possible for unethical individuals to
move from one mortgage brokerage firm to another.
16Mortgage broker-originated loans that involved
suspected loan fraud. Reports filed during the
first quarter of 2006 equals the total number of
reports filed in all of 2004.
17Suspicious Activity Reports
18Increasing incidence of identity theft in
conjunction with mortgage loan fraud in this
study.
19Fixed income and elder exploitation
20Characterizations of Suspicious Activity
- False statement was the most reported suspicious
activity in conjunction with mortgage loan fraud.
- Identity theft represented the fastest growing
secondary characterization reported, more than
two percent in less than two years.
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23April 1, 1996 to March 31, 2006.
24Top five reported states in 2005
- California
- Florida
- Illinois
- Texas
- Georgia
25Loan Types
- Residential real estate purchase loans 880
(83.65) - Residential refinance loans (76), home
equity/lines of credit (28), FHA Title One loans
(20), second Trust loans (4) (12.17) and - New construction loans 16 (1.52).
26Material Misrepresentation/False Statements
- Material misrepresentation and false statements
were reported on 692 (65.78) -
- Identity fraud was reported on 160 (23.12)
- Identity theft was reported on 27 (3.9)
- Mortgage brokers or correspondent lenders
initiated the loans in 254 (36.71)
27Types of loan falsifications
- Altered bank statements
- Altered or fraudulent earnings documentation
such as W-2s and income tax returns - Fraudulent letters of credit
- Fabricated letters of gift
- Misrepresentation of employment
- Altered credit scores
- Invalid social security numbers
- Silent second trust
- Failure to fully disclose the borrowers debts
or assets or - Mortgage brokers using the identities of prior
customers to obtain loans for customers who were
otherwise unable to qualify.
28Misrepresentation of Loan Purpose
- Misrepresentation of loan purpose or misuse of
loan proceeds in 129 (12.26) - Mortgage brokers or correspondent lenders
originated the loans described on 37 (28.68) - Misuse of FHA Title One (home improvement loans)
reported in 20 (15.5) - Occupancy fraud was reported in 104 (80.62)
29Appraisal Fraud and Property Flipping
- Appraisal fraud and fraudulent property flipping
were described in 111 of the sampled reports
(10.55). - Appraisal fraud is frequently associated with
fraudulent property flipping. - Filers indicated on 48 (42.34) of these reports
that they suspected the fraudulent activity was
perpetrated with the collusion of mortgage
brokers, appraisers, borrowers, and/or real
estate agents/brokers.
30Appraisal Fraud
- Lenders rely on accurate appraisals to ensure
that loans are fully secured. - Appraisal fraud occurs when appraisers fail to
accurately evaluate the property, or - when the appraiser deliberately becomes party to
a scheme to defraud the lender, the borrower, or
both.
31The Appraisal Institute and the American Society
of Appraisers
- it is common for mortgage brokers, lenders,
realty agents and others with a vested interest
to seek out inflated appraisals to facilitate
transactions because it pays them to do so.
32Higher Sales Prices - Higher Fees
- for
- Brokers
- Lenders
- Real Estate Agents
- Loan Settlement Offices, and
- Higher Earnings for Real Estate Investors
33Types of appraisal fraud
- Appraisers failed to use comparable properties
to establish property values - Appraisers failed to physically visit the
property and based the appraisal solely on
comparable properties, i.e., the actual condition
of the property was not factored into the
appraisal - Appraisers participated in a fraud scheme such
as flipping or - A licensed appraisers name and seal were used
by unauthorized persons.
34Fraudulent Property Flipping
- Nearly 64 percent described collusion by sellers,
appraisers, and mortgage brokers in connection
with property flipping. - Nearly 14 percent described the use of straw
buyers. - Fraudulent property flipping activity remained
steady over the past four years. - A significant spike in reports describing
appraisal fraud was seen in 2004, but there was a
slight decrease in the trend in 2005. - Activities associated with flipping (straw buyers
and false statements) were increasing.
35Appraisal Fraud Flipping Trend
36Actions taken to combat fraudulent property
flipping
- HUD makes certain frequently flipped properties
ineligible - Some states have adopted new or enhanced
appraisal standards and appraisal licensing
requirements.
37Straw buyers
- The use of straw buyers to obtain mortgage loans
was 2.57 - Mortgage brokers or correspondent lenders
processed loans in 77.78
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39Other Fraudulent Activity
- Forged Documents 1.9
- Loan Services not paying off notes, liens etc.
- Borrowers signing multiple loan apps on same
property within a short time of each other - Mortgage Broker misuse of Power of Attorney
- Mortgage Broker giving kickbacks to lenders
- Elder Exploitation
- Unofficial loan assumption
- Fraudulent bankruptcy
- Money laundering
40Emerging Mortgage Fraud Schemes
- Asset Rental Fraud
- Debt Elimination Fraud
41- For fiscal year 2005
- 21,994 SARs were filed (up from 17,127 in 2004).
- 721 pending FBI Mortgage Fraud cases (534 in
2004). -
- 1,020 pending HUD-OIG Mort. Fraud cases (920 in
2004). -
- 206 FBI indictments/informations (241 in 2004).
- 170 FBI convictions (172 convictions in 2004).
- 1,014,000,000 (FBI) reported loss (up from
429,000,000 in Fiscal Year 2004).
42Hot Spots for Mortgage Fraud2004
- Missouri
- Illinois
- Maryland
- Georgia, and
- Florida
- California
- Nevada
- Utah
- Arizona
- Colorado
43Residential Mortgage Fraud Act.NC HOUSE BILL 817
- A person is guilty of residential mortgage fraud
when, for financial gain and - with the intent to defraud, that person,
knowingly does any of the following - makes or attempts to make
- uses or facilitates or attempts to use or
facilitate the use of any material - misstatement
- misrepresentation or
- omission
- within the mortgage lending process with the
intention that a mortgage lender, mortgage
broker, borrower, or any other person or entity
that is involved in the mortgage lending process
relies on it, or - receives or attempts to receive proceeds or any
other funds in connection with a residential
mortgage closing that the person knew, or should
have known, resulted from a violation of the
above, or - conspires or solicits another to violate any of
these provisions
44Appraisal Standards Board
- Certain types of conditions are unacceptable in
any assignment because performing an assignment
under such conditions violates USPAP. - Specifically, an assignment condition is
unacceptable when it - precludes an appraisers impartiality.
- Because such a condition destroys the objectivity
and independence required for the development and
communication of credible results - limits the scope of work to such a degree that
the assignment results are not credible, given
the intended use of the assignment or - limits the content of a report in a way that
results in the report being misleading.
45Unacceptable Assignment Conditions
- A Mortgage Brokers or Loan Officers engagement
letter says - 1. We need comps for (property description) that
will support a loan of ___________ can you
provide them? - 2. Sales Price ___________.
- 3. Approximate (or Minimum) value needed
__________. - 4. Amount needed ______________.
- 5. Owners estimate of value ___________.
- 6. If this property will not appraise for at
least ___________, stop and call us immediately. - 7. Please call and notify if it is NOT possible
to support a value at or above ___________,
BEFORE YOU PROCEED!!!!
46Violation of Ethics
- It is unethical for an appraiser to accept an
assignment, or to have a compensation arrangement
for an assignment, that is contingent on any of
the following - 1. the reporting of a predetermined result (e.g.,
opinion of value) - 2. a direction in assignment results that favors
the cause of the client - 3. the amount of a value opinion
- 4. the attainment of a stipulated result or
- 5. the occurrence of a subsequent event directly
related to the appraisers opinions and specific
to the assignments purpose.
47- What information should the regulated institution
provide to the appraiser upon engagement? - Answer
- The regulated institution should provide the
property's address, its description, and any
other relevant information. - The regulated institution may also provide a copy
of the sales contract for purchase transactions. - However, the information provided by the
regulated institution should not unduly influence
the appraiser or - in any way suggest the property's value.
- The regulated institution and the appraiser
should agree on the scope of the appraisal in
advance, consistent with the Uniform Standards of
Professional Appraisal Practice (USPAP) and the
agencies' appraisal regulations and interagency
guidelines.
48Each is an Appraisal Request
- If an appraiser is asked whether a specific
property has a value (a point, a range, or a
relationship to some benchmark), that request is
for an opinion of value (an appraisal). - Appraisers, obligated to comply with USPAP, must
develop a real property appraisal in accordance
with STANDARD 1. - Communicating that value opinion must be
accomplished in accordance with STANDARD 2.
49Do Not Use or Blacklist
- Lenders maintain a Do Not Use list of
appraisers - Legitimate use of list
- Screen out incompetent appraisers
- Screen out appraisers who have lost their
credentials - Illegitimate use of list
- To eliminate an appraiser who doesnt play ball
- To unduly influence an appraiser to make value
- To apply pressure to alter an appraisal report
that has disclosed adverse conditions of the
property or occupant.
50Fraudulent Blacklisting
- It is illegal for a person to make any false
statement regarding income, assets, debt, or
matters of identification, or to willfully
overvalue any land or property, in a loan and
credit application for the purpose of influencing
in any way the action of a financial institution.
- Threatening to blacklist an appraiser is
intimidation and may be mortgage fraud if it
results in any of the following - Mortgage Lending Act. 53-243.11. (Effective
July 1, 2002) - Prohibited activities
- (1) To misrepresent or conceal the material facts
or make false promises likely to influence,
persuade, or induce an applicant for a mortgage
loan or a mortgagor to take a mortgage loan, or
to pursue a course of misrepresentation through
agents or otherwise. - (8) To engage in any transaction, practice, or
course of business that is not in good faith or
fair dealing or that constitutes a fraud upon any
person, in connection with the brokering or
making of, or purchase or sale of, any mortgage
loan. - (11)To influence or attempt to influence through
coercion, extortion, or bribery, the development,
reporting, result, or review of a real estate
appraisal sought in connection with a mortgage
loan.
51Appraisers have no Recourse
- No notice is given after being Blacklisted
- No appeal process is provided
- No oversight by regulators or industry
- The lenders do not use list is often
distributed to other lenders. - An appraiser suffers significant financial loss.
- Absolute power, corrupts absolutely
52Appraisal Report is not contingent on loan closing
- Mortgage Lending Act.
- 53-243.11. (Effective July 1, 2002)
Prohibited activities. - (9) To fail promptly to pay when due reasonable
fees to a licensed appraiser for appraisal
services that are - a. Requested from the appraiser in writing by the
mortgage broker or mortgage banker or an employee
of the mortgage broker or mortgage banker and - b. Performed by the appraiser in connection with
the origination or closing of a mortgage loan for
a customer or the mortgage broker or mortgage
banker. - It is unethical for an appraisal to be contingent
in any way.
53Violation of Ethics
- It is unethical for an appraiser to accept an
assignment, or to have a compensation arrangement
for an assignment, that is contingent on any of
the following - 1. the reporting of a predetermined result (e.g.,
opinion of value) - 2. a direction in assignment results that favors
the cause of the client - 3. the amount of a value opinion
- 4. the attainment of a stipulated result or
- 5. the occurrence of a subsequent event directly
related to the appraisers opinions and specific
to the assignments purpose.
54URLS