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Mortgage Fraud

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Mortgage Fraud & The Appraiser Presented By: Douglas G. Winner Certified General Real Estate Appraiser AQB Standards Instructor NC Instructor of Real Estate And Appraisal – PowerPoint PPT presentation

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Title: Mortgage Fraud


1
Mortgage 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

2
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3
The 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

4
Office of Regulatory Analysis
  • Financial Crimes Enforcement Network
  • An Industry Assessment based upon Suspicious
    Activity Report Analysis November 2006

5
Introduction
  • 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.


6
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7
Loans 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).

8
Loan 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

9
Fraud for Property
  • Generally committed by home buyers attempting to
    purchase homes for their personal use.

10
Fraud 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.

12
Vulnerabilities
  • 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.)

13
Increase in Phone/Internet Apps

14
Sub-prime loans in SARs reporting suspected
mortgage loan fraud.

15
Mortgage 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.

16
Mortgage 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.
17
Suspicious Activity Reports
18
Increasing incidence of identity theft in
conjunction with mortgage loan fraud in this
study.
19
Fixed income and elder exploitation
20
Characterizations 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.

21
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23
April 1, 1996 to March 31, 2006.
24
Top five reported states in 2005
  • California
  • Florida
  • Illinois
  • Texas
  • Georgia

25
Loan 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).

26
Material 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)

27
Types 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.

28
Misrepresentation 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)

29
Appraisal 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.

30
Appraisal 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.

31
The 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.

32
Higher Sales Prices - Higher Fees
  • for
  • Brokers
  • Lenders
  • Real Estate Agents
  • Loan Settlement Offices, and
  • Higher Earnings for Real Estate Investors

33
Types 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.

34
Fraudulent 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.

35
Appraisal Fraud Flipping Trend
36
Actions 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.

37
Straw buyers
  • The use of straw buyers to obtain mortgage loans
    was 2.57
  • Mortgage brokers or correspondent lenders
    processed loans in 77.78

38
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39
Other 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

40
Emerging 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).

42
Hot Spots for Mortgage Fraud2004
  • Missouri
  • Illinois
  • Maryland
  • Georgia, and
  • Florida
  • California
  • Nevada
  • Utah
  • Arizona
  • Colorado

43
Residential 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

44
Appraisal 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.

45
Unacceptable 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!!!!

46
Violation 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.

48
Each 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.

49
Do 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.

50
Fraudulent 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.

51
Appraisers 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

52
Appraisal 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.

53
Violation 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.

54
URLS
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