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
(No Transcript)
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
(No Transcript)
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
(No Transcript)
22
(No Transcript)
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
(No Transcript)
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