With more homeowners facing the possibility of foreclosure, the FBI says mortgage fraud schemes are targeting homeowners seeking financial guidance, and exploiting the home-equity-line-of-credit application process.
The FBI’s latest report on mortgage fraud identifies the top 10 states for mortgage fraud as California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas and Utah.
Mortgage loan originations are expected to fall to $2.28 trillion this year from a high of $3.81 trillion in 2003, which could increase the likelihood that “mortgage fraud perpetrators may take advantage of eager loan originators attempting to generate loans for commission,” the report said.
The FBI cited an estimate by a risk management firm, The Prieston Group, that losses from mortgage fraud schemes perpetrated in 2006 will hit $4.2 billion, not including another $1.2 billion spent on fraud prevention tools.
The most common form of mortgage fraud is illegal property flipping, which often involves false appraisals and other fraudulent loan documents. Because mortgage fraud perpetrators hope to sell their property quickly, “they would likely gravitate towards mortgage loans that offered low and short-term interest rates such as those offered by ARMs (adjustable-rate mortgages),” the report said.
The number of ARM loans containing fraudulent misrepresentations is unknown. The FBI cited an analysis of 3 million loans by BasePoint Analytics, a fraud analytics company that found between 30 percent and 70 percent of early payment defaults (EPDs) are linked to significant misrepresentations in the original loan applications.
The FBI is also alerting lenders about schemes that have emerged during the housing downturn.
Those include foreclosure-rescue fraud scams and schemes involving home-equity-line-of-credit (HELOC) applications.
In foreclosure rescue scams, perpetrators promise homeowners that they can save their homes if they agree to deed transfers and the payment of upfront fees. Such scams often involve forged deeds, and perpetrators may sell the home or secure a second loan without the homeowners’ knowledge, stripping the property’s equity for personal enrichment.
Schemes that exploit the HELOC application process, may involve multiple applications to different lenders for a single property within a short time period. Because property liens may not be recorded for several days or months, lenders may not be aware of other HELOCs taken out against the property. Instead of holding a second lien, lenders may end up with a third, fourth, or fifth lien, and money obtained from the multiple HELOCs may total more than its original purchase price.
HELOC accounts are also being used in check fraud schemes. After securing a HELOC and withdrawing the entire allotted amount, perpetrators use fraudulent checks to pay the balance owed on the HELOC. Before the bank realizes the check is worthless, the perpetrator makes another withdrawal from the HELOC.
A New Jersey couple last year were sentenced to prison and ordered to pay $3.8 million in restitution after being convicted of defrauding Bank of America, Wells Fargo Bank and other major banks in California using such a scheme. Between April 2000 and December 2002, the couple manipulated business and home equity lines of credit extended by the banks to obtain millions of dollars, prosecutors said.
Some lenders have complained that the FBI does not have the resources to adequately investigate suspected cases of mortgage fraud. The Mortgage Bankers Association has requested that Congress set aside $31.25 million over five years to hire more FBI investigators and prosecutors.
An industry-funded group that tracks mortgage fraud, the Mortgage Asset Research Institute (MARI), recently reported a 30 percent increase in suspected mortgage fraud incidents during 2006. The increase was attributed partly to the slowdown in housing markets, which can reveal instances of fraud previously masked by home-price appreciation.
Suspicious activity reports to federal regulators related to mortgage fraud have risen from 3,515 per year in 2000 to more than 28,000 in 2006, which according to the Mortgage Bankers Association, represents losses of about $1 billion. Those numbers likely understate the problem because the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) does not collect reports from lenders regulated at the state level.
The FBI report provides no numbers on the total number suspected cases of mortgage fraud, or of investigations the bureau is conducting. But the report does break down of where FBI investigations are taking place on a regional basis. The FBI said 31 percent of pending mortgage fraud investigations were taking place in the North Central region, 23 percent in the Southeast, 19 percent in the West, 18 percent in the South Central states, and 9 percent in the Northeast.
The report notes that no single regulatory agency is charged with monitoring mortgage fraud, and that combating it “requires the cooperation of law enforcement and industry entities,” including the FBI, the Department of Housing and Urban Development’s Office of Inspector General (HUD-OIG), the IRS, the Postal Inspection Service, and state and local agencies.
The “FBI is proactively working with the mortgage industry in an effort to curb mortgage fraud crimes,” the report said, citing a March 8 memorandum of agreement with the MBA to promote the FBI’s Mortgage Fraud Warning Notice.
The notice states that it is illegal to make false statements about income, assets, debt or matters of identification, or to inflate property value to influence a financial institution’s decisions. The MBA and the FBI are making the notice available to mortgage lenders to use voluntarily to educate consumers and mortgage professionals about the penalties and consequences of mortgage fraud.