Despite heightened vigilance by financial institutions, mortgage fraud remained at elevated levels in 2010, and is attracting organized criminal groups drawn by the chance to rake in "high profits through illicit activity that poses a (relatively) low risk for discovery," the FBI says in a new report.
Financial institutions filed 70,533 "suspicious activity reports" with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) during the fiscal year ending Sept. 30, 2010, which detail $3.2 billion in losses from suspected mortgage fraud, the report said. That’s a 16 percent increase in dollar losses from 2009, and a 117 percent increase from 2008.
The FBI has struggled to keep pace, with pending mortgage fraud investigations totaling 3,129 in fiscal year 2010, up 12 percent from 2009 and 90 percent from 2008.
FBI field divisions with the most pending investigations were Las Vegas; Los Angeles; New York; Tampa; Detroit; Washington, D.C.; Miami; San Francisco; Chicago; and Salt Lake City.
Most suspicious activity reports involve loans originated years ago. In its most recent report, FinCEN said 79 percent of the 24,485 suspected cases of mortgage fraud reported by lenders during the first quarter of this year involved activities that occurred more than three years ago.
The FBI is concentrating on more recent loan fraud, revealing that "the majority" of cases it opened last year involved criminal activity that occurred in 2009 or 2010.
The FBI said it continues to support 25 mortgage fraud task forces and 67 working groups, using "sophisticated investigative techniques, such as undercover operations and wiretaps," to apprehend criminals engaged in ongoing schemes.
The bureau said it has developed a technique it will use in the future to identify mortgage fraud schemes "using tactical analysis coupled with advanced statistical correlations and computer technologies."
Mortgage data aggregator CoreLogic has estimated that about $12 billion in loans were originated with fraudulent application data in 2010.
At the end of fiscal 2010, the U.S. Department of Housing and Urban Development’s Office of Inspector General also had 765 pending loan-fraud investigations involving mortgages on single-family homes, up 29 percent from the year before and up 70 percent from 2008.
To identify geographic trends, the FBI report analyzed the bureau’s data and combined it with statistics collected by HUD-OIG, FinCEN, LexisNexis Mortgage Asset Research Institute (MARI), Interthinx, Fannie Mae, Radian Guaranty, CoreLogic, the U.S. Census Bureau, and the U.S. Department of Labor.
Combining information about actual fraud with vulnerability for fraud, the report identified the top 10 states for mortgage fraud in 2010 as Florida, California, Arizona, Nevada, Illinois, Michigan, New York, Georgia, New Jersey and Maryland.
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Citing a source with "good access" but whose reliability "cannot be determined," the FBI said Asian, Balkan, Armenian, La Cosa Nostra, Russian and Eurasian organized crime groups have been linked to various mortgage fraud schemes, such as short-sale fraud and loan origination schemes.
Mortgage fraud rings "recruit people who have access to tools that enable them to falsify bank statements, produce deposit verifications on bank letterhead, originate loans by falsifying income levels, engage in the illegal transfer of property, produce fraudulent tax return documents, and engage in various other forms of fraudulent activities," the report said.
Perpetrators include mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, and trust account representatives.
"Mortgage fraud perpetrators have a high level of access to financial documents, systems, mortgage origination software, notary seals, and professional licensure information necessary to commit mortgage fraud, and have demonstrated their ability to adapt to changes in legislation and mortgage lending regulations to modify existing schemes or create new ones," the report said.
Fannie Mae reported that fraud on short sales and real estate owned (REO) properties continues to "thrive as a result of the opportunities created by defaulting markets."
Fannie Mae is investigating fraud schemes perpetrated by real estate agents who manipulate multiple listing services (MLS) data to bolster sagging sales prices.
"Fannie Mae continues to investigate REO flipping involving real estate agents who withhold competitive offers on REO properties so that they can control the acquisition and subsequent flip," the report said. Condo conversions represent 14 percent of Fannie Mae’s mortgage fraud investigations.
Freddie Mac is also seeing property flips with phantom rehabilitation to increase property valuations, and has been interviewing borrowers and their neighbors to determine if the rehabilitations are actually occurring.
Also, Freddie Mac is reporting that fraudsters continue to use transactional lenders such as "dough for a day" businesses that loan potential borrowers money so it will appear that they have assets when applying for a loan.
Inflated appraisals remain a problem for underwriters, with overstated comparable properties used to increase the value of the subject property. Perpetrators will either employ a rogue appraiser as a conspirator or falsify appraisal documents outright.
Lenders also view short-sale fraud schemes as an increasing threat.
One of the most common short-sale schemes involves "property flopping" — obtaining a property at less than its market value, then selling the property in a dual closing the same day or within a short time frame for a significant profit.
To pull off such property flops, the FBI said, fraud perpetrators may withhold the "best offer" to the lender, manipulate broker price opinions (BPOs) and MLS data, and engage in non-arm’s-length transactions.
They may resort to bribing brokers and appraisers, or refuse to allow the broker or appraiser access to the property unless they are present.
Fraud schemers may try to provide their own comparables to the appraiser, or take unflattering photographs of the property and point out defects to the appraiser.
To hide their involvement in short sales, they may sell properties to a limited liability company (LLC) or trust months before a resale, or sell a property to a family member or other party they control and deed the property back to themselves.
Although authorities believe most mortgage fraud schemes are never detected, hardly a day goes by without an announcement of new mortgage fraud charges or convictions. Many such announcements are cataloged on the website, Mortgage Fraud Blog, authored by an attorney, Rachel Dollar, who represents lending institutions in mortgage fraud cases.
A roundup of a few cases making the news recently includes:
- A federal grand jury in Ohio charged a real estate agent in Cincinnati this month with fraudulently obtaining $6.9 million in loans on approximately 59 properties by convincing clients — including close friends and fellow church members — to purchase residential properties at overinflated prices.
- Four people — including a mortgage company loan officer and a title company attorney — were indicted last week in Houston for their alleged involvement in a scheme in which straw borrowers were recruited to defraud lenders of more than $22 million.
- An Edina, Minn., mortgage broker pleaded guilty on Aug. 10 of conspiracy to commit wire fraud for his role in a $20 million mortgage fraud scheme that involved 57 properties.
- The Manhattan U.S. Attorney on Aug. 4 announced indictments of 15 people, including five loan officers, for their alleged role in a fraud scheme involving more than 100 mortgages valued at more than $58 million.