In monitoring fraud activity across the United States, it has been no surprise to see so much attention to and interest in mortgage related frauds. Among the myriad of mortgage fraud schemes that exist, they generally fall into one of two categories, depending on their intended purpose: for property (i.e. housing) or for profit.
Fraud for property involves schemes whereby those wishing to become homeowners or purchase property lie or employ deception in order to qualify for a mortgage. They may do so because they cannot afford the property (“dream-house”) or because they know they will not otherwise qualify for a loan without lying. This is most often done by falsifying information on a loan application, sometimes to include moderate “back-stopping” (a tradecraft term whereby which resources are employed to give the appearance that information is accurate if checked).
These are not the frauds which cause significant individual financial impact, as the borrower generally intends to pay the mortgage and use the property, often as a primary residence. In recent years, speculators have caused this type of fraud to have a greater impact because of the negative turn in housing values and demand. In those cases, property that was mortgaged based upon fraudulent loan applications by borrowers intending to make payments until such time as the property could be fixed-up and sold, could not be sold and went into foreclosure.
Most fraud for property attempts can be easily detected and prevented in the loan processing and underwriting process. Though there are many controls that can be employed to prevent fraud for property, some basic training of loan processors on red flags to look for, along with incentivizing them to prevent/detect fraud, goes a long way. Combine this with verification of key information on the loan application (i.e. employment, income, credit, savings, etc…) and the risk for this type of fraud is significantly mitigated.
Unfortunately, in many recent cases, otherwise honest homebuyers were coached by unscrupulous mortgage brokers and lenders to enter false information into their loan application (in some instances, loan application information was altered without the homebuyer’s knowledge or consent), being told that doing so was not illegal or common practice. That’s a lie. Though this type of fraud may better fit into the next category, a lie on a loan application is a federal offense with a long statute of limitations and big penalties, including prison time.
The other category of mortgage fraud involves those committing fraud for monetary gain. These can be the really financially damaging frauds with broad impact, usually involving multiple parties conspiring and working together to deceive lending institutions and homeowners or prospective buyers. As was described earlier regarding the entering or altering of false information on loan applications, numerous instances have been uncovered over the last few years where this was done on a grand scale, particularly by mortgage brokers. Their ability to do so was made easier with the acceptability of “stated income” or “no document” loans, which accepted the information on the loan application without question, much less support.
Following are descriptions of some of the more common fraud for profit schemes:
Equity Skimming/Foreclosure Rescue Schemes – Generally targets homeowners who cannot make their monthly payments and may be on the road to foreclosure. The scheme involves an offer to the homeowner to pay off the mortgage loan, while permitting the homeowner to remain in the home as a renter, sometimes with an option to purchase the home back at a later time. They may also involve the collection of fees from the unwary homeowner. Ultimately, no payments are made while rent is collected and/or equity is stripped through a deeding of the property. The original homeowner is eventually evicted as the home is foreclosed.
Air Loans – A loan on non-existent property, often perpetrated by an unscrupulous mortgage broker. While the property may be a complete fabrication, the broker creates documentation and fictional transactions to give it the appearance of being real. In some cases, some level of backstopping may even occur in order to further conceal the fraud from simple verification techniques.
Property Flipping – Though flipping can be done legally in the sense of one buying a property which is then “fixed-up” (repaired, upgraded, etc.) and re-sold for a profit, there are also schemes to do so that are fraudulent. In these schemes, a property is usually purchased at an amount above its asking price and real value, then quickly sold. To facilitate the process, a false appraisal is needed. The schemes may also entail the promise or actual payment of kickbacks to various players in the loan process, such as homeowners, title company employees, real estate agents, appraisers and others. By doing this, a property that has an actual value, for example, of $250,000 may be re-sold for $500,000. At some point, after the loans are made, the various parties receive their “cut” and no payments are ever made on the loan. In some cases, multiple flips might be made, each successively increasing in amount.
Straw Buyer/Nominee Loans – These are schemes whereby the borrower is not the actual borrower. In some instances, a person may be approached and offered some form of payment to act as a borrower on behalf of the fraudster, who convinces the nominee of his honesty and legitimate desire to purchase a property. Once the loan is made, the fraudster will then attempt to strip any equity value from the property though illegal flipping, renting or other means, leaving the nominee on the hook for the loan. A slight variation on this scheme entails the fraudster stealing someone’s identity and using it in the loan process.
Double Dipping – With preparation, good timing and some luck, one could attempt to get two or more loans on the same property at the same time, playing on the float/lag time for filings to be recorded before they can be found by title search agencies.
John “The Fraud Guy” Hanson, CPA, CFE is a former FBI Agent, a Certified Public Accountant (LA) and Certified Fraud Examiner specializing in helping companies and individuals proactively and/or reactively respond to challenges arising from fraud or corporate compliance related issues. After nearly 10 years as an FBI Agent investigating white collar crime, John spent five and a half years at a large publicly traded consulting firm where he helped lead and build an international forensic accounting and fraud investigations practice. John is now the Executive Director of Artifice Forensic Financial Services, a boutique consulting firm specializing in independent corporate monitoring, forensic accounting and fraud examinations. John can be contacted at (202) 590-7702 or JHanson@ArtificeForensic.com.