Old Fraud Schemes Get New Life in Today's Market

MBA (3/17/2008 ) Murray, Michael
CHICAGO—Old schemes are getting new workouts today by fraudsters adapting to a slow-reacting mortgage origination industry.

Jenny Brawley, mortgage fraud investigations manager at Freddie Mac, speaking here at the Mortgage Bankers Association’s National Fraud Issues Conference, noted two common fraud schemes given a new wrinkle: builder bailouts and foreclosure rescue scams.

Builder bailouts, likely to happen in slow market with lagging sales, involve downpayment assistance with an inflated appraisal and a seller “second” that forgives the borrowers' downpayment and gives the lender 100 percent financing on a home.

Currently, builders are providing incentives—cash back at closing; four years of mortgage payments; homeowners association payments; guaranteed income whether the property rents or not. In some instances, borrowers can receive cars, trucks, swimming pools or cash back at closing from builders.

While fine print sugests incentives are fully disclosed, not every party in the process necessarily knows about them. “These are problematic because these incentives are not getting disclosed to the appraisers, to the lenders or to the loan officers,” Brawley said.

Brawley said some fraud schemes involve the property seller and real estate agents—shopping loans and taking them to the loan officers with purchase contracts that compromise loan officers. Retail loan originations—built into a purchase price by inflating values and amounts in reserve accounts—provide cash back or guaranteed mortgage payments. In some cases, excessive real estate commissions are going back to real estate agents, who split the commission with a borrower.
Brawley noted signs of bailouts include a slight drop in sales and volume followed by a spike in both; multiple loans to a borrower and out-of-state borrowers; 80-15-5 loans; excessive real estate agent commissions on HUD-1 forms; homes based on a lower “net” sales price that is the true price before incentives take place; missing purchase contract addendums; and second-home originations to the same borrower within one week.

Some borrowers have other assets and enough cash to keep fraud schemes funded, but occupancy could be misrepresented. “In some cases, commitments made to borrowers for a guaranteed mortgage or if rental payments appear to be coming from proceeds of a sale, they would all be considered signs of mortgage fraud against lenders,” Brawley said. “Many of these schemes take place in condominium conversion deals, as seen in Florida. If we think Florida is bad now, just wait until these start going into default.”

In some cases, incentives are built into the loan to keep the properties and loans current for two to four years, and HUD-1’s show clear incentives. “I applaud lenders and title companies that are looking to the seller’s side of HUD-1s,” Brawley said.

Meanwhile, foreclosure rescue scams “definitely thrive in a down economy,” Brawley said. In these scams, fraudsters—in this case “rescuers”—gain access to property deeds and effectively sell property to someone else; the “rescuers” then take equity from the home and flip it without the borrower knowing they no longer have any legal claim to the house.

Brawley said borrowers fall for these scams because “‘rescuers’ keep borrowers in dark about the foreclosure process. Sometimes, handwriting is used in these scams to perpetuate trust, and affinity groups are prevalent in scams because they will prey on their own based on that level of trust,” she said.

Lenders should be aware of “red flags,” such as an elderly seller or a long-time resident with a large amount of equity; a property purchased in foreclosure; a mail-away or “kitchen” closing; a suspicious “seller” signature on a purchase contract; no real estate agent or realtor commissions or a profit made off of equity.

Today, perpetrators continue on the fraud schemes for longer periods. “They now know what we do. They know our quality control,” said John Gray, senior vice president of fraud prevention at Bear, Stearns & Co. Inc., New York.

In one scheme, perpetrators commit fraud on the front-end and then make short sales on the back-end. “We have people we are trying to help with short sales, and then you have these guys coming through the back door. It’s really sad,” Gray said.

Data mining for development of cases to help recognize patterns and trends is crucial to a successful fraud program, Gray said. Pre-funding fraud prevention tools and reviews are important in today’s market and familiarity with vendors and other business partners is also a key toward prevention. Gray said that the Mortgage Electronic Registry System is the key today as a data reference for ownership to title. He said to check MERS and title records for the correct first or second lien positions.

With a return to full-doc loans for now in the origination arena, fraud prevention training programs are turning back to reviewing files for full document-type misrepresentations in W2 forms, bank statements, verifications of deposits, employment and other documentation, Gray said.

“Guess what? [Underwriters] haven’t looked at a lot of docs,” Gray said. “We have had to revamp or retrain going back to the old days.”

Gray noted some good news, however, that the landscape on penalties from mortgage fraud against lenders is changing. Georgia—the first state to make mortgage fraud against lenders a felony, recently sentenced 50-year old Phillip Hill to 28 years in prison in a fraud scam. In Colorado, Gerald Small was sentenced to 101 months in federal prison; and 63-year-old Laurence Seidenfeld was sentenced to 67 months for generating millions of dollars in fraudulent loans.

Gray said puffing, or “the new flip,” consists of a seller listing property for $100,000 with a borrower wanting to buy it for $150,000, with the $50,000 difference requiring an inflated appraisal.

“Basically, you have all the components of a flip transaction,” Gray said. “A puffing is no different than a flip. All you’re missing is two closing transactions.”

Gray added that puffing is also very popular in today’s market. “This is one of the new types of fraud that is a twist on an old type of fraud,” he said.