Mortgage Fraud Report of 2008 and CPNs (Credit Privacy Numbers) – By FBI

Scope Note

The purpose of this study is to provide insight into the breadth and depth of mortgage fraud crimes perpetrated against the United States and its citizens during 2008. This report updates the 2007 Mortgage Fraud Report and addresses current mortgage fraud projections, issues, and the identification of mortgage fraud “hot spots.” The objective of this study is to provide FBI program managers with relevant data to better understand the threat, the trends, allocation of resources, and to prioritize investigations. The report was requested by the Financial Crimes Section, Criminal Investigative Division (CID), and prepared by the Financial Crimes Intelligence Unit (FCIU), Directorate of Intelligence (DI).

This report is based on FBI, state, and local law enforcement, mortgage industry, and open-source reporting. Information also was provided by other government agencies, including the US Department of Housing and Urban Development-Office of Inspector General (HUD-OIG), Federal Housing Administration (FHA), Internal Revenue Service, US Postal Inspection Service, and the Federal National Mortgage Association. Suspicious Activity Reports (SARs) were obtained from the Financial Crimes Enforcement Network (FinCEN). Industry reporting was obtained from the Mortgage Asset Research Institute (MARI), RealtyTrac, Inc., Mortgage Bankers Association (MBA), Interthinx, and Radian Guaranty, Inc. Some industry reporting was acquired via open-sources.

While the FBI has high confidence in all of these sources, some inconsistencies relative to how various organizations catalog their statistics are noted. SARs are cataloged according to the year in which they are submitted. However, their information may describe activity that occurred months or years previously. The geographic specificity of industry reporting varies; some companies report at the zip code level, others by city, region, or state. Many of the statistics provided by the external sources, including FinCEN, FHA, and HUD-OIG are captured by fiscal year, while this report focuses on the calendar year findings. While these discrepancies have minimal impact on the overall findings stated in this report, we have noted specific instances in the text where they may affect conclusions.

See Appendix B for additional information for these sources.

Geospatial maps were provided by the Geospatial Intelligence Unit, DI and the Crime Analysis Research and Development Unit, Criminal Justice Information Services Division.

Key Findings

• Mortgage fraud continued to be an escalating problem in the United States during 2008. Although no central repository exists for collecting mortgage fraud complaints, virtually all law enforcement and industry statistics indicated an upswing in mortgage fraud activity. SAR mortgage fraud filings from financial institutions increased 36 percent to 63,713 during Fiscal Year (FY) 2008 compared to 46,717 filings in FY2007. The total dollar loss attriSbuted to mortgage fraud is unknown; however, at least 63 percent (1,035) of all pending FBI mortgage fraud investigations during FY2008 involved dollar losses totaling more than $1 million.
• A decrease in loan originations and an increase in defaults and foreclosures continued to dominate the downward trend in the housing market in 2008. While the amount of mortgage fraud cannot be precisely determined, industry experts agree that there is a direct correlation between fraud and distressed real estate markets. As the housing market continued to decline in response to an increase in housing inventories, lack of sales, and new foreclosures surface, to include a wave of Alt-A and Option ARM loans due to reset beginning in April 2009, real estate values softened, and fraud reporting increased throughout 2008.
• Analysis of available law enforcement and industry information indicates the top states for mortgage fraud during 2008 were California, Florida, Georgia, Illinois, Michigan, Arizona, Texas, Maryland, Missouri, New Jersey, New York, Ohio, Colorado, Nevada, Minnesota, Rhode Island, Massachusetts, Pennsylvania, Virginia, and the District of Columbia. Rhode Island , Massachusetts , Pennsylvania , and the District of Columbia were new to the list in 2008, replacing Utah , Indiana , Tennessee and Connecticut from 2007.
• The downward trend in the housing market during 2008 provided a favorable climate for mortgage fraud schemes to proliferate. Several of these schemes have the potential to spread if the current economic downward trend, as expected, continues into 2009 and beyond. Increases in foreclosures, declining housing prices, and decreased demand place pressure on lenders, builders, and home sellers. These and other market participants are perpetuating and modifying old schemes, including property flipping, builder-bailouts, short sales, and foreclosure rescues. Additionally, they are facilitating new schemes, including reverse mortgage fraud, credit enhancements, condo conversion, loan modifications, and pump and pay in response to tighter lending practices.

Introduction

Mortgage fraud trends in 2008 reflected the overall downturn in the US economy initiated by the sub-prime mortgage crisis of 2007. The US stock markets suffered their deepest losses since the 1930s; unemployment increased dramatically; the mortgage loan industry reported a spike in foreclosures and defaults; and financial markets continued to contract, diminishing credit to financial institutions, businesses, and homeowners. These combined factors uncovered and fueled a rampant mortgage fraud climate fraught with opportunistic participants desperate to maintain or increase their current standard of living. Industry employees sought to maintain the high standard of living they enjoyed during the boom years of the real estate market and overextended mortgage holders were often desperate to reduce or eliminate their bloated mortgage payments.

Mortgage fraud continues to be an escalating problem in the United States and a contributing factor to the billions of dollars in losses in the mortgage industry. Recent congressional economic stimulus legislation and the proliferation of FHA-insured mortgages are providing funding streams for perpetrators to further exploit this industry. Multiple fraud schemes are being conducted by industry professionals who are in a position to exploit the current depressed housing market. Market conditions are also fueling the use of traditional and emerging schemes which have the potential to multiply across jurisdictions as foreclosures increase, the market contracts, access to credit diminishes, and more homeowners are unable to sell or refinance their homes. Properties affected by these schemes negatively impact neighborhoods; federally insured loan programs; the mortgage, banking, and securities industries; secondary market investors; tax payers; homeowners; and the overall US economy.

Mortgage fraud provides perpetrators, including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, trust account representatives, investment banks, and credit rating agencies with a criminal activity which is relatively low-risk with high-yield returns. Rising housing prices and exotic financial instruments, including teaser-rate adjustable rate mortgages, low or zero-equity loans, and sub-prime loans allow them to shift the risk to others.¹ Despite increased scrutiny, many industry insiders will perpetrate fraud to maintain or increase their current standard of living. In addition to traditional industry conspirators, there have been instances involving various organized criminal groups and gang members involved in mortgage fraud activity.

Victims of mortgage fraud activity may include borrowers, mortgage industry entities, and those living in neighborhoods affected by mortgage fraud. As properties affected by mortgage fraud are sold at artificially inflated prices, properties in surrounding neighborhoods also become artificially inflated. When this happens, property taxes also artificially increase. As unqualified homeowners begin to default on their inflated mortgages, properties go into foreclosure and neighborhoods begin to deteriorate, and surrounding properties and neighborhoods witness their values depreciating. As this happens, legitimate homeowners find it difficult to sell their homes. Additionally, the decline in US home values has a direct correlation to state and local government’s ability to provide resources for schools, public safety, and other necessary public services which are funded in large part from property tax revenue.²

The schemes most directly associated with the escalating mortgage fraud problem continue to be those defined as fraud for profit. Fraud for profit schemes often employ the use of a variety of loan products in addition to a standard conventional loan, such as sub-prime loans, Alt-A loans, Home Equity Lines of Credit (HELOCs), option-adjustable rate mortgage (ARM) loans, and Home Equity Conversion Mortgage loans. Prominent schemes include builder bail-out, short sale, foreclosure rescue, credit enhancement, loan modification, illegal property flipping, seller assistance, bust-out, debt elimination, mortgage backed securities, real estate investment, multiple loan, assignment fee, air loan, asset rental, backwards application, reverse mortgage fraud, and equity skimming. Many of these schemes employ various techniques such as the use of straw buyers, identity theft, silent seconds, quit claims, land trusts, shell companies, fraudulent loan documents (to include forged applications, settlement statements, and verification of employment, rental, occupancy, income, and deposit), double sold loans to secondary investors, leasebacks, and inflated appraisals.

Financial Institution Reporting of Mortgage Fraud Increases

Suspicious Activity Reports (SARs) from financial institutions indicate an increase in mortgage fraud reporting. There were 63,713 mortgage fraud related SARs filed with FinCEN in FY2008, a 36-percent increase from FY2007. Preliminary statistics indicate SAR filings in FY2009 will exceed 70,000 (see Figure 1).³

SARs reported in FY2008 revealed losses of more than $1.4 billion, an increase of 83.4 percent from FY2007 (see Figure 2). Additionally, SAR losses reported in the first six months of FY2009 exceed the same period in FY2008 by $208 million.

Mortgage Fraud in a Depressed Housing Market