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Emerging Fraud Trends

You Should Know About

The current housing market, while showing modest signs of improving, continues to suffer from high inventories, sluggish sales, and a high foreclosure rate. It remains an attractive environment for mortgage fraud perpetrators who discover methods to circumvent loopholes and gaps in the mortgage lending market whether the market is up or down. Here’s a look at some emerging schemes, according to the Federal Bureau of Investigation.


Economic Stimulus: First Time Home Buyer (FTHB) Tax Credit Fraud

The schemes used to exploit the home buyer credit program include applicants with income that exceeds program requirements, individuals who have owned a home more than five years, and individuals applying for the program before finalizing the purchase of a home. The FBI anticipates that fraud strategies will primarily include the following two deceptions: using people under the age of 18 to claim the tax credit, thereby allowing subsequent transfer of ownership to a family member who qualifies for the credit; and using non-resident aliens or illegal immigrants to apply to the home buyer credit program. 160 schemes related to this economic stimulus tax credit have been uncovered, and it is investigating over 100,000 possible fraudulent filers in Buffalo, New York.

Commercial Real Estate Loan Fraud

Perpetrators, including loan officers, real estate developers, appraisers and apartment management companies, are increasingly submitting fraudulent documents that misrepresent their assets and property values to qualify for loans to buy or retain property. When the loans are funded, the perpetrators often cease payment of their mortgages, resulting in foreclosure. According to open-source reporting, CRE loans are expected to produce more than $100 billion in losses by the end of 2010. Preliminary analysis indicates that the commercial markets exhibiting the most significant signs of distress are in areas where there is also a significant mortgage fraud problem.

Foreclosure Rescue Schemes –

Loan Modification Fraud

The growing number of homeowners needing loss mitigation assistance has overwhelmed mortgage servicers and led to the explosion of third-party loan modification companies claiming to offer assistance to homeowners struggling to avoid foreclosure. Perpetrators of loan modification scans follow the same pattern as predatory lenders by targeting vulnerable homeowners, including minorities, non-English speakers, seniors, and residents of low-income neighborhoods. Perpetrators solicit homeowners with mail flyers offering to help them stop the foreclosure process on their homes. This type of scheme is also conducted in conjunction with the filing of a bankruptcy petition to stall the foreclosure process to garner more advance fees for the perpetrator.

Home Valuation Code of Conduct Fraud

Lenders are circumventing the Home Valuation Code of Conduct (HVCC) by using other non-commission employees to order appraisals. The HVCC agreement between the FHFA and the New York Attorney General’s Office was intended to govern the way appraisals were ordered for all single-family mortgage loans (excluding government-insured loans such as FHA and VA) sold to Fannie Mae and Freddie Mac. In the fashion of a true arms-length transaction, all appraisals are to be ordered through a third-party appraisal management company to eliminate collusion between the appraiser and those who earn an income from loan closings.

Flipping, Short Sales, and Broker Price Options

Perpetrators are conducting short sale property flipping schemes using distressed properties of homeowners who are unemployed or facing foreclosure. The perpetrators collude with appraisers or real estate agents to undervalue the property using an appraisal or a broker price opinion to further manipulate the price down (the flop) to increase their profit margin when they later flip the property. They negotiate a short sale with the bank or lender, purchase the property at the reduced price and flip it to a pre-selected buyer at a much higher price. In closing short sales, agents must read the closing instructions carefully to see if there are limitations in the time period before a house can be transferred after the original sale. While the initial sale could be a legitimate transaction, if the property is resold before meeting a specified time frame by the lender, the agent could face a CPL claim.

Property Theft Targeting Bank Owned Properties

Perpetrators are targeting bank-owned properties by filing a false warranty deed using a false rental/lease agreement and collecting advance fees from an unauthorized tenant. The perpetrator arranges to rent out the bank-owned property to an unsuspecting renter. If the renter is confronted by a realtor or law enforcement, the perpetrator has advised the renter to produce a lease agreement previously provided to them. During the course of this scheme, the perpetrator places “no trespassing” signs on the properties and often changes the locks. With access to the appropriate software and knowledge of required real estate documents, a perpetrator can create fictitious documents such as a deed of trust, have the deed notarized, pay a nominal fee, and present or mail the deed to the recorder. The deed will then be recorded transferring title of all legal rights to the property.

Additional Concerns: FHA 90-Day

Property Flip Waiver

The HUD FHA 90-day property flip rule designed to prevent illegal property flips of FHA-insured properties was waived by HUD through January 31, 2011 for all sellers to move a stagnant real estate market and remove property off the books and records of banks. Regulators and law enforcement officials continue to oppose this waiver as it contributes to an ever-increasing pool of potentially fraudulent property flipping schemes as it does not require the seller to have title to the property for a minimum of 90 days.

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