Mortgage fraud - Term Paper Example

? Mortgage fraud Introduction The dream of owning a home is running away from reality due to the increase in the number mortgage frauds1. Misguided real estate professionals and dishonesty homeowners are fleecing homeowners billions of dollars through mortgage scams. Mortgage fraud can be defined as the intentional misrepresentations, omissions to fund or secure a loan that is designed to acquire mortgage financing using fraudulent or stolen identification documents or false financial and income statements2. Inflated real estate properties and high property taxes have made homeownership rarely accessible to the honest citizens. Statistics from the Federal Bureau of Investigation show that real estate fraud is the most rampant white –collar crime in the United States. From 2003-2004, mortgage fraud crime rates increased by 146% while during the period 2004-2005, the rate increased further by another 29%. According to industry figures, losses from real estate frauds run in to millions of dollars annually in Canada. Most criminal groupings are responsible for the mortgage scams. Mortgages frauds leave individuals with high property taxes, inflated property prices and adverse credit histories. In Canada, mortgage fraud is mainly concentrated in Ontario and Alberta though some cases occur in other Cities. If this is the trend, the real estate industry will degenerate to a ramshackle slum3. Combating mortgage fraud has not been possible since as soon a law is enacted, the con artists devise other loopholes in the real estate market which they use to defraud the homeowners4. The crime is becoming more sophisticated due to technological innovations which have made it easy for the criminal groups to obtain personal information like identification and financial statements through the internet. Majority of the financial institutions depend on automated systems to underwrite and value the property, to conduct financial strengths and capabilities of the borrower and to generate financial statements hence it is difficult for the lender to detect the fraudulent and falsified financial statements5. Risk factors for mortgage frauds Political, social economic and technological advancements can impact on the magnitude of mortgage frauds. The competitive banking industry during periods of economic boom and the customer pressures for the mortgage interest rates have increased rates of mortgage crime. Financial institutions avoid losing commissions and fees thus they may not conduct due diligence in mortgage approvals6. Technological innovations such as the internet communications and e-commerce involve widespread exchange of personal information and identity documents over the internet. Criminals may fraudulently obtain personal information over the internet thus using it to defraud the customer or acquire mortgages fraudulently. Criminal gangs are also utilizing the internet to conduct their illegal activities since with modern communications individuals do not need to physically meet in order to conduct a business transaction7. Mortgage frauds mainly involve numerous players in the financial industry insiders. Vendors, lawyers, credit rating agencies and real estate agents and mortgage brokers knowingly give consent to the use of false financial statements or will conduct false appraisals of the financial strength of the purchaser. Fraud for property also occurs when dishonest lenders lead the borrowers to buying houses which they may not be able to service. The lenders assist the borrower to submit false financial statements, income and asset records8. Types of mortgage frauds There are numerous types of frauds involved in the real estate industry. The frauds range from undisclosed kickbacks to falsifying income and employment information. The first type of mortgage fraud is the occupancy fraud. The fraud occurs when the mortgage borrower anticipates acquiring an investment property and states in his or her loan application documents that the property will be a second home or the primary residence. If these false statements are undetected, the customer will obtain lower a lower interest rate than he or she deserves. Most of the lenders charge a premium rate for non-occupied residence mortgages. This kind of mortgage fraud exposes the lender to a higher financial risk compared with the interest rate received from the capital invested in the mortgage. This fraud leads to waiver of taxes thus constituting a further fraud9. Income fraud The income fraud mainly occurs when the borrower overstates his income level in order to acquire a higher value mortgage than he is able to refinance. The approval authorities may not disclose the overstated income since some of the bank account details and income tax returns may not be available. This kind of fraud leads to the issuance of more mortgages in the market which further leads to increase in the property prices due to high demand in the market10. Employment fraud This is another common mortgage fraud whereby the borrower falsely gives details of his employment history. The borrower will claim to be self-employed in a certain non-existing company or claim to hold a higher managerial position that entitles him or her to high monthly income. This leads to imprudent judgment of the financial position and viability of the borrower11. Failure to disclose liabilities Mortgage lender’s employees, credit rating agencies and lawyers may enter in to a complex financial scam to conceal the financial debts and obligations of the borrower prior to approval of the mortgage. The omissions of the liabilities in the mortgage application favor the borrower since it lowers the debt-income ratio hence leading to a mortgage approval. The fraud for profit motivation is to defraud the financial institution a large amount of funds. The appraisal intentionally prepares two sets of financial statements and overstates the value of the property12. Identity theft It occurs when the borrower assumes the identity of another person to obtain a mortgage without the consent of the other person. The criminal will disappear without making any repayments to the financial institution. The scheme may be discovered too late thus leading to costly suits where the victim tries to justify his or her identity was obtained through fraud13. Appraisals fraud This entails deliberate and fraudulent inflation of the property prices to the lender or criminal groups using hacking and manipulating online real estate appraisal systems. The criminal group will then pretend to buy or sell the property to unsuspecting people hence they will obtain higher amounts of money from the financial institutions and default thus leaving the financier with high mortgage compared with the lower value of the property14. Illegal property flipping A number of mortgage fraud instances may involve collusion of individuals and nominees. This scheme involves many successive sales of the property between colluding individuals. The property is repurchased numerous times which leads to artificial price inflation. If one of the colluding purchasers defaults, the financial institution is left with a lower property value compared to the funds advanced to the borrower. This scheme involves straw buyers, false appraisals and kickbacks to the buyers15. Foreclosure frauds Foreclosure frauds involve individuals purporting to be foreclosure agents of the financial institutions on the defaulting mortgages. They mainly target low income individuals who are presented with a debt consolidation scheme that requires the victim to transfer the property to the defrauder. The borrower is required to send bills and taxes to the defaulter who in turn pockets the payments16. Mortgage frauds usually involve the misstatement of assets where the real estate values are inflated. The borrower’s income is also inflated. In 2006, 35,617 cases were reported while in 2007, 46717 cases were reported. The reported cases involved $ 813 million. The main States were criminal engaged in mortgage frauds were Florida, California, Georgia and Illinois. Most of the perpetrators were accountants, mortgage brokers and lenders. The properties were later sold at inflated prices leading to increase in the values of the surrounding property in those neighborhoods. Mortgage fraud through fraudulent underwriting practices led to subprime mortgage lending17. The subprime mortgages had adjustable interest rates that were high. The subprime mortgage lending led to increase in the values of houses in many parts of the U.S and Canada. The adjustable interest rates led to high interest payments which increased the possibility of defaults. With the onset of defaults, the property values started to decline thus financial institutions had to write down losses in their books18. Fannie Mac, which is the largest corporation in mortgage investment in the U.S held one quarter of the secondary mortgage business in the U.S home loans. The FBI investigations in 2004 concluded that the mortgage market was fraudulent where financial institutions lost billions of dollars19. Ed Parker, the manager of mortgage fraud investigation at Ameriquest, the largest lender of subprime mortgages in 2004 and 2005, told the commission of SEC on mortgage fraud investigation that fraudulent mortgages were common. The Enterprise management Capital Markets of Fannie Mae indicated that some borrowers falsified their identity to acquire as many as 19 properties using different falsified identities. Fannie Mae instructed lender like Countrywide and Bank of America to repurchase roughly $ 550 million of mortgages in 2008 and another $ 650 million in 200920 . In June 2008, investigations by the FBI found out that there were massive instances of mortgage crimes like kickbacks. The former management of Bear Stearns hedge funds that had collapsed was charged with conspiracy to defraud the investors. In 2009, the former officers of New Century Financial Corporation that was responsible for the majority of misleading information regarding the subprime mortgage lending were charged for overstating the company’s financial records including loan repurchases and making pending loan repurchase requests. American Home Mortgage Investment Group also involved in misleading disclosure on the risk level of the mortgage profile. Another financial institution that was involved in mortgage frauds was Brook Street Securities Corporation21. The mortgage fraud cases were lowest in 2011due to strict underwriting practices that were implemented following the global meltdown. According to Suspicious Activity Reports (SAR) mortgage fraud case have climbed from 6,936 cases in 2003 to 93,508 cases reported in 2011. The FBI has accomplished investigations on significant cases. For instance, Luis Belevan, The Guardian Group, LLC (phoenix), Luis Belevan pleaded guilty for conspiracy together with other co-perpetrators to defraud more than 1,800 distressed homeowners a total of $1,595 as upfront fees for assistance to avoid home foreclosure. He managed to collect $ 3 million from customers of the company. Another case involved the Shmuckler Group (Washington) were the proprietor Howard Shmuckler ran a mortgage-rescue business but he misrepresented the business on several occasions in Virginia where he claimed he could help the homeowners to affordably manage their homes. Howard displayed himself as a licensed attorney from Virginia hence managed to collect fees of $ 2500 to $ 25,000 to modify the conditions of their mortgages22. Mortgage loan foreclosures and defaults have also contributed to the mortgage frauds. 3.6 million of residential mortgages in the US were past due in 2010 while 8.8 percent of those mortgages were delinquent (past 90 days after the due date). The number of delinquencies in commercial mortgages increased by 79 percent in 2010 from 5 percent in 2009 to 8.79 percent in 2010. Alabama and Nevada States experienced the highest delinquent rates which averaged 16 percent. For adjustable rate mortgages (ARMs), the delinquent rates of the subprime mortgages were around 30 percent in 2010 where the most affected States were New York, New Jersey and Florida. (Source: FBI report) According to credit rating by Fitch, 70 percent of the subprime mortgages were at risk of foreclosure. Negative equity mortgages or the underwater mortgages; increase the homeowners vulnerable to the short selling fraud schemes. 23 percent of all the residential mortgages had negative equity ($ 750 billion) in 2010. Fannie Mac has reported a sharp increase in the number of foreclosure rescue, sales fraud and short sales due to the fraud opportunities created by the high default rates in the market. In 2010, Fannie Mac indicated that several forms of mortgage frauds like occupancy fraud, condo conversion and reverse mortgages were high since most of the criminal groups engaged in asset misrepresentations and identity theft23. Michael Austin, the director of Direct Title & Escrow services Incorporated, Florida was sentenced on March 2012 and may face up to thirty years jai term if convicted since he engaged in buying and selling real estates through stray buyers. The stray buyers obtained inflated values due to fraudulent loan applications and falsified income statements. Austin prepared HUD-1 settlement statements that he falsely represented to the lenders that the stray buyers were committing their own money to the property. Austin also created duplicate statements of HUD-1 settlements which he presented to the mortgage lender that show different prices to the lender and the sellers. The lenders version of the statements depicted higher sales price of the property than the version presented to the sellers24. The Appraisals institute has urged the Federal judiciary system to use the real estate appraisal while calculating the losses involved in mortgage frauds. The basis of the argument stems from the need to utilize a specific provision while determining the fair market values of the property if the real property had not been disposed before the sentencing of the offender. If a uniform method is adopted, it will lead to uniformity and consistency in loss determination and avoid overreliance on tax assessments25. (Source: FBI report). Mortgage fraud trends The recent trend of mortgage frauds involve builder bailouts or condo conversion schemes were builders facing rising inventory and declining property values for newly constructed houses use the bailout scheme to offset the losses. The builder will look for buyers who obtain mortgages to purchase the houses. The buyer will intentionally allow the house to go to foreclosure. Condo-conversion scheme allows the apartments purchased by the builder during boom to be converted to condos. When the market prices of the apartments decline, the builder will have excess inventories of units hence can recruit stray buyers with cash back incentives and inflate the house prices. Failure to disclose the cash back incentives to the mortgage lenders and overstatement of the asset information and stray buyers’ income will lead to high property prices and also issuance of imprudent mortgages which exposes the financial institutions to high customer default risks26. Another trend is the Home Equity Conversion Mortgage (HECM) which is a reverse mortgage facility insured by the Housing Administration to borrowers of more than 62 years of age. The facility allows the mortgage borrower to own a home or have small mortgage balance or occupy the home as the primary residence and participate in numerous HECM counseling programs. Criminal groups currently recruit aged people through churches, television programs and investment seminars and obtain HECM in the name of the recruited member. The criminal group will convert the equity value of the home in to cash and pay the senior citizen some fee. Loan repayment may not be required until the senior citizen stops to use the house as the primary residence. (Source: FBI report) Mortgage fraud prevention measures Real estate market players have suggested some measures which the borrower can take to prevent mortgage frauds. The borrower should seek referrals from real estate professionals only and not middle men. Any promises of short term profits may be suggestions of fraud. The borrower should also review the recent sales information of houses in the particular neighborhood and tax assessments in order to estimate the real values of the property. The borrower should also review the sales history of the property; multiple sales within short periods may suggest an element of fraud. The borrower should seek legal assistance in understanding the terms and conditions of the mortgage agreement before signing it since there may be hidden information contained in the documents27. Mortgage fraud legislation There are numerous laws that have been enacted to combat mortgage frauds. The Dodd Frank Act is one of the legislations that were enacted to deal with mortgage issues that emerged during the financial crisis. The act establishes the consumer financial protection bureau that sets the standards for mortgage processing and regulations. The bureau licenses the mortgage appraisers and controls the advertising practices since some advertisements mislead the consumers. The secure and fair enforcement Act for the mortgage licensing was enacted in 2008 required all States to register all loan originators by July 2010 in order to reduce the chances of mortgage frauds28. Conclusion Some of mortgages schemes that thrive in the economy include property flipping, equity conversion, identity theft, occupancy theft and second residence. As the rates of foreclosure and delinquency keep on soaring, the real estate market will remain sluggish while the mortgage fraud cases will keep increasing through out the year in 2012. The perpetrators will seek new loopholes in the mortgage market legislation in order to commit mortgage frauds. Bibliography: Clarke, Michael. Mortgage fraud. London. Chaplan & Hall. 1991. Deflem, Mathieu. Economic crisis and crime. Bingley. Emerald. 2011. Dollar, Rachel and Roberts, Ralph. Protect yourself from real estate and mortgage fraud: preserving the American dream of homeownership. New York. Kaplan. 2007. FBI. “2010 mortgage fraud report”, Reports and publications. Accessed on 16 March 2012 from http://www.fbi.gov/stats-services/publications/mortgage-fraud-2010. Financial crimes Enforcement Network. Mortgage loan fraud: an industry assessment based upon suspicious activity report analysis 2006. Accessed on 16 March 2012 from http://www.fincen.gov/news_room/rp/reports/pdf/MortgageLoanFraud.pdf. Financial Crisis Inquiry Commission. The financial crisis inquiry report: final report of the national commission on the cause of the financial and economic crisis in the United States. Washington, D.C. Government printing office. 2011. Jones, Michael. Creative accounting fraud and international accounting scandals. West Sussex. John Wiley. 2011. Kolb, Robert. The financial crisis of our time. New York. Oxford University Press. 2011. Marshall, Dennis and Thomas, Pinkowish. Residential lending principles and practices. New York. Cengage Learning. 2011. Mortgage Fraud Blog. Appraisals may be required when calculating loss in mortgage fraud case. Web. 16 March 2012. Accessed from http://mortgagefraudblog.com/perp-walk/item/17213-appraisals-may-be-required-when-calculating-loss-in-a-mortgage-fraud-case Ramage, Sally. Serious fraud and current issues: fraud law book. New York. Universe. 2005. Richardson, Michael. An American Epidemic: mortgage fraud- a serious business. London. Routledge. 2005. Ryder, Nicholas. Financial crime in the 21st century: law and policy. Cheltenham. Edward Elgar Publishing. 2011. Read More