Colorado Still in the Top 10 – FBI 2007 Mortgage Fraud Report Highlights


The FBI released its 2007 Mortgage Fraud Report and Colorado still ranks in the top 10 states. This is a “brief” overview of what is happening out there in general taken directly from that report and edited. See if any of these fit your market?

Mortgage fraud is growing. Suspicious Activity Reports from financial institutions indicated an increase of 31 percent to 46,717 during 2007. Just seven percent of those reports totals $813 million.

The subprime share of outstanding loans has more than a doubled since 2003 putting a greater share of loans at higher risk of failure. During 2007 there were 2.2 million foreclosure filings, up 75 percent from 2006. The declining housing market affects many in the mortgage industry who are paid by commission. During declining markets, mortgage fraud perpetrators may take advantage of industry personnel attempting to generate loans to maintain current standards of living.

The top 10 mortgage fraud states for 2007 were Florida, Georgia, Michigan, California, Illinois, Ohio, Texas, New York, Colorado, and Minnesota. Other states significantly affected by mortgage fraud included Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut.

Several schemes have emerged with the potential to spread as the recent rise in foreclosures, depressed housing prices, and decreased demand place pressure on lenders, builders, and home sellers. Schemes for 2007 included builder-bailouts, seller assistance, short sales, foreclosure rescue, and identity thefts exploiting home equity lines of credit.

“The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market.” -Chris Swecker, former FBI Assistant Director, Criminal Investigative Division, Introductory Statement: House Financial Services Subcommittee on Housing and Community Opportunity, 7 October 2004.

The FBI divides Mortgage loan fraud into two categories. Fraud for property entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan. Fraud for profit involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. It is this second category that is of most concern to law enforcement and the mortgage industry. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation.

Mortgage Fraud is defined as the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan. Financial Crimes Enforcement Network indicates finance-related occupations, including accountants, mortgage brokers, and lenders were the most common suspect occupations associated with reported mortgage fraud.

The housing market is expected to continue its downward trend. The Mortgage Bankers Association estimates that mortgage loan originations will continue to decline through 2009. Loan originations went from $3,812 in 2003 to $1,885 in 2009; (USD billions). Existing home sales are expected to decline by 13 percent during 2008 from 2007. Likewise, new home sales are expected to decline 15 percent from 2007 figures. Median home prices are also expected to decline in 2008. The current and future market conditions will have mortgage industry professionals pursuing a smaller pool of customers. As such, professional fraudsters will devise new and improved schemes to exploit the weaknesses in the housing market.

These recent events likely resulted in an increase in mortgage fraud as higher housing prices tempted borrowers to exaggerate income and assets to qualify for a mortgage loan. Mortgage fraud perpetrators also likely seized the opportunity to take advantage of the relaxed lending practices to commit fraud for profit.

Alt-A loans are designed for prime-quality borrowers, and in many instances do not require documentation, making them ideal for fraud exploitation. Alt-A loans include stated income, stated income/stated asset or no income/no asset loans that are offered by both prime and subprime lenders. BasePoint Analytics, a fraud analysis and consulting service, analyzed loans that were originated between 2002 and 2006; nearly 1 million Alt-A loans and 3 million nonprime loans were evaluated. The relative fraud-loss rate of Alt-A loans was more than three times higher than nonprime loans. Losses within Alt-A loans were caused by income misrepresentations, employment frauds, straw buyers, investor-related frauds, and occupancy frauds. This is an increase of 300% to 400% on misrepresentation rates from 2003 to 2007.

FBI mortgage fraud investigations at the end of 2007 totaled 1,204, a 47 percent increase from FY 2006 and a 176-percent increase from 2003. Fifty-six percent of pending FBI mortgage fraud investigations in 2007 were associated with dollar losses of more than $1 million. FBI field divisions that ranked in the top 10 for pending investigations during 2007 included Los Angeles, Chicago, Detroit, Dallas, Atlanta, Miami, Denver, Houston, Cleveland and Salt Lake City.

Emerging Schemes

Bad Appraisals. Condominium units that are totally trashed are listed as having Brazilian hardwood floors and granite counter tops and they are literally non-existent. No problem the appraiser says it is worth $275,000.00. Fraudulent appraisals continue to be a significant issue. Makes it hard for the honest ones to work. Don’t be a part of inflated or fake appraisals.

Use a Trusted Lender. As financial institutions begin to enforce higher lending standards, the identities of individuals with good credit will increase in value to perpetrators. As such, individuals with good credit will likely be at a more significant risk for identity theft and mortgage fraud schemes, and the continued vulnerability of identifying information will allow perpetrators the access necessary to commit such schemes.

Illegal Property Flipping. Illegal property flipping scheme shows how property is sold based on a fraudulent appraisal, goes into foreclosure, and the bank is left with an overvalued mortgage.

Builder Bailouts. Builder-bailout schemes to offset losses and circumvent excessive debt and potential bankruptcy as home sales suffer from escalating foreclosures, rising inventory, and declining demand. Builder-bailout schemes are common in any distressed real estate market and typically consist of builders offering excessive incentives to buyers, which are not disclosed on the mortgage loan documents (contract and HUD1). Builder-bailout schemes often occur when a builder or developer experiences difficulty selling their inventory and uses fraudulent means to unload it. In a common scenario, the builder has difficulty selling property and offers an incentive of a mortgage with no down payment. For example, a builder wishes to sell a property for $200,000. He inflates the value of the property to $240,000 and finds a buyer. The lender funds a mortgage loan of $200,000 believing that $40,000 was paid to the builder, thus creating home equity. However, the lender is actually funding 100 percent of the home’s value. The builder acquires $200,000 from the sale of the home, pays off his building costs, forgives the buyer’s $40,000 down payment, and keeps any profits. If the home forecloses, the lender has no equity in the home and must pay foreclosure expenses.

Seller Assistance Scams. Mortgage fraud perpetrators are exploiting the depreciating housing market by assisting sellers and providing buyers to conduct property sales that are based on inflated appraisals. In a typical seller assistance scam, a perpetrator solicits an anxious seller or his real estate agent and offers to find a property buyer. The perpetrator negotiates the amount that the property seller is willing to accept for the home. The perpetrator then hires an appraiser to inflate the property’s value. The property is sold at the inflated rate to a buyer who is recruited by the perpetrator. The buyer takes out a mortgage for the inflated amount. The seller then receives the asking price for the home, and the perpetrator pockets a “servicing fee,” the difference between the home’s market value and the fraudulently inflated value. When the mortgage defaults, the lender forecloses on the house, but is unable to sell it for the amount owed as a result of the inflated value.

Seller assistance programs may be easily perpetrated in any depressed market where sales of homes have languished and sellers are motivated. The current instability in the housing market and mortgage industry has created an ideal environment for perpetration of this fraud. Seller assistance schemes eliminate the need for the two property transactions that are required for illegal property flipping, which involves first purchasing and then selling a property. Some industry sources have coined the phrase “cash back purchase” or “one transaction flip” to describe the scheme because it eliminates the need for two property transactions to generate a profit.

Short-Sale Schemes. It is easy to see why lenders are suspicious of those trying diligently to obtain a legitimate short sale. Look what they are confronted with. Perpetrator recruits a straw buyer to purchase a property. Perpetrator has straw buyer secure a mortgage for 100% of the property’s value. Perpetrator may have a straw buyer refinance the home and obtain $30,000 for “repairs.” Perpetrator pockets the $30,000. No repairs are made. No payments are made so the mortgage will default.

Straw buyer informs the lender that the home will foreclose and recommends the perpetrator as a potential buyer in a short sale. Perpetrator approaches lender prior to foreclosure and offers to pay less for the home than would otherwise be received in a competitive foreclosure sale. Lender agrees to the short sale not knowing that the mortgage payments were deliberately not made to create this short-sale situation. Perpetrator sells the property at actual value for a profit, or has the property artificially inflated to conduct an illegal property flip.

Short-sale schemes are desirable to mortgage fraud perpetrators because they do not have to competitively bid on the properties they purchase, as they do for foreclosure sales. Perpetrators also use short sales to recycle properties for future mortgage fraud schemes. Short-sale fraud schemes are difficult to detect since the lender agrees to the transaction, and the incident is not reported to internal bank investigators or the authorities. As such, the extent of short sale fraud nationwide is unknown.

Foreclosure Rescue Scams. Escalating foreclosures provide criminals with the opportunity to exploit and defraud vulnerable homeowners seeking financial guidance. The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. This “foreclosure rescue” often involves a manipulated deed process that results in the preparation of forged deeds. In extreme instances, perpetrators may sell the home or secure a second loan without the homeowners’ knowledge, stripping the property’s equity for personal enrichment.

The FBI held a mortgage fraud summit with FBI Supervisory Special Agents to address the most severe mortgage fraud problems nationally. Currently the FBI has mortgage fraud working groups or task forces in 32 field divisions, including Anchorage, Albuquerque, Atlanta, Buffalo, Charlotte, Chicago, Cincinnati, Cleveland, Detroit, Dallas, Denver, El Paso, Honolulu, Houston, Indianapolis, Jackson, Kansas City, Louisville, Memphis, Miami, Minneapolis, Milwaukee, Portland, Pittsburgh, Philadelphia, Phoenix, Sacramento, San Diego, San Francisco, Salt Lake City, Tampa, and Washington, DC. The FBI continues to encourage the use of undercover operations as an effective technique to address mortgage fraud.

The Solution. Use a Good REALTOR® and be a Good REALTOR®. Working with a good, honest REALTOR® will help the public use associated professionals (title, lender, appraiser) that do not cheat. Don’t participate in any scheme that has “funny” marketing fees, offers money paid back to a borrower/buyer that is not clearly indicated in the contract and clearly on the HUD1. Don’t participate in any schemes that don’t seem proper. Ask your attorney to review questionable proposed transactions. Select a lender that “does not cheat” and a title company that only closes “legitimate deals” and neither of them “look the other way” or say things like “what happens after closing is not our concern.”

Report those that do not fit in our business. Contact the FBI at or call the local office. If the people involved are in the mortgage business, real estate business or title insurance business contact the Colorado Real Estate Commission immediately. It is our business and we have to help clean it up before the epidemic of fraud kills us all.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.