Mortgage Fraud is defined as a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.

Mortgage Fraud is often committed with the assistance of an insider within the system, whether it is an appraiser, banker, lawyer or broker.

Generally mortgage fraud is committed for one of two reasons, fraud for property or fraud for profit.

Fraud for Property

In this type of mortgage fraud the client is generally the only person committing the fraud and would make a misrepresentation on a single bond application in order to secure the loan. Generally the fraudster will inflate his income by means of a fraudulent salary advice and bank statements. Another example may be a fraudster making a misrepresentation in regards to personal debt or other information required by the financing institution.

The main purpose of the offender is to secure a bond with the aim of acquiring a property either to occupy or rent out with the aim of generating an income.

There may be instances where the offender may make use of an insider to ensure that the bond is approved.

Fraud for Profit

In this type of mortgage fraud one will often find syndicates operating. Generally one will find multiple loan applications with several different financing institutions. One will find one or more insiders to be involved with syndicates in approving the loans.

Here offenders will often make use of stolen identities in applying for loans. The majority of information and documentation presented in these offences will be fraudulent. This may include employment information, collateral information, banking information, etc.

One example of these offences is where a property is acquired at a certain amount. An evaluator will inflate the value of the property, which will then be refinanced with another financing institution at the inflated amount. In this way offenders generate cash proceeds and have no other use for the properties they are dealing with.

Types of Mortgage Fraud Schemes

Simple Approval

With the simple approval scheme the offender identify a property he or she is interested in acquiring, but do not meet the requirements of the financing institution. This offender will generally inflate his or her income by providing a fraudulent salary advice or bank statements. He or she may make a misrepresentation as to current debts or collateral.

Non Existent Property

With this scheme offenders will generally make use of a fraudulent or stolen identity in applying for a bond on a property that does not exist. These scams often require the cooperation of a number of insiders involved in the financing process.

Nominee Loans

In these schemes the borrower’s identity will be withheld and a third party will be used in the finance application process. This generally occurs where the borrower does not qualify for finance and an agreement is made with a third party to acquire the property on behalf of the borrower.

Property Flipping

In these schemes property is acquired after which it is falsely appraised at a much higher value and then quickly sold. Generally fraudulent documentation and false income information is used in order to get the finance approved on both occasions.

Silent Seconds

Here the buyer will generally borrow the down payment from the seller through the issuance of a non-disclosed second mortgage. The lender is placed under the impression that the buyer has paid the down payment with his own funds, while in fact this was borrowed.

Foreclosure Schemes

Offenders will identify victims who are at risk of defaulting on loans or whose houses are already in foreclosure. The victim will be placed under the impression that their properties can be saved in exchange for a transfer of the deed and an upfront payment. Fraudsters generally benefit by re-mortgaging the property or stealing the upfront payment made by the victim.

Equity Skimming

Offenders of this scam will generally make use of a fraudulent or stolen identity in applying for a bond. Once the bond is approved they will offer the property for rent, but make no monthly repayments on the bond, until foreclosure takes place. Once this happens they will again start the same process on another property.

Protecting Oneself Against These Scams

Never sign a blank document or a document containing blanks. This leaves you vulnerable to fraud.

Don’t sign anything you don’t understand.

Get referrals for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county, or city regulatory agencies.

Be suspicious of outrageous promises of extraordinary profit in a short period of time.

Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques.

Look at written information to include recent comparable sales in the area and other documents such as tax assessments to verify the value of the property.

Understand what you are signing and agreeing to. If you do not understand, re-read the documents or seek assistance from an attorney.

Make sure the name on your application matches the name on your identification.

Review the title history to determine if the property has been sold multiple times within a short period. It could mean that this property has been “flipped” and the value falsely inflated.

Know and understand the terms of your mortgage. Check your information against the information in the loan documents to ensure they are accurate and complete.

Before purchasing a home, research information about the prices of homes in the neighborhood.

Shop for a lender and compare costs. Beware of lenders who tell you that they are your only chance of getting a loan or owning your own home.

Beware of “No Money Down” loans. This is a gimmick used to entice consumers to purchase property that they likely cannot afford or are not qualified to purchase. Beware of the mortgage professional who falsely alters information to qualify the consumer for the loan.

Do not let anyone convince you to borrow more money than you can afford to repay.

Do not let anyone persuade you into making a false statement such as overstating your income, the source of your down payment, or the nature and length or your employment.

Read and carefully review all loan documents signed at closing or prior to closing for accuracy, completeness and omissions.

Be aware of cost or loan terms at closing that are not what you have agreed to.

Be suspicious if the cost of a home improvement goes up if you accept the contractor’s financing.

Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a Quit-Claim Deed, and up-front fees. The perpetrator profits from these schemes by re-mortgaging the property or pocketing fees paid by the homeowner without preventing the foreclosure. The victim suffers the loss of the property as well as the up front fees.

Be aware of offers to “save” homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure.

Seek a qualified Credit Counselor or an attorney to assist you.

US Mortgage Fraud Cases:

CHALANA MCFARLAND (Atlanta): This case involves a mortgage fraud property flip scheme which operated from the summer of 1999 through March 2004. This case was worked by the FBI, HUD-OIG, and USPIS.

Chalana McFarland was an attorney who operated her own law firm. She acted as a title agent for title insurance companies as well as the closing attorney for various lenders.

McFarland used the stolen identity of numerous victims to submit false fraudulent loan applications. Appraisals were inflated and straw buyers were used to complete the fraudulent sales of over 100 properties. McFarland paid her identity thief $10,000 per stolen identity, as well as paying the appraiser who inflated property values over $400,000. Fraudulently obtained mortgages valued in excess of $20 million with losses in excess of $12 million.

McFarland and 16 other subjects were indicted. Fifteen have been sentenced, with McFarland receiving 30 years in prison—the largest sentence ever for Mortgage Fraud.

THOMAS FAUNTLEROY/DAVID BOWIE (Newark): This case involves the subjects’ alleged inducement of the FHA to insure mortgage loans valued over $1 million, made by Neighborhood Mortgage (owned by Bowie) to unqualified buyers. In support of the FHA loan applications, the defendants allegedly created and submitted false and fictitious bank statements, leases, IRS Forms W-2, verifications of past mortgage payments, pay stubs, attorney escrow letters, gift letters, verifications of employment, deposit checks, and fraudulent property appraisals.

To date, the following have occurred: one complaint, three informations, two indictments, three arrests, four federal convictions, and one state conviction.

MARK YOUNG (Nevada): This case involves a former Nevada First Residential Mortgage Company branch manager (Young) who directed loan officers and processors in the origination of 233 fraudulent FHA loans valued at over $25 million. Young conspired with other mortgage company employees and with employees of General Realty to manufacture and submit false employment and income documentation for borrowers. Most of the borrowers were illegal immigrants from Mexico. To date, 58 loans with a total value of $6.2 million have gone into default, with a loss to HUD of over $1.9 million. The Nevada First Residential Mortgage Company is no longer in business.

On 09/01/2005, Mark Young was found guilty on 32 counts of submitting false information to HUD, and one count of conspiracy. This case was jointly investigated by FBI, HUD-OIG, and the Nevada Mortgage Fraud Task Force.

RANDALL DAVIDSON ET AL (Cincinnati): Randall Davidson used his companies Knab Mortgage and Capital Properties to commit Mortgage Fraud. He used unsuspecting buyers from Pittsburgh, Pennsylvania, for the purchase of depressed properties in the Dayton, Ohio, area. These properties were purchased at an inflated rate using falsified documents to secure the loans. Davidson maintained a business office in both Pittsburgh as well as Dayton. The closing agent would disburse funds prior to receiving the down payment checks in order to provide Davidson and other co-schemers with money. The closing agent was aware that many of the documents used in order to secure the loans were falsified, but continued to close the loans. Davidson would inevitably receive a large cash profit during the disbursement of funds. Currently the known loss is over $8 million. This case was jointly investigated by FBI and IRS-CID.

ROBERT A. AMICO ET AL (Buffalo): Robert A. Amico and his sons Robert J. Amico and Richard Amico engaged in a large conspiracy with loan brokers, appraisers, and buyers to submit over 100 fraudulent mortgage applications that overstated the value of all houses so that no down payment was made and so that the buyers could qualify for loans that they could not otherwise afford. All of the conspirators plead guilty, with the exception of the Amicos. Some of these conspirators were sentenced to probation and testified at the Amicos trial. Others were sentenced to jail terms of up to five years. After a six month jury trial the Amico sons were convicted and the father died of cancer. Fraudulently obtained mortgage applications were valued at $58 million with losses totaling $14.7 million. Robert J. Amico was sentenced to 17 years in prison and Richard N. Amico was sentenced to 9 years in prison. This case was joint investigation with IRS/CID.

OPERATION CLEAN DEED (Charlotte): Promoters and other industry professionals obtained/brokered loans based on inflated property values and false application information for recruited buyer/investors. Participating attorneys falsified closing documents showing non-existent down-payments and closed the sales as “primary residence” purchases rather than as investments. The excess amount of the inflated loan was diverted to the promoters and other co-conspirators with a payment typically made to the buyer/investor following the closing. Loan payments were not made and houses eventually went into foreclosure. Fraudulently obtained loans valued in excess of $71 million with losses in excess of $9.5 million. To date, 14 subjects have been convicted, including promoters, attorneys, mortgage brokers, and builders.

AMERIFUNDING (Denver): This joint investigation with IRS/CID involved kiting of mortgage loans by utilizing stolen identities to facilitate the scheme. Further investigation determined that the scheme involved over $200 million in fraudulent loans over a 24 month period. One of the subjects obtained fraudulent identities by placing “help wanted” advertisements in a local newspaper. Information from the victims applications were used to apply for mortgage loans between $300,000 and $500,000. The proceeds of the scheme were used to pay personal expenses of the defendants. In a related fraud scheme, the lead defendant paid prior loans and purchased defective properties that were then resold for a substantial profit with inflated appraisals. To date, six subjects have been indicted. Losses totaled $37.5 million and approximately $16 million in assets were seized.

DOTTY PIERRE ET AL (Boston) : Four individuals were indicted with Bank Fraud and Aggravated Identity Theft in connection with a scheme involving the use of stolen identities to obtain mortgage loans. The subjects used stolen identity information to obtain, or attempt to obtain, mortgages worth over $800,000. This case was a joint investigation with the Postal Inspection Service, and Massachusetts State Police.