Mortgage Fraud-Appraiser Risk Management

1. Mortgage Fraud-Appraiser Risk Management • Course Number 027 • Instructor ____________ Phone: ______________ cell or ______________home/office Email: ________@______

2. Mortgage Fraud and Predatory Lending: What Every Agent Should Know Second Edition Written By Marie S. Spodek, DREI, GRI®, and Jerome Mayne Appraisal Supplement, George Harrison, phded

3. Course Learning Objectives • When you complete this course you will be able to: • Understand USPAP’s directives on fraud • Review the history of mortgage fraud in the mortgage system • Identify the fraud indicators • Read how frequently mortgage fraud occurs and is detected • Understand the characteristics of Predatory Lending and Illegal Flipping • Review Federal Activities regardingfraud

4. Introduction • Historically mortgage fraud has always been in existence • Fraud is the “intentional perversion of truth in order to induce someone to part with something of value or to surrender a legal right” (Webster’s Dictionary)

5. Introduction • Borrowers greed prompted misrepresentation on loan applications such as stating their intent to occupy a residence when their real intent was to rent. • Mid-2000s other types of fraud became more prevalent such as the acts to deceit and conspiracy to deceive primary and/or secondary market lenders for the purpose of pocketing large sums of money.

6. The Appraiser and Risk Management • The appraiser is a member of the real property financing system appraiser The appraiser is expected (under USPAP) to be independent, impartial and objective • The appraiser is also required to be competent to complete any appraisal assignment they accept • Unfortunately in most cases the scheme of mortgage fraud would not have been successful without the participation of the appraiser • One of the appraiser’s most significant tool to manage their risk is their workfile • Included in this handout is the extract from the Ethics and competency rule of USPAP. Its critical to review those rules to protect from potential involvement with fraud through adherence

7. The Appraiser and Risk Management • Special emphasis must be given to the NEW Record Keeping Rule • Included in this handout is the extract from Chapter 5 of the HUD Handbook which provides a guide that may be used for discussion in the class of what might be expected to be found in the appraiser’s workfile. • Although the book used is primarily written for real estate agents it is also beneficial for appraisers.

8. FHA Work File Example extract HUD Handbook 4150.2 Sec 5-3

9. FHA Work File Example extract HUD Handbook 4150.2 Sec 5-3

10. FHA Work File Example extract HUD Handbook 4150.2 Sec 5-3

11. Introductory Case StudiesCase Study 1-Fraud in a Down Market • “The appraiser was in collusion with the broker and, • Knowing that the house was worth about $200,000 owing a balance of about $180,000; he appraised it for $250,000. • The broker told the owner how lucky she was and that they would ask the full $250,000 in a listing. • The broker reported the property was under contract but there was no real subsequent offer • Under the advice of this broker (implying to the seller the market was falling) the seller took the property off of the market • The seller being desperate to sell and telling the broker that foreclosure was imminent the broker agreed to purchase the property for $165,000 • After the sale the seller declared bankruptcy and during the hearings the suspicious judge reported the matter to the FBI

12. Introductory Case StudiesCase Study 1-Fraud in a Down Market (cont) Questions Might the broker have committed some illegal act? If so, what? 2. Might the appraiser have committed some illegal acts? If so what? 3. Might both (broker and appraiser) be liable to the homeowner for damages? 4. What was necessary for this to occur? 5. Is it still possible for this to occur?

13. Case Study 2-Fraud in a Stable Market • Residential area is constructed near a major urban area by a real estate developer • The cost to construct, including the lots, is $400,000 +/- each • Spec houses were built on several lots as has as $500,000 • The developer’s broker and he jointly decided to improve productivity which included soliciting the help of a mortgage broker who: • Identified local celebrities (primarily television) who acted as straw buyers • The deed would actually be in their name but a side contract existed retaining ownership by the developer • Three of these transactions were completed without appraisals, for more than $600,000 each • Other properties were listed in the $600,000 range • Appraisal was provided using the three “straw buyer sales” for which the state appraisal board asked “why those three sales” • Appraiser did not mention the source being the developer stated he often relied on builder data in new subdivisions of non-MLS sales

14. Introductory Case StudiesCase Study 2-Fraud in a Stable Market • Questions • Did the developer do anything unethical? • 2. Did the developer do anything illegal? • 3. Did the broker do anything unethical? • 4. Did the broker do anything illegal? • Did the appraiser do anything unethical? • 6. Did the appraiser do anything illegal”

15. Chapter 1: Financial Crisis

16. Housing Market Collapse • Record number of foreclosures • Continued mortgage fraud schemes • Appraiser reforms

17. Dodd-Frank Reform Act • Residential loan originators • Minimum standards for mortgages • Standards for appraisals

18. Industry Insiders • Collaboration • Collusion

19. U.S. Mortgage Fraud • Affects real estate values • Rental markets

20. Mortgage Fraud in the United States • Fraud • 1974–1975 • 2000–2005

21. Effects of Foreclosures • Boarded up homes • Negative feelings • Difficult to find buyers • Lower tax appraisals • Eroded tax base • Fewer community services

22. Effects of Foreclosures • Foreclosed property • Lowers for one-eighth mile • 0.9% to 1.44% • Each foreclosed Property • Reduces by 1.8% • There goes the neighborhood

23. www.ftc.gov/idtheft Factors Leading to Foreclosures • Effect of credit scores • Personal bankruptcy • Poor loan servicing • ARM adjustments • Identity theft • Mortgage fraud and illegal flipping • Predatory lending

24. SAFE Act • License mortgage loan originators (MLOs) • Exemption individuals • Minimum standards • NMLSR

25. Chapter 2: Mortgage Basics for Real Estate Licensees

26. Loan Application • Qualify borrowers • Income • Asset • Credit information • Qualify security (appraisal)

27. Roles of Professionals • Mortgage loan originators (MLOs) • Loan processors • Underwriters • Appraisers • Importance of proper risk assessment

28. Impact of Liens • Promissory/mortgage note • Mortgage/deed of trust

29. Value Time Cost of Borrowing Money Factors • Term of loan • Time value of money • Assessing borrower’s borrowing history • Loan amount • Security for loan

30. Loan Sources • Government-assisted programs • FHA • VA • Private sector programs

31. Loan Types • Fixed-rate mortgage (FRM) • Adjustable-rate mortgage (ARM)

32. Exotic Loans • Interest-only (IO) loans • Pay-option ARMs • Negative outcomes

33. Underwriting Criteria • Income • Credit • Assets/down payment • Occupancy

34. Alternatives to Traditional Requirements • Full documentation loan • Lite doc/alt doc loan • No doc loan • Stated income loan • Seller carryback loan • Combinations

35. Role of Secondary Market • Primary market • Secondary market • Securitization • Tighter standards • More losses

36. Manage Buyer Expectations • Lenders who specialize • Meet buyers’ needs • Use reputable lenders • Avoid unrealistic expectations

37. Chapter 3: Mortgage Fraud

38. Tracking Suspected Fraud • Financial Crimes Enforcement Network (FinCEN) • Financial Institution Fraud Unit (FIFU) • Suspicious Activities Reports (SARs) • Suspicious Mortgage Activity Report (SMARt Form)

39. Fighting Identity Theft • Fair and Accurate Credit Transactions Act (FACTA) • Identify warning signs • How to detect • Actions to be taken • Update programs • Mortgage buy backs

40. Mortgage Fraud • Define • Deception, false facts • Collusion, false premises • Lying • Types • Fraud for housing • Fraud for profit (and business)

41. Penalties for Fraud • Felonies • Lying on loan application • Lying about purchase price • Lying on mortgage application • Federal and state fines • Imprisonment

42. Red FlagsPossible Mortgage Fraud • Shady practices • Dual contracts/double HUDs • Hidden addenda • Silent mortgage • Inflated appraisals

43. Red FlagsPossible Mortgage Fraud • False information on applications • Straw buyers • Unreported debt • Rebates to borrowers • Creative financing

44. Chapter 4: Predatory Lending

45. Dilemma for Low Income and Poor Credit • Federal Housing Administration (FHA) loans • Lost market share • Regained popularity • Growth of subprime market • Concentration of credit problems • Little or no credit history

46. Signs of Predatory Lending • Subprime • Not always predatory • Legal interests not in best interest of borrower • Lack of competition from prime lenders

47. Predatory Lending • Higher interest rates • Adjustable-rate mortgages (ARMs) • Excessive origination and closing fees • Prepayment penalty fees • Binding mandatory arbitration (BMA) • Yield spread premiums (YSPs) as kickbacks

48. Signs of Predatory Lending • Large origination fees • Prepayment penalties • YSP to loan originator • Steering and targeting • Low entry arms • Promise to fix with more loans • Flipping loans • Hiding tax and insurance payments

49. Steering and Targeting • Elderly • Reverse mortgages • Racial profiling • Immigrants • Those with low credit scores • Flipping loans • Unnecessary products • Misleading or no information

50. Changing the Climate • Automated underwriting systems • More regulation/SAFE Act • Prohibit appraisal fraud/Dodd-Frank Reform Act • Consumer education