Latest Trends in Mortgage Fraud

1. Latest Trends in Mortgage Fraud Fernando Ramos, ASAC HUD Office of Inspector General Tampa, Florida

2. Intro/Topics of Discussion • Changes in the FHA • FHA Fraud Trends and Schemes • Reverse Mortgages • Flipping • Enforcement Efforts - Remedies

3. Changes in the FHA • In the early 90’s, FHA had 15% of the home purchase market • By 2006, FHA’s market share had been reduced to 3% • Currently, FHA’s market share is +30% • Increased FHA loan limits nationwide, over $300,000 in Florida for single family unit

4. Changes Continued, FHA Annual Totals • 2007: 580,813 FHA Loans • 2008: 1,467,252 FHA Loans • 2009: 2,022,150 FHA Loans • 2010: 1,623,934 FHA Loans • 2011: 1,150,724 FHA Loans • 2008 to Present: 6,561,776 FHA Loans

5. FHA Limits • Hillsborough County $290,000+ • Orange County $350,000+ • Duval County $387,000+ • Palm Beach County $420,000+ • Monroe County $700,000+

6. Reverse Mortgage/HECM • People over 62 convert portion of their equity into cash, credit and employment are non-issues • No repayment until the borrower no longer uses the home as their principal residence • HECM can be used to purchase a primary residence • Maximum insurance amounts exceed $600,000. • HUD has insured 380,000 HECM’s since 2008

7. HECM Frauds-False Mortgage Payoff • Perpetrator creates a fake mortgage company and “lends” funds to the borrower (no money changes hands but the paper is filed with the recorder). • The subject refinances the borrower into a HECM. At closing, the title co. pays all debts to include the fake mortgage.

8. HECM Fraud-Annuity • Financial professionals fraudulently convince HECM borrowers to invest proceeds in a financial product, such as an annuity. • The financial professionals receive increased fees and divert mortgage pay-outs.

9. HECM Fraud-Unauthorized Recipient • Individual, often family members, may keep HECM payments after the authorized recipient dies or permanently leaves the residence, ie. Nursing home or assisted living.

11. Palm Beach County loan officer sentenced in reverse mortgage fraud • John Incandela, 25, of Palm Beach, was sentenced by U.S. District Court Judge William P. Dimitrouleas in Fort Lauderdale to 41 months in prison, three years of supervised release and ordered to pay more than $1.9 million in restitution, according to a news release from the U.S. Department of Justice.

12. “Flipping” • "This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed," Donovan said. • In today's market, FHA research finds that acquiring, rehabilitating and the reselling of these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

13. “Flipping, Continued” • The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities. • "FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties," said FHA Commissioner David H. Stevens. "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity." • Waiver was recently extended until February 1, 2013

14. Property Flipping • Investor buys & sells property on same day or shortly thereafter • Second sale has questionable appraisal • Second buyer prepares false documents in order to qualify • Second sale goes into default • Creates artificial market/high property taxes/losses to govt. and lender

16. Department of JusticeFOR IMMEDIATE RELEASE Tuesday, April 17, 2012 Loan Officer Pleads Guilty for Role in Mortgage Fraud Scheme That Resulted in More Than $6.5 Million in Losses • Curbelo admitted that he conspired with others to create and submit false and fraudulent Federal Housing Administration (FHA) mortgage loan applications and accompanying documents to a lender on behalf of the unqualified borrowers. Curbelo and others offered the borrowers cash back after closing as an incentive for them to purchase the units. These payments were not disclosed properly during the loan application process. According to court documents, the closing costs were paid on behalf of the borrowers by interstate wire. After the loans closed, the unqualified borrowers failed to meet their monthly mortgage obligations and defaulted on their loans.

18. Appraisal Fraud • Does not look at previous sales • Comparables are used for multiple files • Figures are backed into contract price • Pictures vary widely from comparables • House appraised “as is” when contingent upon stipulations • Appraising house you own by hiding ownership • Appraiser’s ID Theft

19. Administrative Actions Program Fraud Civil Remedies Act: • Double damages not to exceed $150,000; • Up to $7,500 penalty for each false statement; • Handled by HUD attorneys False Claims Act: • Treble damages; • Up to $11,000 Penalty for each false statement; • Handled by DOJ Civil (parallel proceedings)

20. Administrative Actions, cont. • Debarments and suspensions- usually after judicial action taken against Subject/Entity. These are government wide, i.e., no business allowed with any federal agency; Posted on Excluded Parties List Government Wide; • Limited Denial of Participation (LDP) – Agency specific, i.e., HUD only; • Civil Money Penalties- FHA Commissioner is authorized to initiate CMP’s against various mortgagers with varying fee limits; • Mortgagee Review Board- headed by the FHA Commissioner, can take following actions: letter of reprimand, probation, suspension and removal from the mortgage insurance programs

21. Federal Mortgage Statutes • 18 USC 1010, False statements to HUD (Felony) (2 years) • 18 USC 1012, False statements to HUD (Misdemeanor) (less than one year) • 18 USC 1341 (Mail Fraud) 20 -30 years depending if the act impacts a financial institution; can be intra-state • 18 USC 1343 (Wire Fraud) same as above (must be interstate or international) • 18 USC 1344 (Bank Fraud) 30 years

22. Non-Traditional Mortgage Fraud Statutes • 18 USC 1028 (Fraud and related activity in connection with I. D. documents) • 42 USC 408 (Misuse of SSN)

23. Investigative Techniques • Working our way up: Use of straw-buyers as cooperating informants DOJ wants our focus on Real Estate Professionals

24. Investigative Techniques cont. • Use of Task Forces as force multiplier: We work with FBI; Secret Service; Postal OIG; SSA; and many other Federal and State Agencies as well as Industry Professionals

25. Investigative Techniques cont. • Covert Operations: Consensual Monitoring Under Cover Confidential sources Cooperating subjects

26. Enforcement Efforts • Operation Malicious Mortgage, June, 2008 • Operation Malicious Mortgage II, June 2009 • Operation Stolen Dreams, June, 2010

27. HUD OIG Hotline 1-800-347-3735