Latest Trends in Mortgage Fraud Special Agent Eric Mascari HUD Office of Inspector General

1. Latest Trends in Mortgage Fraud Special Agent Eric Mascari HUD Office of Inspector General (317) 226-6303 Ext. 7438 Indianapolis, IN | July 23, 2013

2. Latest Trends in Mortgage Fraud Introduction/Topics of Discussion • Changes in the Federal Housing Administration (FHA) • FHA Fraud Trends and Schemes - Reverse Mortgages (HECM) - Property Flipping - Short Sales - Deed Theft -Loan Modification • Statutes • Case Examples • Questions and Answer

3. Changes in the FHA

4. Latest Trends in Mortgage Fraud FHA Changes • In the early 1990’s, FHA had about 15% of the home purchase market • By 2006, FHA’s market share had been reduced to 3% of all loans nationwide • Currently, FHA’s market share is in excess of 30% • Current Single Family Loan Limit in Marion County is $271,050.00

5. Latest Trends in Mortgage Fraud FHA by the #’s • 2007 – 580,813 FHA Loans • 2008 – 1,467,252 FHA Loans • 2009 – 2,022,250 FHA Loans • 2010 – 1,623,934 FHA Loans • 2011 – 1,150,724 FHA Loans • 2012 – 1,239,874 FHA Loans

6. Latest Trends in Mortgage Fraud FHA Loan Volume 2006 -2012

7. Latest Trends in Mortgage Fraud

8. Latest Trends in Mortgage Fraud FHA may need $943-million bailout (Chicago Tribune 4/10/13) The Obama administration's proposed budget projects that the FHA would need a $943-million bailout this year to stabilize its shaky long-term finances. As banks pulled back on lending during the recession, the Federal Housing Administration's role in the market expanded. Now its long-term finances are being dragged down by bad loans it backed from 2007 to 2009. Above, a foreclosure sign at a bank-owned home for sale in Las Vegas in 2010. (Robyn Beck, AFP/Getty Images / November 8, 2010)

9. Reverse Mortgage (HECM)

10. Latest Trends in Mortgage Fraud Reverse Mortgage • People over 62 convert portion of their equity into cash or line of credit. Credit & Employment are non-issues • No repayment until the borrower no longer uses the home as their principal residence • HECM can also be used to purchase primary residence • Maximum Insurance amounts exceed $600,000 depending on locality • HUD has insured over 395,000 HECM Loans since 2008

11. Latest Trends in Mortgage Fraud HECM Frauds - False Mortgage Payoff • Subject creates a fake mortgage company and “lends” funds to the borrower (No $ changes hands but the paper is filed with the County Recorder) • The Subject refinances the borrower into a HECM. At closing the title company pays all debts up to and including the fake mortgage. -Subject may file subordinate mortgages, Promissory Notes, and other paperwork to create the illusion that the borrower owes money

12. Latest Trends in Mortgage Fraud 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 from the HECM proceeds

13. Latest Trends in Mortgage Fraud HECM Fraud – Unauthorized Recipient • Individual, often family members, may keep HECM payments after the authorized recipient dies or permanently leaves the residence, i.e. Nursing Home or Assisted Living

14. Home Flipping Schemes

15. Latest Trends in Mortgage Fraud Property 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 been shut out from buying affordable properties” said FHA Commissioner David H. Stevens. “This action will enable our borrowers, especially first-time home buyers, to take advantage of this opportunity.” • Waiver was recently extended until 2014

16. Latest Trends in Mortgage Fraud Property Flipping • From HUD Secretary Shaun Donovan “this change in policy is temporary and will have strict conditions and guidelines to assure that predatory practices are not allowed” • 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 for a 90-day period of time.

17. Latest Trends in Mortgage Fraud Property Flipping, Continued • Investor buys & sells property on same day or shortly thereafter • Second sale had questionable appraisal/s • Second buyer prepares false documents in order to qualify for mortgage loan • Second sale immediately goes into default • Creates a artificial market/high property taxes/losses to the Government and the lender

18. Latest Trends in Mortgage Fraud

22. Appraisal Fraud

23. Latest Trends in Mortgage Fraud Appraisal Fraud • Appraiser 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 interests • Appraiser ID Theft

24. Short Sale Fraud

25. Latest Trends in Mortgage Fraud Short Sale Fraud • Investor Purchases property from bank at a lower price while new buyer is recruited • Many of the offers are “low balled” • Seller/Buyer/All Parties to the transaction fraudulently advise lender: • Sale is “Arm’s Length” • No Hidden Agreements Involved • No Party will received proceeds except as set forth on the HUD-1

26. Latest Trends in Mortgage Fraud Short Sale Fraud • Fraudster will find an end buyer • Double closing is possible, i.e. (A to (B) to C) • Broker Price Opinion (BPO) is influenced to yield a lower value • Lender is defrauded into accepting an artificially “LOW” price on the property

27. Warranty Deed Theft

28. Latest Trends in Mortgage Fraud Warranty Deed Theft • Property researched to ensure vacancy • In many cases, the property is in foreclosure or near foreclosure • Property has warranty deed recorded, which indicates the property is in receivership • Property transferred to an individual through a second warranty deed

29. Latest Trends in Mortgage Fraud Warranty Deed Theft Schemes • Cash out refinance (HELOC) • Subsequent sale to straw borrower • Section 8 Rental • Conventional/Market Rate Rental • Security Deposit Collection • Earnest Money Deposit Collection

30. Loan Modifications

31. Latest Trends in Mortgage Fraud Loan Modification Red Flags • 99% Success Rate • Charging fees up front • Money Back Guarantee • Attorney Based Legal Team

32. Federal and State Mortgage Statutes

33. Latest Trends in Mortgage Fraud Federal Statutes • 18 USC 1010, False Statements to HUD (Felony) • 18 USC 1012, False Statements to HUD (Misdemeanor) • 18 USC 1341, Mail Fraud • 18 USC 1343, Wire Fraud • 18 USC 1344, Bank Fraud • 18 USC 1014, Loan Fraud (Statute is now 10 years)

34. Latest Trends in Mortgage Fraud Indiana State Statutes • IC 35-43-5-8, Fraud on a Financial Institution • Class C Felony • IC 35-43-4, Theft • Class C Felony • IC 35-43-5-2 Forgery • Class C Felony

35. Latest Trends in Mortgage Fraud Questions??

36. HUD OIG WEBSITE www.hudoig.gov