NATIONAL NEWS

The United States is seeing a dramatic increase in reported mortgage fraud. To combat these crimes, numerous government agencies are teaming up to create task forces to bust mortgage fraud schemes and spread awareness across the country.

In April, two owners of a Minneapolis Real Estate company pleaded guilty to mortgage fraud in connection with a scheme involving at least 162 properties and nearly $35 million in proceeds. How did they do it?

According to a federal lawsuit, they bought and flipped homes using inflated appraisals, and then profited by selling the homes at inflated markups to buyers believed to be straw buyers.

Ultimately the scheme fell apart, leaving the investors owing mortgages that were far greater than the property value. Most of the properties are now in foreclosure, and the U.S. Attorney’s office said that the fraudsters face a maximum penalty of 20 years in federal prison.

This lawsuit is just one example of government agencies fighting back against mortgage fraud. In another case, officials from the U.S. Department of Justice, the Federal Bureau of Investigation (FBI) and the Internal Revenue Service busted a California-based mortgage fraud ring responsible for a major equity-stripping and foreclosure-rescue scam that had impacted more than 100 properties.

What is Mortgage Fraud?
The FBI defines mortgage fraud 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.”

Mortgage fraud is divided into two categories: fraud for property, in which applicants lie or misrepresent information to purchase a property for a primary residence; and fraud for profit, which often involves multiple loans and efforts to gain illicit proceeds from property sales. The latter category is considered most harmful by law enforcement and the mortgage industry.

According to the FBI, recent statistics suggest that the increase in foreclosures gives criminals more opportunities to exploit homeowners seeking financial help. In one common scheme, scammers convince homeowners that they can avoid foreclosure by conducting deed transfers and paying up-front fees. This foreclosure-rescue scam often involves a manipulated deed process that involves preparing forged deeds. In some cases, perpetrators may sell the home or secure a second loan without the homeowners’ knowledge, stripping the property’s equity for personal gain.

While foreclosure scams vary, they are often used in conjunction with other fraudulent schemes. For example, scammers may see foreclosure-rescue scams as a new way to fraudulently acquire properties to illegally flip them and skim equities.

Victims of mortgage fraud encompass anyone who has a stake in Real Estate, including borrowers, mortgage industry entities, and people living in neighborhoods that are impacted by mortgage fraud. Lenders face high foreclosure costs, broker commissions, reappraisals, attorney fees, and other expenses as the result of mortgage fraud. As homes impacted by mortgage fraud are sold at inflated prices, homes in surrounding neighborhoods also become inflated. When property values increase, property taxes go up as well, which hurts legitimate homeowners.

On the Rise
FBI director Robert Mueller said that the FBI is seeing a "tremendous surge" in mortgage fraud investigations. According to Robert, the FBI is investigating about 1,300 mortgage fraud cases, including 19 that involve subprime lending practices by financial institutions.

Statistics confirm that mortgage fraud is on the rise. Losses from mortgage fraud, such as lying on loan applications and inflated appraisals, will cost the industry about $2.5 billion annually for several years, according to a report from Tower Group, a research firm.

According to the report, the $10 trillion U.S. mortgage industry has become a haven for fraud, as loose lending standards and quick price appreciation increased opportunities for borrowers and lenders to lie on loan applications. In many of the "fraud for profit" schemes, Real Estate professionals—such as appraisers, agents and loan officers—work in teams. They falsely inflate a home's value, get a mortgage to buy it, split the profits, and then disappear.

According to the FBI, the top mortgage fraud areas are California, Florida, Georgia and Illinois.

Who’s Fighting Back?
Fortunately, it is becoming increasingly difficult and risky to pull off mortgage fraud and get away with it. The FBI is proactively working with the mortgage industry to combat mortgage fraud crimes. The bureau signed a memorandum of agreement with the Mortgage Bankers Association (MBA) to promote the FBI’s Mortgage Fraud Warning Notice, which makes it illegal to make any false statement regarding income, assets, debt or matters of identification, or to willfully inflate property value to influence the action of a financial institution.

In the past year, the FBI created 34 mortgage fraud task forces and is working with investigators from various departments, such as Housing and Urban Development, Treasury, and Veterans Affairs. These task forces investigate suspicious activity, including inflated pricing and false documentation by mortgage brokers, lenders, appraisers, Real Estate firms and individuals.

In addition, state legislators are stepping up to fight the battle against mortgage fraud. Maryland and Utah are the most recent states to sign into law two measures aimed at prosecuting those who participate in such fraud.

"Mortgage fraud is a very real problem, both legally and economically,” said U.S. Attorney McGregor Scott in a recent FBI statement. “It is our duty to do all we can to restore faith and confidence in the marketplace by placing these thieves where they belong: in prison."