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Mortgage Fraud and Other Hazards in the Title Industry Mary K. Alissandratos Underwriting Counsel First American Title Insurance Company

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2011 First American Financial Corporation. All rights reserved. NYSE: FAF (year of creation 2011) First American Title Insurance company makes no express or implied warranty representing the information presented and assumes no responsibility for errors or omissions. FIRST AMERICAN TITLE is a trademark owned by First American. The following presentation is for informational purposes only and is not and may not be construed as legal advice. First American is not a law firm and does not offer legal services of any kind. No third party entity may rely upon anything contained herein when making legal and/or determinations regarding title practices. You should consult with an attorney prior to embarking upon any specific course of action.

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Mortgage Fraud is a Significant Threat To our economy To stability of the nations housing market To peace of mind of millions of homeowners

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How Did We Get Here? Past generations dealt with local banks Personal knowledge of the borrowers Changes in Technology Internet provides easy access to title and personal information Identity Theft

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Just Read the News

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More bad news.

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And still more

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And on and on.

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US Housing Bubble Peak in housing hit in 2006 with national builders like Pulte reaching 14.6 Billion profit Housing prices began to decline in 2007 Housing bubble burst causing 2007-2009 economic recession 2008 Subprime lenders filed bk and collapsed 2008-9 US govt gives $900 Billion to special loans and rescues (FNMA, FDMC and HUD)

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Economic Consequences Housing prices fall Homeowners equity if wiped out Holders of the mortgage debt suffer loss Increased foreclosures Decline in sales Job losses Increased unemployment

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Fastest White Collar Crime in the US Enhanced penalties for fraud Increased maximum sentence of imprisonment from 20 to 30 years Increased maximum fine from $250,000 to $1 million Expanded the statute of limitations from 5 years to 10 years

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Obamas New Legislation Fraud Enforcement and Recovery Act Provides tools to investigate and prosecute fraud Authorized funds to hire prosecutors and investigators at Justice Dept. Double FBI mortgage fraud task force Helping Families Save Their Home Act Provides training and education to fraud task force Establishes nationwide Mortgage Fraud Task Force within the Justice Department

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Two Basic Kinds of Mortgage Fraud Fraud for Property Fraud for Profit

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Fraud for Property Also known as Fraud for Housing Accounts for 20% of mortgage related fraud Involves Borrower as perpetrator on single loan Borrower makes misrepresentations on: 1.Income 2.Personal Debt 3.Property Value 4.Conceals source of down payment Borrower wants property and intends to pay debt. Often coached by realtor, broker, lender, etc.

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Fraud for Profit Accounts for 80% of mortgage related fraud Involves defrauding one or more of the parties to the transaction Involves taking cash out of the deal Causes losses of 15 to 25 billion a year

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Who is doing all this? Mortgage Fraud perpetrated by real estate Industry insiders accounts for 80% of all reported mortgage fraud losses. Mortgage Brokers Loan Officers Loan Processors Underwriters Title Insurers

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Who is doing all this. cont Correspondents Appraisers Real Estate Brokers and Agents Closing and Settlement Agents Builders and/or Developers Third Party Service Providers (Notary) Inspectors Property Sellers Property Buyers Loan Workout Facilitators Transaction Facilitators

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Property Flipping Property is purchased, falsely appraised at higher value and then quickly sold. Fraudulent appraisals Doctored loan documents Inflated Buyer Income Kickbacks to Buyer, Investors, Brokers, Appraisers, Etc.

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Flipping Red Flags Ownership changes two or more times in a brief period Two or more closings occur almost simultaneously Seller may not be on title Transaction is not arms length Rapid Increase in Sale Price over short period Unusual Cash payouts requested on HUD

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Silent Second Buyer of a property borrows the down payment from the seller through the issuance of a non- disclosed second mortgage. Primary lender believes buyer has invested own money, when, in fact, it is the seller Second down payment may not be recorded to further conceal it from primary lender

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Nominee Loans/Straw Buyers Identity of the borrower is concealed through use of a nominee who allows borrower to use the nominees name and credit history to apply for loan. Family Member/Identity Theft Kickbacks Use of Fictitious or stolen identity in loan app Applicants name, personal id info, credit history used w/o knowledge of actual person Inflated Appraisals

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Equity Skimming Investor may use a straw buyer, false income documents and false credit reports to obtain a mortgage loan in the straw buyers name. After closing, straw buyer quit claims property to investor Investor does not make any mortgage payments Investor rents property, collects profits until the property is foreclosed.

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Air Loan Non-existent property loan where there is usually no collateral. Broker invents property and borrowers Establishes account for payments and maintains custodial accounts for escrow Set up office with bank of telephones (employer, appraiser, credit agency, etc for verification purposes)

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Liar Loan Also known as Stated Income Loans, NINA (No Income, No Asset Loans), or NINJA (No Income, No Job, No Assets). Originally created for high-income individuals who did not wish to divulge all assets and incomes. Loans simply required applicant state base income and minimal assets To compensate for higher risk, higher interest rate. In fraudulent transactions, loans provided to applicants who could not otherwise qualify for loan.

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Loan Slamming Borrower applies for several loans at the same time on same property. Times closings so they occur within a few days or hours of each other. Transaction occur so close to each other that they often go undetected. Title Insurance Claims due to gap issue.

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Property Theft Targeted at owners who leave their homes for significant periods throughout the year. Culprit moves into house Records fraudulent deeds and releases. Sells property to unsuspecting buyer *Local scheme: Checking tax records

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Foreclosure Rescue Schemes Perpetrator identifies homeowners who are at risk of defaulting on loans or whose homes are already in foreclosure. Perpetrator misleads the owner that they can save the home in exchange for deed and upfront funds Perpetrator may file fraudulent release May make cosmetic improvements Re-sell the house and take funds Homeowners get foreclosed anyway Defrauded buyers get nothing.

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Asset Rentals Brokers misrepresent borrowers ability to qualify for loan by fabricating employment history, income verification, credit records and/or bank statements. For a fee, they will transfer funds into borrowers account so that it looks like he has enough to close with ample reserve. Closing takes place and funds transferred back to asset rental company

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Asset Rentals contd Issue fake appraisals Fake credit reports Even someone elses social security #

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Chunking Borrower attends a seminar about how to invest in real estate with no money down. Presenter encourages borrower to invest in 3 or more properties. Acts as borrowers counsel or agent. Under perpetrators guidance, borrower completes applications and submits them to multiple lenders for multiple properties.

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Chunking Contd Scheme requires appraiser, broker and/or title professional to insure that the borrower does not have to bring money to closing. Borrower may receive proceeds from 3 closings but the perpetrators take proceeds on other 7 properties. Lenders forced to foreclose properties which borrowers have no ability to pay.

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Short Sale Fraud Homeowner is approved by lender for short sale but terms of transaction are not followed. Fraudulent low appraisal provided Sell low to family member who sells quickly for inflated price Related parties split the profit Government measures taken to help prevent this

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Neighborhood Stabilization Program (NSP) Fraud Fraud that came about with establishment of a government program that sought to rebuild neighborhoods that had a high rate of foreclosures and dropping values. HUD program provided funds to rebuild and re- develop failing neighborhoods Perpetrators would establish non-profit organizations and apply for funds Funds used to enrich perpetrators rather than rebuild neighborhoods

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Home Equity Conversion Mortgage (FECM) Fraud Occurs when perpetrators contact elderly individuals and encourage them to take out reverse mortgages based on inflated appraisals. Paid in lump sum to elderly borrower who pays large portion to perpetrator Not detected until homeowner dies Family finds all the equity taken out of property Too proud to tell family members

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Affinity Fraud Perpetrators exploits trust and friendship that exists in groups of people who have something in common. Pretend to be a member of the group (religious, military, ethnic, professional, workplace, elderly, fitness/gym) Immediate level of trust Some members have invested and made high returns

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Affinity Fraud Contd Become advocates for the scheme Loyalty to the group Embarrassment deter members from reporting

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Strategic Default Decision by borrower to stop making payments and default on debt despite financial ability to pay. Homeowner owes more money than property is worth Sudden default with no prior delinquency history Borrower cannot adequately explain sudden default

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Strategic Default Contd Often followed by request for loan workout Borrower is current on all other financial obligations Borrowers financial info indicates conflicting spending, saving and credit patterns that do not fit a delinquency profile

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Identity Theft One of the largest components of both Fraud for Property and Fraud for Profit is Identity Theft. Laptops are stolen with sensitive information Documents containing sensitive information are not properly disposed of or shredded Employees leave documents out visible for others to view and access them Sensitive information is discussed in public areas where they can be easily overheard

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People At Greatest Risk of Mortgage Fraud Elderly Retired Low Income Fixed Income Minimum or no education Pride prevents disclosure to family members

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Fraud Found in the Following Vehicles Power of Attorney Mail Away Closing Questionable or Expired ID Seller is a business entity or LLC that recently came into title Hiding information from lenders or other parties Suspicious releases

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Fraud Found in the Following Vehicles Contd Forged documents (Do signatures match?) No consideration stated on deeds Related parties Terms change over the course of the transaction Asked to prepare documents not called for in the transaction Buyer funds provided by different party Unusual payouts in the HUD

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How Can We Prevent Fraud? Carefully check all aspects of parties ID Knowing our customers Checking lenders, realtors, title agents licensing status and if complaints have been filed against them Always receiving lender approval on HUD Accepting and distributing funds directly to the appropriate entity or person

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How Can We Prevent Fraud Contd Prohibit employees from notarizing signatures they did not witness Not accepting closing instructions, payoffs, releases, etc. from third parties not involves in transaction Keeping all matters pertaining to closing in strict confidence Report mortgage fraud

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Cases of Tennessee Mortgage Fraud Closing agents showing second mortgage on HUD but diverting funds to operating account for costs and personal use. Calls advising out of country check will be coming for closing as professional will be moving into area. Shortly thereafter, urgent call to wire funds back as plans have changed. Check has not had time to clear and is no good

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Cases of Tennessee Mortgage Fraud Contd Checking county Trustee and Registers records for mailing address for tax bill. File release, fraudulent deed and sell preperty. East Tennessee scam involving NC minister group. Cabins in Smokey Mountains Diverting funds from escrow accounts for personal use instead of escheating them to state Filing fraudulent deeds and releases

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Other Hazards in the Title Industry Foreclosures Deeds in Lieu of Foreclosure Short Sales

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Foreclosures Who is the holder of the note? Assignments not required to be recorded in TN Was proper notice provided to all interested parties? Was the adjournment according to statute? Was the appointment filed timely? Publication run in the correct county and according to statute?

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Foreclosures Contd Possible errors in publication, legal description, trustees deed Did all the trustees who were appointed sign the Trustees Deed? Is the legal description correct? Special Warranty Deed provides no warranty except that they own the property and convey it in REO due to the foreclosure

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Deeds in Lieu of Foreclosure Property is conveyed to lender warts and all Nothing is wiped out as in a foreclosure sale Releases must be filed for the trust deed for which the DIL was given before closing in REO Reservations by bank

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Short Sales Often take long time for bank approval to close Restrictions by bank and reservations in deed All lienholders must agree to short sale HUD requirements are strict and must be approved Forged Bank of America payoffs on short sales