Mortgage Fraud & The

Appraiser• Presented By:

• Douglas G. Winner

• Certified General Real Estate Appraiser• AQB Standards Instructor• NC Instructor of Real Estate And Appraisal• A Director, Past President and a Founder of the North Carolina Professional Appraisers

Coalition• A Director of the National Association of

Appraisers

The Recent Financial Collapse• Fraud

• Over Valuation of Collateral

• Market Correction

• Loss of Consumer Confidence

• More Market Correction

• Under Valuation of Collateral

• Stricter Lending Requirements

• More Market Correction

• Supply and Demand out of Balance

Office of Regulatory Analysis

Financial Crimes Enforcement Network

An Industry Assessment based upon Suspicious

Activity Report Analysis November 2006

Introduction The US had experienced substantial growth in mortgage lending markets and of innovative loan products that expanded consumer access to home finance. At the same time there was a significant increase in filings of Suspicious Activity Reports (SARs) pertaining to suspected mortgage loan fraud.

Loans Increased 33% in 2003

The Federal Financial Institutions Examination Council reported an increase in the number of mortgage loans beginning in 2003: “The 2003 data include a total of 42 million reported loans and applications, which is an increase of about 33 percent from 2002, primarily due to a significant increase in refinancing activity (approximately 41 percent).”

Loan Fraud Increased 92%Suspicious Activity Reports (SARs) on

mortgage loan fraud increased over 92% between 2003 and 2004.

The increase in filings may be attributed to an increase in overall mortgage lending concurrent with the decline in interest rates in the 2002 – 2005 timeframe and a broader awareness of this fraudulent activity

Fraud for Property

Generally committed by home buyers attempting to purchase homes for their personal use.

Fraud for Profit

Often committed with the complicity of industry insiders such as mortgage brokers, real estate agents, property appraisers, and settlement agents (attorneys and title examiners).

Typical fraudulent activities associated with this category in the SAR filing sampling are:

appraisal fraudfraudulent flippingstraw buyersand identity theft.

Vulnerabilities

Filers reported use of the telephone or Internet in origination of mortgage loans on 106 reports of mortgage loan fraud (less than one percent). The following chart depicts the reports of suspected fraudulent loans originated via telephone or Internet since 1998. (Note that the filings for 2006 occurred during the first three months.)

Increase in Phone/Internet Apps

Sub-prime loans in SARs reporting suspected mortgage loan fraud.

Mortgage broker originated loans

The National Association of Mortgage Brokers reported that as many as two-thirds of mortgage loans were then originated by mortgage brokers. There were no national standards for licensing and oversight of mortgage brokers. Some states license mortgage brokerage offices, but not individuals; 24 states had no specific educational or experience requirements for mortgage brokers; and only a few states required criminal background checks on mortgage brokers making it possible for unethical individuals to move from one mortgage brokerage firm to another.

Mortgage broker-originated loans that involved suspected loan fraud. Reports filed during the first quarter of 2006 equals the total number of reports filed in all of 2004.

Suspicious Activity Reports

Increasing incidence of identity theft in conjunction with mortgage loan fraud in this study.

Fixed income and elder exploitation

Characterizations of Suspicious Activity

False statement was the most reported suspicious activity in conjunction with mortgage loan fraud.

Identity theft represented the fastest growing secondary characterization reported, more than two percent in less than two years.

CHARACTERIZATION OF SUSPICIOUS ACTIVITY

NUMBER OF

SARs

% OF TOTAL SARs

MORTGAGE LOAN FRAUD 82,851 100.00%

FALSE STATEMENT 15,390 18.58%

OTHER 3,149 3.80%

IDENTITY THEFT 1,761 2.13%

MISUSE OF POSITION OR SELF DEALING 1,219 1.47%

CONSUMER LOAN FRAUD 699 Less than 1%

COMMERCIAL LOAN FRAUD 409 Less than 1%

DEFALCATION/EMBEZZLEMENT 373 Less than 1%

CHECK FRAUD 290 Less than 1%

BSA/STRUCTURING/MONEYLAUNDERING 256 Less than 1%

COUNTERFEIT INSTRUMENT (OTHER) 217 Less than 1%

WIRE TRANSFER FRAUD 169 Less than 1%

COUNTERFEIT CHECK 69 Less than 1%

BRIBERY/GRATUITY 68 Less than 1%

CHECK KITING 62 Less than 1%

MYSTERIOUS DISAPPEARANCE 60 Less than 1%

CREDIT CARD FRAUD 57 Less than 1%

COMPUTER INTRUSION 33 Less than 1%

DEBIT CARD FRAUD 25 Less than 1%

TERRORISM 9 Less than 1%

COUNTERFEIT CREDIT/DEBIT CARD 5 Less than 1%

April 1, 1996 to March 31, 2006.

Top five reported states in 2005

California Florida Illinois Texas Georgia

Loan Types

• Residential real estate purchase loans – 880 (83.65%);

• Residential refinance loans (76), home equity/lines of credit (28), FHA Title One loans (20), second Trust loans (4) – (12.17%); and

• New construction loans – 16 (1.52%).

Material Misrepresentation/False

Statements Material misrepresentation and false

statements were reported on 692 (65.78%)

Identity fraud was reported on 160 (23.12%)

Identity theft was reported on 27 (3.9%)

Mortgage brokers or correspondent lenders initiated the loans in 254 (36.71%)

Types of loan falsifications • Altered bank statements

• Altered or fraudulent earnings documentation such as W-2s and income tax returns

• Fraudulent letters of credit

• Fabricated letters of gift

• Misrepresentation of employment

• Altered credit scores

• Invalid social security numbers

• Silent second trust

• Failure to fully disclose the borrower’s debts or assets; or

• Mortgage brokers using the identities of prior customers to obtain loans for customers who were otherwise unable to qualify.

Misrepresentation of Loan Purpose

Misrepresentation of loan purpose or misuse of loan proceeds in 129 (12.26%)

Mortgage brokers or correspondent lenders originated the loans described on 37 (28.68%)

Misuse of FHA Title One (home improvement loans) reported in 20 (15.5%)

Occupancy fraud was reported in 104 (80.62%)

Appraisal Fraud and Property Flipping

Appraisal fraud and fraudulent property flipping were

described in 111 of the sampled reports (10.55%). Appraisal fraud is frequently associated with fraudulent

property flipping. Filers indicated on 48 (42.34%) of these reports that

they suspected the fraudulent activity was perpetrated

with the collusion of mortgage brokers, appraisers,

borrowers, and/or real estate agents/brokers.

Appraisal Fraud

Lenders rely on accurate appraisals to ensure that loans are fully secured.

Appraisal fraud occurs when appraisers fail to accurately evaluate the property, or

when the appraiser deliberately becomes party to a scheme to defraud the lender, the borrower, or both.

The Appraisal Institute and the American Society of Appraisers

“…it is common for mortgage brokers, lenders, realty agents and others with a vested interest to seek out inflated appraisals to facilitate transactions because it pays them to do so.”

Higher Sales Prices - Higher Fees

for

Brokers

Lenders

Real Estate Agents

Loan Settlement Offices, and

Higher Earnings for Real Estate Investors

Types of appraisal fraud • Appraisers failed to use comparable properties

to establish property values;

• Appraisers failed to physically visit the property

and based the appraisal solely on comparable

properties, i.e., the actual condition of the

property was not factored into the appraisal;

• Appraisers participated in a fraud scheme such

as flipping; or

A licensed appraiser’s name and seal were used

by unauthorized persons.

Fraudulent Property Flipping

Nearly 64 percent described collusion by sellers, appraisers, and mortgage brokers in connection with property flipping.

Nearly 14 percent described the use of straw buyers.

Fraudulent property flipping activity remained steady over the past four years.

A significant spike in reports describing appraisal fraud was seen in 2004, but there was a slight decrease in the trend in 2005.

Activities associated with flipping (straw buyers and false statements) were increasing.

Appraisal Fraud & Flipping Trend

Actions taken to combat fraudulent property flipping

HUD makes certain frequently flipped properties ineligible

• Some states have adopted new or enhanced appraisal standards and appraisal licensing requirements.

Straw buyers

The use of straw buyers to obtain mortgage loans was 2.57%

Mortgage brokers or correspondent lenders processed loans in 77.78%

Other Fraudulent Activity Forged Documents – 1.9% Loan Services not paying off notes, liens etc. Borrowers signing multiple loan apps on same

property within a short time of each other Mortgage Broker misuse of Power of Attorney Mortgage Broker giving “kickbacks” to

lenders Elder Exploitation Unofficial loan assumption Fraudulent bankruptcy Money laundering

Emerging Mortgage Fraud Schemes

Asset Rental Fraud Debt Elimination Fraud

For fiscal year 2005: 21,994 SARs were filed (up from 17,127 in 2004).

721 pending FBI Mortgage Fraud cases (534 in 2004).

1,020 pending HUD-OIG Mort. Fraud cases (920 in

2004).

206 FBI indictments/informations (241 in 2004).

170 FBI convictions (172 convictions in 2004).

$1,014,000,000 (FBI) reported loss (up from

$429,000,000 in Fiscal Year 2004).

Hot Spots for Mortgage Fraud2004

California

Nevada

Utah

Arizona

Colorado

Missouri

Illinois

Maryland

Georgia, and

Florida

Residential Mortgage Fraud Act.NC HOUSE BILL 817

A person is guilty of residential mortgage fraud when, for financial gain and

with the intent to defraud, that person, knowingly does any of the following:

makes or attempts to make uses or facilitates or attempts to use or facilitate the use of any

material misstatement misrepresentation or omission

within the mortgage lending process with the intention that a mortgage lender, mortgage broker, borrower, or any other person or entity that is involved in the mortgage lending process relies on it, or

receives or attempts to receive proceeds or any other funds in connection with a residential mortgage closing that the person knew, or should have known, resulted from a violation of the above, or

conspires or solicits another to violate any of these provisions

Appraisal Standards Board Certain types of conditions are unacceptable

in any assignment because performing an assignment under such conditions violates USPAP.

Specifically, an assignment condition is unacceptable when it: precludes an appraiser’s impartiality. Because such a condition destroys the objectivity

and independence required for the development and communication of credible results;

limits the scope of work to such a degree that the assignment results are not credible, given the intended use of the assignment; or

limits the content of a report in a way that results in the report being misleading.

Unacceptable Assignment Conditions A Mortgage Broker’s or Loan Officer’s

engagement letter says:

1. We need comps for (property description) that will support a loan of $___________; can you provide them?

2. Sales Price: ___________. 3. Approximate (or Minimum) value needed:

__________. 4. Amount needed: ______________. 5. Owner’s estimate of value: ___________. 6. If this property will not appraise for at least

___________, stop and call us immediately. 7. Please call and notify if it is NOT possible to

support a value at or above ___________, BEFORE YOU PROCEED!!!!

Violation of Ethics It is unethical for an appraiser to accept an assignment,

or to have a compensation arrangement for an assignment, that is contingent on any of the following:

1. the reporting of a predetermined result (e.g., opinion of value);

2. a direction in assignment results that favors the cause of the client;

3. the amount of a value opinion;

4. the attainment of a stipulated result; or

5. the occurrence of a subsequent event directly related to the appraiser’s opinions and specific to the assignment’s purpose.

What information should the regulated institution provide to the appraiser upon engagement?

Answer: The regulated institution should provide the property's

address, its description, and any other relevant information.

The regulated institution may also provide a copy of the sales contract for purchase transactions.

However, the information provided by the regulated institution should not unduly influence the appraiser or

in any way suggest the property's value.

The regulated institution and the appraiser should agree on the scope of the appraisal in advance, consistent with the Uniform Standards of Professional Appraisal Practice (USPAP) and the agencies' appraisal regulations and interagency guidelines.

Each is an Appraisal Request

If an appraiser is asked whether a specific property has a value (a point, a range, or a relationship to some benchmark), that request is for an opinion of value (an appraisal).

Appraisers, obligated to comply with USPAP, must develop a real property appraisal in accordance with STANDARD 1.

Communicating that value opinion must be accomplished in accordance with STANDARD 2.

Do Not Use or Blacklist

Lenders maintain a “Do Not Use” list of appraisers

Legitimate use of list:

Screen out incompetent appraisers

Screen out appraisers who have lost their credentials

Illegitimate use of list:

To eliminate an appraiser who doesn’t “play ball”

To unduly influence an appraiser to “make value”

To apply pressure to alter an appraisal report that has

disclosed adverse conditions of the property or occupant.

Fraudulent BlacklistingIt is illegal for a person to make any false statement regarding

income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.

Threatening to blacklist an appraiser is intimidation and may be mortgage fraud if it results in any of the following:

Mortgage Lending Act. § 53-243.11. (Effective July 1, 2002)

Prohibited activities (1) To misrepresent or conceal the material facts or make false promises

likely to influence, persuade, or induce an applicant for a mortgage loan or a mortgagor to take a mortgage loan, or to pursue a course of misrepresentation through agents or otherwise.

(8) To engage in any transaction, practice, or course of business that is not in good faith or fair dealing or that constitutes a fraud upon any person, in connection with the brokering or making of, or purchase or sale of, any mortgage loan.

(11)To influence or attempt to influence through coercion, extortion, or bribery, the development, reporting, result, or review of a real estate appraisal sought in connection with a mortgage loan.

Appraisers have no Recourse

No notice is given after being Blacklisted

No appeal process is provided

No oversight by regulators or industry

The lender’s ‘do not use list’ is often distributed to other lenders.

An appraiser suffers significant financial loss.

‘Absolute power, corrupts absolutely’

Appraisal Report is not contingent on loan closing

Mortgage Lending Act. § 53-243.11. (Effective July 1, 2002)

Prohibited activities.

(9) To fail promptly to pay when due reasonable fees to a licensed appraiser for appraisal services that are: a. Requested from the appraiser in writing by

the mortgage broker or mortgage banker or an employee of the mortgage broker or mortgage banker; and

b. Performed by the appraiser in connection with the origination or closing of a mortgage loan for a customer or the mortgage broker or mortgage banker.

It is unethical for an appraisal to be contingent in any way.

Violation of Ethics It is unethical for an appraiser to accept an assignment,

or to have a compensation arrangement for an assignment, that is contingent on any of the following: 1. the reporting of a predetermined result (e.g.,

opinion of value); 2. a direction in assignment results that favors the

cause of the client; 3. the amount of a value opinion; 4. the attainment of a stipulated result; or 5. the occurrence of a subsequent event directly

related to the appraiser’s opinions and specific to the assignment’s purpose.

URLS