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