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Re-emerging Scheme: Re-emerging Scheme: Builder-Bailout ExampleBuilder-Bailout Example
Builder wishes to sell a property worth Builder wishes to sell a property worth $200,000 to a buyer. $200,000 to a buyer.
The property’s value is fraudulently inflated The property’s value is fraudulently inflated to $240,000. to $240,000.
The lender funds a mortgage loan of The lender funds a mortgage loan of $200,000 believing that $40,000 was paid to $200,000 believing that $40,000 was paid to the builder, creating home equity. The the builder, creating home equity. The builder forgives the buyers $40,000 down builder forgives the buyers $40,000 down payment. Hence, the lender unknowingly payment. Hence, the lender unknowingly funds 100 percent of the home’s value. funds 100 percent of the home’s value.
Re-emerging Scheme: Builder-BailoutRe-emerging Scheme: Builder-Bailout
Emerging Scheme: Emerging Scheme: Seller AssistanceSeller Assistance
Perpetrators are exploiting the depreciating Perpetrators are exploiting the depreciating housing market by assisting sellers and housing market by assisting sellers and providing buyers to conduct property sales providing buyers to conduct property sales that are based on inflated appraisals. that are based on inflated appraisals.
In a typical seller assistance scam, a In a typical seller assistance scam, a perpetrator solicits an anxious seller or his perpetrator solicits an anxious seller or his realtor and offers to find a property buyer. realtor and offers to find a property buyer. The perpetrator negotiates the amount that The perpetrator negotiates the amount that the property seller is willing to accept for the the property seller is willing to accept for the home. home.
The perpetrator then hires an The perpetrator then hires an appraiser to inflate the property’s appraiser to inflate the property’s value. value.
The property is sold at the inflated The property is sold at the inflated rate to a buyer who is recruited by the rate to a buyer who is recruited by the perpetrator. perpetrator.
The buyer takes out a mortgage for The buyer takes out a mortgage for the inflated amount. the inflated amount.
Emerging Scheme: Emerging Scheme: Seller AssistanceSeller Assistance
Emerging Scheme: Emerging Scheme: Seller Assistance Seller Assistance
The seller then receives the asking The seller then receives the asking price for the home, and the perpetrator price for the home, and the perpetrator pockets a “servicing fee”: the pockets a “servicing fee”: the difference between the home’s market difference between the home’s market value and the fraudulently inflated value and the fraudulently inflated value. value.
Emerging Scheme: Emerging Scheme: Seller Assistance Seller Assistance
Some industry sources have coined the Some industry sources have coined the phrase “cash back purchase” or “one phrase “cash back purchase” or “one transaction flip” to describe the transaction flip” to describe the scheme because it eliminates the need scheme because it eliminates the need for two property transactions to for two property transactions to generate a profit.generate a profit.
Emerging Scheme: Emerging Scheme: Short-Sale FraudShort-Sale Fraud
A real estate short sale is a type of pre-A real estate short sale is a type of pre-foreclosure sale in which the lender agrees foreclosure sale in which the lender agrees to sell a property for less than the mortgage to sell a property for less than the mortgage owed.owed.
Short-sale fraud schemes are difficult to Short-sale fraud schemes are difficult to detect since the lender agrees to the detect since the lender agrees to the transaction, and the incident is not reported transaction, and the incident is not reported to internal bank investigators or the to internal bank investigators or the authorities. authorities.
Emerging Scheme: Short-Sale FraudEmerging Scheme: Short-Sale Fraud
Perpetrators convince homeowners that Perpetrators convince homeowners that they can save their homes through deed they can save their homes through deed transfers and up-front fees. transfers and up-front fees.
Involves a Involves a manipulated deedmanipulated deed process that process that results in the preparation of forged deeds.results in the preparation of forged deeds.
Perpetrators may sell the homePerpetrators may sell the home or or secure secure a second loana second loan without the homeowners’ without the homeowners’ knowledge. knowledge.
Re-emerging Scheme: Re-emerging Scheme: Foreclosure Rescue Foreclosure Rescue
ScamsScams
Re-emerging Scheme: Foreclosure Rescue ScamsRe-emerging Scheme: Foreclosure Rescue Scams
Emerging Scheme: ID Theft and HELOCs
Stolen customer identification information Stolen customer identification information is being used to compromise Home Equity is being used to compromise Home Equity Lines of Credit (HELOC) accounts. Lines of Credit (HELOC) accounts.
The Sub-Prime Loan ProcessPotential Areas for Criminal Activity
UNCLASSIFIED//FOUO
20042004Federal Reserve began a series of Fed Funds Rate increases. By June 2006, there will have been 17 consecutive increases raising the rate from 1% to 5.25%.
20062006
The weakest subprime mortgage originators begin to fail; by December 2007, over 110 mortgage origination companies will have closed their doors.
June
December
Sub-Prime Meltdown Timeline
UNCLASSIFIED//FOUO
20072007
New Century (2nd largest originator of Sub-Prime loans) filed for bankruptcy.
April
Sub-Prime Meltdown Timeline
UNCLASSIFIED//FOUO
Bear Stearns announced that investors in their sub-prime hedge funds would receive little or no recovery; the two funds had lost 90% of their value.
July
20072007
RealtyTrac announced that foreclosures had risen 93% in one year.
August
Goldman Sachs forecasted Sub-Prime losses for the financial sector would reach $400 billion.
November
20082008
AprilSub-Prime losses reached $232 billion and the IMF estimated that financial institutions world-wide may face losses of $945 billion over the next two years.
Investors Securitize loan and
sell to investors
Secondary MarketLoan Origination
Mortgage Broker
Broker Loan Mortgage
Banker
BankSell Loan Investment Bank, Brokerage House, or
Real Estate Investment Trust
Cre
ate
spec
ial
purp
ose
entit
ies
Special Purpose EntitiesSell ownership
interest to investors
Hold in portfolio
Pension FundsLife Insurance CompaniesOther Commercial Banks
State & Local GovernmentsCentral Banks
Fund ManagersThe Public
Brokerage Firms
UNCLASSIFIED//FOUO
The Sub-Prime Loan Process
Sub-Prime Investigations
Mortgage Lenders
Builders/ Developers
Hedge FundsInvestment Banks
Real Estate Investment Trusts
Brokerage Houses
Mortgage Brokers
UNCLASSIFIED//FOUO
FBI Sub-Prime Fraud Investigations
UNCLASSIFIED//FOUO
80.2% of securitized sub-prime loans originated during 2005 had 80.2% of securitized sub-prime loans originated during 2005 had adjustable adjustable ratesrates; 74.9% of these loans were 2/28 adjustable-rate loans. ; 74.9% of these loans were 2/28 adjustable-rate loans.
These ARMS had fixed mortgage rates for the These ARMS had fixed mortgage rates for the first two yearsfirst two years after after origination and were subject to reset in 2007.origination and were subject to reset in 2007.
Source: First American CoreLogic’s LoanPerformance Source: First American CoreLogic’s LoanPerformance The MarketPulseThe MarketPulse
SUB-PRIME COLLAPSE
Impact of Sub-Prime “Crisis”Problems Related to Credit Contraction• Economy slows• Reduced available credit for new development• More difficult for people to obtain mortgages• Refinancing opportunities are less available• Financing becomes more expensive• Reduced interest from foreign investors in MBSs
Problems Related to Poor Underwriting• Increased number of foreclosures• Depreciating real estate values• No room for equity withdrawals
Problems Related to Write-downs• Stock market declines• Reductions in dividends• Increased need for capital infusions: (sources include sovereign wealth funds)
UNCLASSIFIED//FOUO
$232 billion as of April ‘08
MoneyMoney LaunderingLaundering
Money LaunderingMoney Laundering
Money laundering is the process by which Money laundering is the process by which criminals conceal or disguise the proceeds of criminals conceal or disguise the proceeds of their crimes or convert those proceeds into their crimes or convert those proceeds into goods and services. It allows criminals to goods and services. It allows criminals to infuse their illegal money into the stream of infuse their illegal money into the stream of commerce, thus corrupting financial commerce, thus corrupting financial institutions and the money supply and giving institutions and the money supply and giving criminals unwarranted economic power – U.S. criminals unwarranted economic power – U.S. Department of JusticeDepartment of Justice
In Effect,In Effect,
Any Knowing Use of the Any Knowing Use of the Proceeds of Criminal ActivityProceeds of Criminal Activity
Is Money Laundering!Is Money Laundering!
Case in PointCase in Point
Martin Frankel, et. al.Martin Frankel, et. al.