The Scheme of Things: What you Should Know About

Mortgage Fraud Protecting Homeowners

Empowering Victims

U.S Department of Housing and Urban

Development – Office of Inspector

General

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Session Speaker

Michael H. Stolworthy Director, Fraud Prevention and Program Integrity U.S. Department of Housing and Urban Development Office of Inspector General

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Session Objectives • Discuss the Role of the Office of Inspector

General • Provide history and background of the FHA

Mortgage Insurance Program • Describe Home Mortgage Basics

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Session Objectives • Outline Common Mortgage Fraud Schemes • Discuss Current Mortgage Fraud Trends • Detail the Impact of Mortgage Fraud on

Borrowers and Communities

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Inspector General Act • Enacted in October 1978 • Created Inspectors General in 12 of the

largest Federal agencies • Currently authorizes IGs in more than 50

agencies

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HUD-OIG MISSION • Prevent and detect fraud, waste, and abuse • Promote integrity, efficiency and effectiveness

in HUD programs and operations • Seek administrative sanctions, civil, and/or

criminal prosecution • Independent and objective reporting to the

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What is the Federal Housing Administration (FHA)?

• The FHA is a wholly-owned government corporation created by Congress in 1934

• The FHA was consolidated into HUD in 1965 • FHA provides mortgage insurance on loans

made by FHA-approved lenders • It is the largest mortgage insurer in the world

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Ups and Downs of FHA • In the early 90s, FHA had about 15% of the home

purchase mortgage market • Through the 90s FHA lost business to the sub-prime • By 2006 FHA market share was a marginal 3%-- and

dropping • People asked if we still needed the FHA

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The Perfect Storm

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Mortgage Crisis • FHA was left as the only game in town • Market conditions, new products and a Congressionally

mandated expanded role caused a resurgence in FHA’s market share

• Mortgage limits raised to $729,750 • Now about 35% market share • In some markets, FHA loans constitute about 70% of the

new loan market

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FHA’s Resurgence • Today, FHA insures 7.636 million mortgages

– Totaling $1.1 trillion

• More than 75% of First-Time Homebuyers • Nearly 1/3 Minority Households • Nearly one-quarter of all refinances

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Negative Trends • 284,196 Claims Paid FY 2012

– 102,236 Conveyances

• 100,000 REO Sales • 9.6 % of FHA Loans are Seriously Delinquent

(739,000 loans)

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FHA’s Impact on HUD-OIG Realignment of investigative priorities:

• Single Family investigations are an investigative priority

• Established nationwide mortgage fraud initiatives

• Special Agents participate in numerous task forces and working groups

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Financial Fraud Enforcement Task Force (FFETF)

• Created by President in November 2009

• HUD-OIG is co-chair of Mortgage Fraud Working Group

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Mortgage Fraud Summits

Miami, FL Phoenix, AZ

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The Lending Process

•Types of Mortgages •The Paperwork •The Players

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Types of Mortgages • Government • Conventional • HELOCs • Reverse

Mortgages

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Types of Mortgages • Government

Mortgages – FHA

• 203b • 203k

– VA – AG

• Conventional – Fixed Rate – ARMs – Interest Only – Option ARMs – Piggy Back (80/20)

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Types of Mortgages • HELOCs

• Reverse Mortgages – HECMs – Proprietary

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Processes and Players

• Application • Processing • Underwriting • Post-Closing Review

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Loan Origination Loan Officer

– Application (Form 1003) – Upfront charges (Credit Report and Appraisal)

Loan Processing – Verification of Employment (VOE) – Verification of Rent (VOR) – Verification of Deposit (VOD) – Alternative forms of Credit – 4506 – Tax Return Request – Appraisal

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Underwriting Underwriter Review

– Credit review – Adequate income – Ratios – Stability of income – Available assets to close

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Closing Bank Attorney or Escrow or Title Company

– HUD-1

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Post-Closing Quality Control (QC)

– 4506 Loans

Paperwork

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Reverse Mortgages

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Home Equity Conversion Mortgages (HECMs)

• Created by HUD in 1989. • Allow seniors to draw

equity from their homes. • Major FHA product. • FHA dominates HECM

market.

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What is a Home Equity Conversion Mortgage (HECM)?

• Most commonly known as a reverse mortgage it is a home loan that allows homeowners over age 62 to convert a portion of their equity into cash

• No repayment is required until the borrower(s) no longer use the home as their principal residence

• A HECM can even be used to purchase a primary residence in some cases

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FY 2012 HECMs • 51,124 HECMs

– 44,714 Typical HECMs – 1,335 HECM Refinances – 1,487 HECMs for Purchase – 3,591 HECM Savers

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HECM Application

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Mortgage Fraud Schemes Basic Schemes

– False Statements – Straw Borrowers – Flipping – Silent Second Mortgages – Inflated Appraisals – Bogus Gifts

More Schemes – Flopping – Builder Bailouts – HECM Schemes – Foreclosure Rescue – Bankruptcy – Loan Modification

Schemes

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WKYC.com | Cleveland, OH | Video http://www.wkyc.com/video/default.aspx?bctid=86686616001

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Trends • False Statements • Rescue Schemes • Flopping

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ABC News Report Loan Modification Scams Target Desperate Homeowners - YouTube 56

Common Loan Modification Scams • Phony Counseling or Foreclosure Rescue Schemes • Forensic Loan Audits • Rent to Own or Leaseback Schemes • Short Sale Scams • Bankruptcy to Avoid Foreclosure

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Mortgage Forensics

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Property Flipping/Flopping

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Flopping

• Short sales up 33% over last year

• FBI and Freddie Mac have warned that flopping may be on the rise

• HAFA

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For More Information National Crime Prevention Council 2001 Jefferson Davis Highway Suite 901 Arlington, VA 22202 202-466-6272 www.ncpc.org HUD-OIG

451 7th Street, SW Washington, DC 20410

Hotline: 1-800-347-3735 www.hudoig.gov

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Don’t Forget…

Visit the Exhibition Hall to meet our exhibitors!

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