Attorney General Eric Holder, FBI Director Robert Mueller and HUD Inspector General Kenneth Donohue held a news conference on June 17 to announce that the agencies’ three-month “Operation Stolen Dreams” sting has already netted 485 arrests for mortgage fraud nationwide.
They also said that mortgage fraud has resulted in losses of about $2.3 billion to date. More arrests are expected as the FBI pursues more than 3,000 mortgage fraud claims.
According to the FBI’s Mortgage Fraud Report, the most prevalent schemes include:
Loan Origination Schemes
Loan origination fraud schemes involve falsifying a borrower’s financial information—such as income, assets, liabilities, employment, rent, and occupancy status—to qualify the buyer, who otherwise would be ineligible, for a mortgage loan. This is done by supplying fictitious bank statements, W-2 forms, and tax return documents to the borrower’s favor. Perpetrators also employ the use of stolen identities. Specific schemes used to falsify information include asset rental, backwards application, and credit enhancement schemes.
Foreclosure Rescue Schemes—The Use of Bankruptcy Petitions
The use of bankruptcy petitions to stall the foreclosure process continues to be a prevalent threat to delinquent homeowners looking for assistance.47 Mortgage fraud perpetrators are exploiting the U.S. bankruptcy system by filing fraudulent bankruptcy petitions to delay the foreclosure process and extract the maximum profit from victims during the commission of advance fee, fractional transfer, and sale-leaseback-repurchase foreclosure rescue schemes. This type of fraudulent activity is increasing as perpetrators seize opportunities created by the current housing crisis and the more than 2.1 million properties in foreclosure.
Flopping, Short Sales, and Broker Price Opinions
Perpetrators are conducting short sale property flipping schemes using distressed properties of homeowners who are unemployed or facing foreclosure. The perpetrators collude with appraisers or real estate agents to undervalue the property using an appraisal or a broker price opinion to further manipulate the price down (the flop) to increase their profit margin when they later flip the property.68 They negotiate a short sale with the bank or lender, purchase the property at the reduced price and flip it to a pre-selected buyer at a much higher price.
Commercial Real Estate Loan Fraud
Open sources and FBI analysis indicate that the $6.4 trillion commercial real estate (CRE) market is experiencing a high incidence of loan origination fraud similar to that seen during the last few years in the residential real estate market. Perpetrators, including loan officers, real estate developers, appraisers, and apartment management companies, are increasingly submitting fraudulent documents that misrepresent their assets and property values to qualify for loans to buy or retain property. When the loans are funded, the perpetrators often cease payment of their mortgages, resulting in foreclosure. According to open-source reporting, CRE loans are expected to produce more than $100 billion in losses by the end of 2010.
Preliminary analysis indicates that the commercial markets exhibiting the most significant signs of distress are in areas where there is also a significant mortgage fraud problem. These areas include the New York metropolitan area, Miami, Los Angeles and Orange County, Chicago, Boston, Dallas, Fort Worth, Houston, the District of Columbia, Atlanta, and Baltimore.