Mortgage Fraud Challenge – Test Your Knowledge
Common Mortgage Fraud Schemes – Old, New & Cutting Edge

Investigative Techniques
Where to “find the lie”
Interviewing Techniques
Foreclosure-related Frauds
California Laws
The Difference Between a Bad Business Deal and Criminal Behavior
Managing the Evidence in a Fraud Case
White Collar Psychology

Mortgage Fraud Challenge – Test Your Knowledge

INSTRUCTIONS: Connect the fraud technique on the left to the correct definition on the right.

 

 

 

Common Mortgage Fraud Schemes – Old, New & Cutting Edge

For each of the following schemes, consider which documents might show evidence of the crimes. (See "Where to 'Find the Lie'" below.) Each scenario is essentially a scam to steal money, except that instead of using a gun or knife or a threat of violence, the criminal uses a lie(s) to extract money out of the victim. The most common victim in mortgage fraud crimes is the lending institution. So the investigator needs to hunt for the false pretenses that were used to trick the bank into funding a loan.

• Mortgage Fraud by Identity Theft (Fraud for Profit)

James is a mortgage broker, but in this economy his cash flow is dwindling. James recruits potential investors from church – he belongs to six – promising to get these fellow congregants into real estate investments. Each one fills out financial documents so that he can purportedly determine whether they could qualify for the necessary loans. Not surprisingly, none of them qualifies . . . at least that’s what he tells them. Nonetheless, he misappropriates their personal identifying information to purchase houses for his benefit in their names. Once the houses are purchased, he rents them out to unsuspecting tenants. He pockets the rental income and lets each property go into foreclosure rather than paying the mortgages.

• Mortgage Fraud by Strawbuyer (Can be Fraud for Profit or Home)

Henrietta wants to buy a house to live in and she found one she likes. Unfortunately, she does not have good enough credit to get a purchase money loan. Her mother has great credit, but does not have enough income or assets to obtain a loan. In order to help her daughter, mom wants to buy the house in her name. With the help of her daughter, mom finds www.verifyemployment.net, where for a few hundred dollars, they give her fake W-2s, add her name to a bank account with a large balance, and verbally verify her fake employment when the mortgage broker calls. To get the best interest rate, mom states on the credit application that the house will be her primary residence even though she has no plans to live there with her daughter. Owner-occupied loans qualify for better interest rates than investment loans because they are considered less risky by lenders.

• Flipping, Puffing, Strawbuyer/Investor

Harry needs some extra retirement money and discovers an ad on Ebay soliciting real estate investors. It promises him $16,000 for the use of his credit. Sounds great to him since he has terrific credit. The mortgage broker he contacts uses his name and credit to purchase a house in Harry's name. The loan is an owner-occupied loan. The broker receives his fee for the transaction. Several months later, the mortgage broker arranges a sale from Harry to Brian at a higher price. The appraiser finds a way to justify the higher offer price from Brian because he knows that if he doesn't "hit the number," local brokers won't call hire him anymore. Again, the broker receives his fee for the transaction. Several months later, the mortgage broker arranges another sale from Brian to David at yet a higher price. The appraiser struggles with it, but he hits the number. And, like before, the mortgage broker receives his fee. Unfortunately for David, the market has started to go down, and no additional investors buy the property. David is left with a debt worth far more than the house is worth.

• Silent Second (Mortgage)

Gayle wants to sell her house for $400,000. Ian wants to buy the house for $400,000, but because he does not have any money for a downpayment, he can't get a loan. Ian offers to buy the house for $450,000 if Gayle will loan him $50,000 up front to make the down payment.

Gayle agrees and loans him $50,000. With $50,000 in his bank account, Ian qualifies for a loan of $400,000. He puts the $50,000 into escrow as his downpayment and buys the house for $450,000, which means Gayle receives the $400,000 plus the $50,000. In the end, Gayle netted only $400,000 which was the true purchase price but the bank thought the sale was for $450,000.

Note: In a rising real estate market, Gayle would loan the money and might not get the money back out of the transaction. Instead, she would record a deed of trust securing her loan after the bank funded the first mortgage. She would get paid at some point in the future depending on the terms she worked out with Ian.

• Payment Outside Closing

[Read the Silent Second Scenario above before reading this scenario.] Same scenario with Gayle and Ian, except Gayle doesn't have $50,000 to loan Ian. They adjust the sale price to $450,000 and claim that Ian paid Gayle $50,000 "outside of escrow” or “outside of closing". He applies for a loan for the remaining 80% of the sale price ($400,000) and qualifies. The money goes to Gayle so she receives the full amount she actually wanted for the house. Again, the lender ended up paying l00% of the purchase price.

Note: The lender probably wanted to see some evidence of the payment outside of escrow, so Ian bought a money order for $5.00, changed it to $50,000, and gave a photocopy of the altered document to escrow.

• Double/Dual/Concurrent Closing or Escrow

Julie is a mortgage broker who is short on cash. She creates a fake identity by the name of Joan Bauer, who will buy a house. Bauer makes an offer to buy a house for the listing price of $300,000. The owner accepts. Joyce opens an escrow in Bauer’s name. (Escrow 1.) Joyce finds an "investor" to buy the house for $350,000, but doesn't tell the seller. (The investor is somebody like Harry above in Scenario C. (See above.) Joyce opens escrow for the investor. (Escrow 2.)
The investor qualifies for a loan (possibly with fraudulent documents created by Julie), and when the loan funds it goes into the investor's escrow, Escrow 2. The seller transfers title to Joan Bauer. Escrow 2 closes and pays $300,000 into Bauer's escrow, Escrow 1. That $300,000 is then paid to the seller. Joan Bauer then transfers the title to the investor. The extra $50,000 that was in Escrow 2 is paid to Julie. The investor is now stuck with a $350,000 loan on the house.

Short sale: You might see this technique in the short sale arena if the crook can get the bank to negatively puff-down the prices and get the bank to agree to the lower price.

• Foreclosure Rescue Fraud/Bankruptcy Fraud

Jorge lost his job and can't make his mortgage payments; his house is about to be sold at a foreclosure sale (trustee’s sale). In desperation he calls the phone number on a sign he saw on a freeway offramp that said: “WE STOP FORECLOSURES." Marvin answers and explains that for a monthly fee of only $700 he can delay the foreclosure until Jorge gets his finances straightened out. He tells Jorge that it's perfectly legal and that Jorge does not have to make any payments on his mortgage. Jorge, who is ready to believe anybody who says he can stay in his home, agrees and makes the first payment. Marvin has Jorge sign a grant deed transferring 10% of the title to Pink Elephant Enterprises, a company that Marvin has created out of thin air for this purpose and put in bankruptcy. This simple, but illegal, process immediately stops, or "stays", the foreclosure. Eventually the lender has the "stay" lifted by the bankruptcy judge and proceeds to foreclosure. This time Marvin doesn't bother to tell Jorge; instead he just forges a grant deed transferring another 10% to another fake company called Alpha Beta Gamma Investments. Each month, Jorge pays his fee, not questioning Marvin’s magic since Marvin tells him he is still negotiating with Jorge’s lender. Jorge actually gets to stay in the house for another 24 months before the lender successfully forecloses.

• Loan Modification Fraud

Maria is behind on her mortgage payments and has heard on the news that banks are offering to modify people's loans. Through a friend at work, she hears about a man named George who helps people get their loans modified. She contacts George, pays him $3000, and signs a contract that he writes out by hand. She asks him to hurry because she has already received a Notice of Default and the foreclosure sale is imminent. She does not hear from George again. Every time she calls him, she gets his voicemail. Luckily, her lender calls her directly and offers to modify her loan, and she agrees. In the end, she is able to stay in the home but she gave George money for nothing.

• Rent Skimming

Alice and Van found a house to rent on Craigslist.org. They called the number on the advertisement and spoke with Linda. Linda met them at the house and had them fill out a rental application. Next day, Linda said that they qualified and would have to pay a security deposit and the first month's rent for a total of $3000. Alice wrote out a check and gave it to Linda. When they asked for the keys, Linda said she didn't have them. She explained that her boss had purchased the house as an investment at a foreclosure sale and in that situation they often don't get the keys. She and her husband moved their belongings to the property over the next weekend.

Over the following months, Alice and Van received a lot of official-looking mail but Linda had told them to expect it. When they received it, they just put it in a pile for Linda. Five months after they moved in, the Sheriff showed up at their door and told them they had to leave. Confused and dumbfounded, Van almost got into a scuffle with the deputy. They quickly moved out and have found an apartment to live in.

• The Whole Enchilada – Multiple Fraud Techniques

Sarah and her husband, John, do not have regular employment. They each receive disability checks from the government, and they collect aluminum out of neighborhood trash cans, which they recycle for some extra money. Neither was ever identified as being developmentally disabled, but they are certainly slower than average. Fortunately, Sarah inherited a house from her mother. The house has a small mortgage and they make monthly payments of $250. What they do not realize is that the house has over $300,000 in equity. For several months, they were short on cash and failed to pay their mortgage. A Notice of Default was issued and they received numerous solicitations from people offering to buy their house. They did not want to move, so they did not respond to any of the solicitations.

One day, Sarah was in the front yard when she noticed a man and a 5-year-old boy playing with her cat. She began to talk to them. They were very nice. The man said that he lives around the corner and was out for a walk. His son loves cats. They talked for 20 minutes or more and then said goodbye. The next day the man walked by again without his son, and he and Sarah began to talk. This time he casually mentioned that he was in real estate, with a specialty in helping people in foreclosure. Sarah couldn't believe her luck and called John to come outside. They explained to this man, who said his name was Sam, that they had fallen behind on their mortgage and didn't know what to do. They said that if at all possible they wanted to continue to live in their home. Sam said that he could take care of them.

Several days later, Sam returned and explained his solution. An investor would buy their home from them, but they could continue to live there for 10 years. In the meantime, the investor would pay them $500 per month. He explained that this was called a "reverse mortgage" and was usually reserved for elderly folks, but that he had connections that could make it available for them. Enticed by the extra income, they jumped at the opportunity. Sam brought a notary with him and Sarah and John signed every document Sam placed in front of them. He didn't leave them any copies of anything.

Before Sam left, he gave them $500 in cash. Then they never saw him again. During your investigation, you discover that the documents they signed transferred title to Francis Gonzalez. When interviewed, she said she knew nothing about the transaction and doesn't know Sam. You further discover that a mortgage loan in the amount of $280,000 was taken out against the property, most of which was wired into an account at Bank of America. Over the following several weeks, the money was withdrawn using checks made out to "Cash." The account balance is now negative.

• Other

There are other fraud techniques such as Builder Bust-Outs, Fraudulent Reconveyances, and Flopping (Shout out to Ann). If you have a good example of these or other schemes, please email them to us after sanitizing them. In other words, take out the names of true parties and any indication of who the true parties were. We will add them to this list.

Investigative Techniques

Coming soon!

 

Where to “find the lie”

At its root, most fraud is merely theft that is accomplished by lying. In insurance fraud, the suspect lies about damages or an injury in order to obtain money to which he is not entitled. In welfare fraud, the suspect lies about her status to obtain money or other benefits for which she does not legitimately qualify. In mortgage fraud, the suspect can lie about any number of factors to convince a mortgage lender to fund a loan that it otherwise would not fund.

When investigating mortgage fraud, it is important to uncover and prove up the lies for several reasons. The primary reason is that the lie is evidence of intent to defraud or intent to steal. In most criminal prosecutions, this specific intent is a required element of the crime. Another reason for find the lie is that if the case eventually goes to jury trial, proving up a lie committed by the suspect knocks the support out of any defense arguments. Once the jury believes the suspect is a liar, they are not likely to believe anything the defense says.

The following are the most common documents on which you can find mortgage fraud lies. What lies might you find there?

• Loan Application (Fannie Mae Form 1003) – Uniform Residential Loan Application. The lender uses this form to record relevant financial information about an applicant who applies for a conventional one- to four-family mortgage.

• Verifications

• • Verification of Rent (VOR) – Form used by mortgage broker to verify the amount of rent the applicant claims to pay.
  • Verification of Employment (VOE) – Form used by mortgage broker to verify the applicant’s occupation and income.
  • Verification of Deposits (VOD) – Form used by mortgage broker to verify applicant’s liquid assets.

• Estimated and Final Settlement Statements (HUD-1) – This form is used by the escrow to itemize the costs and fees associated with the financing of a property.

• Uniform Residential Appraisal Report – This report form is designed to report an appraisal of a one-unit property based on an interior and exterior inspection of the subject property.
  
• Recorded Title Documents

• • Grant Deed/Warranty Deed – a type of deed where the grantor (seller) guarantees that he or she holds clear title to a piece of real estate and has a right to sell it to the grantee (buyer).
  • Quitclaim Deed – A document by which a person (the "grantor") disclaims any interest the grantor may have in a piece of real property and passes that claim to another person (the grantee). A quitclaim deed neither warrants nor professes that the grantor's claim is valid.
  • Trustee’s Deed Upon Sale – A written document which is prepared and signed by the trustee when the secured property is sold at a trustee's sale. This document transfers ownership to the successful bidder at the sale; must be recorded with the county recorder in the county in which the property is located.
  • Deed of Trust – A written document, describing the real property that is being given as security for the repayment of an obligation.
  • Notice of Full Reconveyance – A recorded document which gives notice that the loan secured by the identified deed of trust has been paid in full.

Interviewing Techniques

Coming Soon

Foreclosure-related Frauds

Coming Soon

 

California Laws

Coming Soon

 

The Difference Between a Bad Business Deal and Criminal Behavior

Consider these to hypothetical business transaction:

In both cases, Josie is significantly poorer and very angry. In both cases, Franz took Josie’s money and never returned it.
What’s the difference between the two scenarios? Franz’s intent.
In scenario 2, it appears that Franz may have intended to invest the money legitimately. He intended to follow through on his contract with Josie. Unfortunately, he and Josie both made bad business decisions, but Franz did not intend to deceive, defraud or steal from Josie.
In contrast, in scenario 1 Franz lied to Josie so she would give him the money. He immediately used the money for an unauthorized purchase, which is evidence of his intent to defraud.
Determining whether a transaction could potentially be prosecuted criminally, use this two part test:

If your answer to either is “No,” then the transaction is not criminal.

Managing the Evidence in a Fraud Case

Coming Soon

White Collar Psychology

• Profiling a White Collar Criminal: Common traits and characteristics

Opportunity and Access
Trusted
Seeks Recognition (Ego)
Excessive time at work/Doesn’t use sick time (fear of discovery)
Unusual account procedures/results
No delegation of work (fear of discovery)

• Fraud Suspect Psychology

Sense of Entitlement
Belief that Smarter than Supervisor/Boss
Ego
Disrespectful
Angry/Disgruntled

• Fraud Suspect’s Sense of Self

A Professional: I’m a businessman
A Rationalizer: It’s a bookkeeping mistake, I thought they knew I borrowed the money
A Believer: God knows I did not do it
An Innocent: It’s someone else’s fault
A Saint: I was trying to help someone
A Victim: The investigator personally hated me

• Fraud Suspect’s Attitude Toward Investigators

Too Smart to be Caught: Arrogance prevents thorough cover-up
Excessively angry
Accusatory: Investigator has vendetta
Uses contacts to stop or divert the investigation
Threatens lawsuit
Threat of revealing supervisors/others in crimes

• Attitude After Being Discovered

No remorse
No sense of guilt
Angry at victim (their fault)
Lie to self about conduct
Does it again