AML CHALLENGES
property values inflate, property taxes
increase as well. Legitimate homeowners
also find it difficult to sell their homes as
surrounding properties affected by fraud
deteriorate. When properties are foreclosed on as a result of mortgage fraud,
neighborhoods deteriorate and surrounding properties depreciate.
For property or for profit—it’s all illegal
The Mortgage Fraud Report identified
two categories of mortgage loan fraud:
fraud for property and fraud for profit.
Fraud for property/housing entails
misrepresentations by the applicant for
the purpose of purchasing a property for
a primary residence. This scheme usually
involves a single loan. Although applicants
may embellish income and conceal debt,
their intent is to repay the loan.
Many loan applicants lie when they
state that the mortgage will be used for
acquiring a property that will be their
primary residence when in fact, they
are acquiring an investment property.
Nicole’s case would have fallen into this
category had she accepted her broker’s
suggestions. Sometimes, the broker prepares this type of document on a client’s
behalf even when the client is not aware
of the lies contained in such a document.
Herein lies the cause of many defaults.
Greedy brokers enticed borrowers who
could not afford mortgages and soon
after the transactions went through, the
borrowers found themselves unable to
meet their mortgage payments in a timely
manner and as a result, these properties
went into default and were foreclosed
on. The self-employed seeking property
also lie in their applications when it
presents them with a better opportunity.
This could be prevented by an extensive
review of bank transactions that reflect
the trends of their income and expenses
during a given period of time.
One way of accessing mortgages is by
hiding liabilities, which improves the debtto-income ratio. A careful review of the applicant’s credit report prevents the common
practice of underreporting liabilities.
Fraud for profit often involves multiple
loans and elaborate schemes perpetrated
to gain illicit proceeds from property sales.
It is this second category that is of most
concern to law enforcement and the mortgage industry. Gross misrepresentations
concerning appraisals and loan documents
are common in fraud-for-profit schemes and
participants are frequently paid for their
participation.
Among the emerging fraud-for-profit
trends described by the FBI worth highlighting are:
Builder-bailout schemes
Builders employ builder-bailout
schemes to offset losses and circumvent
excessive debt and potential bankruptcy
as home sales suffer from escalating
foreclosures, rising inventory and declining demand. Builder-bailout schemes,
common in any distressed real estate
market, typically consist of builders offering excessive incentives to buyers, which
are not disclosed on the mortgage loan
documents. Builder-bailout schemes often
occur when a builder or developer experiences difficulty selling inventory and uses
fraudulent means to unload it.
Seller-assistance scams
Mortgage fraud perpetrators exploit the
depreciating housing market by assisting
sellers and providing buyers to conduct
property sales based on inflated appraisals. In a typical seller-assistance scam, a
perpetrator solicits an anxious seller or
real estate agent and offers to find a property buyer. The perpetrator negotiates the
amount that the property seller is willing
to accept for the home. The perpetrator
Perpetrators in mortgage industry
occupations are familiar with
the mortgage loan process and
therefore know how to exploit
system vulnerabilities
22 acams today
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November / December 2008
then hires an appraiser to inflate the property’s value. The property is sold at the
inflated rate to a buyer who is recruited
by the perpetrator. The buyer takes out
a mortgage for the inflated amount. The
seller then receives the asking price for
the home, and the perpetrator pockets a
“servicing fee,” the difference between
the home’s market value and the fraudulently inflated value. When the mortgage defaults, the lender forecloses on
the house but is unable to sell it for the
amount owed as a