Mortgage Fraud Analysis: Part II

Mortgage fraud continues to grow, according to the latest FBI statistics, and usually involves an industry insider. In this second part of an exclusive three-part series, the different types of fraud and the players are examined.

A street gang in Chicago.

A mortgage broker in Kansas City.

A mortgage office in Florida.

Lenders, appraisers, homeowners, lawyers, investors and others across the nation.

All have been arrested, investigated, indicted or jailed in the last year for mortgage fraud, a fast-growing criminal enterprise that is touching all corners of the nation.

Scams known as “flipping,” “straw buyers,” “inflated appraisals” and more has become a major target of federal, state and local law enforcement.

In a new report the FBI said it has 642 mortgage fraud cases pending, compared to 534 for all of 2004 and 436 in 2003. Twenty-six states have “significant mortgage fraud” problems, 10 are hot spots and Georgia and Florida are havens for fraud, according to the report.

Mortgage fraud, the agency said, “is pervasive and growing.”

So what defines mortgage fraud?

The Mortgage Bankers Association (MBA), the industry’s trade and lobbying group, divides fraud into two broad categories — fraud for property and fraud for profit, Marta McCall, senior vice president for risk management for the American Mortgage Network in San Diego, told a Congressional committee on behalf of the MBA last fall.

Fraud for property typically occurs when a home buyer or someone else “defrauds the system so they can purchase a house for their own use,” McCall said, according to a written draft of her testimony before the House Subcommittee on Housing and Community Opportunity.

“Fraud for profit schemes are much more far reaching and usually involve a person or groups of persons who abuse the system for financial gain,” McCall said. “These criminals are often industry insiders who know how to exploit our complex system at the expense of lenders, taxpayers, consumers and communities.”

Those are people like Chauncey Calvert, 34, who worked as an originator with Ameriquest Mortgage in Gladstone, Mo.

Calvert knew the business. His job was to solicit borrowers, prepare and process their loan applications, pull all the documents together and then close the loan.

But he also had a way for customers to make money, according to the U.S. Attorney’s office in Kansas City. Calvert convinced people to submit phony loan applications and inflated appraisals when they were applying for mortgage loans. He promised that he could obtain renters and buyers for the properties after just a short period of time.

The investors would make $1,500 and up to half of the profits on the eventual sale of the property.

When the loans were approved and disbursed Calvert reportedly had the money sent to his coconspirators by representing that fictitious companies held the first mortgage. All along he was making fees, bonuses, commissions, kickbacks and other benefits.

But Calvert was finally busted by federal prosecutors and admitted to approving 66 fraudulent loans that totaled more than $4 million.

Industry insiders like Calvert are a major focus of the FBI, the agency said in the May report.

“Although there are many mortgage fraud schemes, the FBI s focusing its efforts on those perpetrated by industry insiders,” the agency said. “Eighty percent of all reported fraud losses involve collaboration or collusion by industry insiders.”

The FBI said the most common type of fraud involves inflated appraisals, when a property is purchased, falsely appraised at a higher value and then quickly sold. This type of fraud accounts for 57 percent of call cases.

Another common fraud involves property flipping, which makes up 49 percent of fraud cases. The percentages are more than 100% because there is significant overlapping, the FBI said, such as when phony appraisals are used in a flipping scheme.

Flipping is actually legal and used often by legitimate investors. A piece of property is bought and the quickly resold for a profit.

The fraud comes when inflated appraisals, doctored loan documents and other phony information is used to dupe lenders and buyers.

In late April federal prosecutors shut down what was described as the largest mortgage fraud case ever in Broward County, Fla., when two people were convicted in a $20 million property flipping scheme.

An “industry insider,” the owner of a mortgage company, was involved by processing false mortgage loan applications and then kicking back the money to coconspirators, the feds said.

Those involved with serve nearly two years in prison.

Other common scams are using straw buyers, where then identity of the borrower is hidden and the “straw”, or phony buyer, uses their name and credit to get a mortgage loan (39% of cases); ID theft, when a fake or stolen identity is used to by a house (36%); and silent second, when a buyer fails to indicate that money for a down payment was borrowed and came through an undisclosed second mortgage on the property (10%).

Some of the instances of recent mortgage fraud are hard to believe either because of the amount of money involved or because of the people working the scam.

On the streets of Chicago The Vice Lords are known as a brutal gang that police say is involved in drug and gun running.

But in October of last year the police and The U.S. Attorney’s Office in Chicago unveiled a federal investigation known as Operation This Old House. Authorities believe that gang leaders may have laundered $70 million in drug money through more than 100 fraudulent mortgage transactions.

“We’ve known that the gangs are sophisticated in how they launder their money,” Chicago Police Superintendent Phil Cline said in a statement. “This is the first time we’ve seen it at this scale. We’ve uncovered information that the gangs are using real estate deals and mortgage fraud to launder their drug proceeds.”

Three years ago in Atlanta the feds broke up a fraud ring responsible for more than a hundred million dollars in losses on hundreds of properties. False documents and brides were used to secure the fraudulent loans, federal investigators said at the time.

And in North Carolina late last year the president of First Beneficial Mortgage Corp. was sentenced to 21 years in prison, ordered to pay $23 million in restitution and forfeit $8 million in property after being convicted of creating fake mortgages and then selling them in the form of mortgage backed securities to Fannie Mae and Ginnie Mae.

McCall, with the mortgage banking group, said the mortgage industry, law enforcement and regulators do grasp the gravity of fraud and are taking steps to crack down on the rip-offs.

Vigilance is required, however, because the schemes seem to grow more sophisticated.

“Fraud schemes,” McCall told members of Congress, “are limited only by the imagination of those who perpetrate them.”