Re-emerging Scheme: Builder-Bailout Example

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Re-emerging Scheme Builder-Bailout Example

• Builder wishes to sell a property worth 200,000
  to a buyer.
• The propertys value is fraudulently inflated to
  240,000.
• The lender funds a mortgage loan of 200,000
  believing that 40,000 was paid to the builder,
  creating home equity. The builder forgives the
  buyers 40,000 down payment. Hence, the lender
  unknowingly funds 100 percent of the homes
  value.

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Re-emerging Scheme Builder-Bailout
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Emerging Scheme Seller Assistance

• Perpetrators are exploiting the depreciating
  housing market by assisting sellers and providing
  buyers to conduct property sales that are based
  on inflated appraisals.
• In a typical seller assistance scam, a
  perpetrator solicits an anxious seller or his
  realtor and offers to find a property buyer. The
  perpetrator negotiates the amount that the
  property seller is willing to accept for the
  home.

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Emerging Scheme Seller Assistance

• The perpetrator then hires an appraiser to
  inflate the propertys 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.

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Emerging Scheme Seller Assistance

• The seller then receives the asking price for the
  home, and the perpetrator pockets a servicing
  fee the difference between the homes market
  value and the fraudulently inflated value.

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Emerging Scheme Seller Assistance

• Some industry sources have coined the phrase
  cash back purchase or one transaction flip to
  describe the scheme because it eliminates the
  need for two property transactions to generate a
  profit.

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Emerging Scheme Short-Sale Fraud

• A real estate short sale is a type of
  pre-foreclosure sale in which the lender agrees
  to sell a property for less than the mortgage
  owed.
• Short-sale fraud schemes are difficult to detect
  since the lender agrees to the transaction, and
  the incident is not reported to internal bank
  investigators or the authorities.

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Emerging Scheme Short-Sale Fraud
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Re-emerging Scheme Foreclosure Rescue Scams

• Perpetrators convince homeowners that they can
  save their homes through deed transfers and
  up-front fees.
• Involves a manipulated deed process that results
  in the preparation of forged deeds.
• Perpetrators may sell the home or secure a
  second loan without the homeowners knowledge.

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Re-emerging Scheme Foreclosure Rescue Scams
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Emerging Scheme ID Theft and HELOCs

• Stolen customer identification information is
  being used to compromise Home Equity Lines of
  Credit (HELOC) accounts.

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The Sub-Prime Loan Process
Potential Areas for Criminal Activity
UNCLASSIFIED//FOUO
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Sub-Prime Meltdown Timeline
2004
Federal Reserve began a series of Fed Funds Rate
increases. By June 2006, there will have been 17
consecutive increases raising the rate from 1 to
5.25.
June
2006
The weakest subprime mortgage originators begin
to fail by December 2007, over 110 mortgage
origination companies will have closed their
doors.
December
2007
April
New Century (2nd largest originator of Sub-Prime
loans) filed for bankruptcy.
UNCLASSIFIED//FOUO
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Sub-Prime Meltdown Timeline
2007
Bear Stearns announced that investors in their
sub-prime hedge funds would receive little or no
recovery the two funds had lost 90 of their
value.
July
RealtyTrac announced that foreclosures had risen
93 in one year.
August
Goldman Sachs forecasted Sub-Prime losses for the
financial sector would reach 400 billion.
November
2008
Sub-Prime losses reached 232 billion and the IMF
estimated that financial institutions world-wide
may face losses of 945 billion over the next two
years.
April
UNCLASSIFIED//FOUO
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The Sub-Prime Loan Process
Hold in portfolio
Loan Origination
Secondary Market
Bank
Sell Loan
Mortgage Broker
Broker Loan
Investment Bank, Brokerage House, or Real Estate
Investment Trust
Mortgage Banker
Create special purpose entities
Securitize loan and sell to investors
Investors
Pension Funds Life Insurance Companies Other
Commercial Banks State Local Governments Central
Banks Fund Managers The Public Brokerage Firms
Sell ownership interest to investors
Special Purpose Entities
UNCLASSIFIED//FOUO
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FBI Sub-Prime Fraud Investigations
Real Estate Investment Trusts
UNCLASSIFIED//FOUO
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SUB-PRIME COLLAPSE

• 80.2 of securitized sub-prime loans originated
  during 2005 had adjustable rates 74.9 of these
  loans were 2/28 adjustable-rate loans.
• These ARMS had fixed mortgage rates for the first
  two years after origination and were subject to
  reset in 2007.

Source First American CoreLogics
LoanPerformance The MarketPulse
UNCLASSIFIED//FOUO
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Impact of Sub-Prime Crisis

• Problems Related to Credit Contraction
• Economy slows
• Reduced available credit for new development
• More difficult for people to obtain mortgages
• Refinancing opportunities are less available
• Financing becomes more expensive
• Reduced interest from foreign investors in MBSs
• Problems Related to Poor Underwriting
• Increased number of foreclosures
• Depreciating real estate values
• No room for equity withdrawals
• Problems Related to Write-downs
• Stock market declines
• Reductions in dividends
• Increased need for capital infusions
• (sources include sovereign wealth funds)

232 billion as of April 08
UNCLASSIFIED//FOUO
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Money Laundering
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Money Laundering

• Money laundering is the process by which
  criminals conceal or disguise the proceeds of
  their crimes or convert those proceeds into goods
  and services. It allows criminals to infuse
  their illegal money into the stream of commerce,
  thus corrupting financial institutions and the
  money supply and giving criminals unwarranted
  economic power U.S. Department of Justice

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In Effect, Any Knowing Use of the Proceeds of
Criminal Activity Is Money Laundering!
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Case in Point Martin Frankel, et. al.
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