The Changing Face of Mortgage Fraud in Florida

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The Changing Face of Mortgage Fraud in Florida

• Chris Hancock, CFE
• Florida Office of Financial Regulation
• Bureau of Financial Investigations

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Central Florida Condo Development
Average Sales Price in 2008 325,000
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Central Florida Condo Development
Average Sales Price in 2009 65,000
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Traditional Mortgage Fraud

• Misrepresentations made to lender to obtain loan
  - typically regarding income, assets, employment
  and use of property.
• Inflated appraisals.
• Property flips.
• Straw buyers.
• Builder bailouts.
• Condo conversions.

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Mortgage Fraud Trends

• Majority of Florida OFR cases of fraud involving
  initial mortgage loans are historic, actual fraud
  occurred two plus years ago (reporting lag
  investigative response lag).
• Geographic shift in fraud to those states with
  high foreclosure rates to take advantage of high
  numbers of distressed borrowers, foreclosed
  properties and short sale opportunities.

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Mortgage Fraud Trends

• SAR filings by depository institutions related to
  mortgage fraud are up but those reporting current
  fraud are down (Source FinCEN).

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Preying on the Desperate

• Targeting distressed borrowers unable or
  unwilling to make payments.
• Foreclosure Rescue
• Homeowner sells home with an agreement to rent
  back until market and/or borrowers credit
  improves. Buyer promises to sell home back to
  original owner.
• Loan Modification Companies
• Purported re-negotiation of existing mortgages
• Upfront fees and schemes to strip equity.
• Short Sales use of straw buyers.

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Seniors at Greater Risk?

• Increased targeting of senior citizens,
  especially those whose wealth has fallen due to
  the decline in financial markets.
• Reverse Mortgages, officially known as Home
  Equity Conversion Mortgages (HECM). Allow
  homeowners, typically 62 years of age or older,
  to access the equity in their home. Repayment
  comes from the eventual sale of the property.
• According to HUD, HECM FHA insured loan
  originations increased 1,300 from FY 1999 to FY
  2008.
• Ripe for fraud and abuse of this vulnerable
  population.

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Responses

• Investigative
• Legislative/Regulatory
• Industry
• Consumer Education

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Investigative Multi-Agency

• Federal/State/Local Law Enforcement Mortgage
  Fraud Task Forces and Initiatives.
• Financial Fraud Enforcement Task Force.
• Miami-Dade County Mortgage Fraud Task Force.
• Middle District of Florida USAO Mortgage Fraud
  Surge
• More than 100 defendants indicted relating to
  400 million in loans allegedly procured by fraud
  involving more than 700 properties (November
  2009).
• Operation Stolen Dreams
• Nationwide multi-agency effort coordinated by the
  Financial Fraud Enforcement Task Force.
• Miami Area - 86 arrests involving 76 million in
  mortgage fraud (June 2010).

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Federal Legislative/Regulatory

• Secure and Fair Enforcement for Mortgage
  Licensing Act 2009 (SAFE).
• SAFE strongly encourages all states to
  participate in Nationwide Mortgage Licensing
  System (NMLS) for the residential mortgage
  industry. Intent to improve flow of info between
  state regulators, increase accountability of
  brokers/lenders and assist consumers. Partial
  go-live earlier this month.
• Appraisers Home Valuation Code of Conduct
  modified in May 2009 requires use of Appraisal
  Management Companies to reduce pressure on
  appraisers from lenders and brokers to inflate
  property values.

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Federal Legislative/Regulatory

• Fraud Enforcement Recovery Act 2009
• Mortgage lending businesses now defined as
  financial institutions for the purposes of bank
  fraud.
• Maximum prison sentences for wire fraud/mail
  fraud affecting financial institutions increased
  to 30 years.
• Dodd-Frank Wall Street Reform and Consumer
  Protection Act 2010
• Regulations to be established requiring issuer of
  an asset-backed security (including certain
  residential mortgages) to retain some of the
  credit risk.
• Establishment of a Consumer Financial Protection
  Bureau with authority to implement rules
  regarding mortgages and many other consumer
  financial products.

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Florida Legislative Changes

• Since January 2010, loan originators need to be
  licensed to modify existing mortgage loans and
  upfront fees are prohibited.
• Beginning this month, loan originators and
  lenders are required to renew license on yearly
  basis (includes criminal background checks and
  credit reports).
• Easier for the OFR to deny or revoke mortgage
  licenses for certain convictions and even for
  pending prosecutions under certain circumstances.
• Unfair, deceptive, or misleading advertising is a
  specific violation.

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Industry and Consumer Awareness

• Industry
• Improved broker and lender due diligence.
• Stricter borrower requirements.
• Fewer exotic loan products and low doc no
  doc (liar) loans.
• Increased resources committed to loan workouts.
• Consumer Education
• Legislators, regulatory agencies and consumer
  protection groups conducting public outreach and
  holding workshops and town hall meetings for
  borrowers.

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