The Changing Face of Mortgage Fraud in Florida

Chris Hancock, CFEFlorida Office of Financial Regulation

Bureau of Financial Investigations

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Central Florida Condo Development

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Average Sales Price in 2008 $325,000

Central Florida Condo Development

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Average Sales Price in 2009 $65,000

“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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0

10

20

30

40

50

60

70

2003/4 2004/5 2005/6 2006/7 2007/8

SAR's Filed (X1000)

% Current

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 borrower’s 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

InvestigativeLegislative/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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