What is mortgage fraud?
The typical mortgage fraud scheme involves false loan application documents, fraudulent appraisals and even unlicensed appraisers. However, it is not mortgage fraud to purchase real estate with financing where there is no intent to defraud anyone.
The Basic Mortgage Fraud Scheme: Lie on the Loan Application
Traditionally, a person's income and debt ratios are crucial in deciding whether or not they qualify for a loan. This is still the case, but in the past few years lending standards have become so loose that literally anyone with a pulse can get a loan even if they are a NINJA (No Income, No Job, and Assets). These loans are usually called "stated-income loans", but another common name is just "liar loans". You could say that the banks were asking for people to lie, but it is still fraud to prepare loan documents with errant information. In these cases of fraud people usually willingly inflate their income and assets in order to qualify for a loan.
Besides lying about income and employment, some people lie about occupancy. The reason is that generally if you buy a house to live in you would get a lower interest rate than if you were an investor who will be renting or flipping the property. In certain areas of the country you would also need to pay a larger down payment on a property if you were an investor and the house is not your primary residence. So in most of these cases of fraud people lie to save money.
Casey Serin is an infamous example of a person who repeated lied about his income and occupancy status on his loan applications and was approved for eight homes. He managed to flip one of his homes, but all the rest went into foreclosure because housing prices came down drastically and he was not able to flip them in time. So for Casey, lying did not pay. However, compared to the rest of the criminals you will meet in this article, Casey is really not a criminal mastermind.
The Professional Scheme -- A Ring of Realtors, Loan Officers, and Appraisers Working Together To Rob the Lenders. When a group of real estate insiders start to work together to defraud the banks, they can manage to steal millions without waving a single gun. The garden variety scheme works like the following:
One of the conspirators finds a person with good credit that is willing to join the scheme as a "straw buyer". In some cases these buyers are victims of identity theft, and sometimes they are the friends and family of the co-conspirators. The ring of thieves finds a cheap property that is for sale and someone related to the ring buys it. The property is reappraised at a much higher value by an appraiser on the inside or an appraiser who was bribed. A loan is taken out by the straw buyer for the new elevated price. Sometimes a loan officer is part of the ring and pushes the loan through.
The bank approves the loan and pays the ring the new price for the house. The ring stops making payments on the house and the house goes into foreclosure The ring of thieves take the bank's money and split it amongst themselves. There are some variations to this process. For example, sometimes the thieves work out a deal with a loan officer to approve a loan that is much larger than the price of the property they are trying to buy. Then they take the difference between the amount of the loan and the price of the property as cash and walk away. In either case, the lenders are always left holding the bag when the properties go into foreclosure.
Here are some of the real estate professionals and other fraudsters that made headlines in recent months for mortgage fraud, I have their files catalogues in my office for study.
Crisp & Cole: David Crisp and Carl Cole were flying high with industry accolades and expensive mansions. Now they are being investigated by the FBI for their business practices and fraud. Practically all of David Crisp and his family's personal properties have gone into foreclosure and the California Department of Real Estate filed a complaint that alleged the agency misled lenders on at least $12 million worth of loans. The real estate office is now gone and is ironically replaced by a real estate office that specializes in bank owned properties.
Wings, Smith, and Wright: This is a story about how a few people managed to steal more than $6 million dollars from Bear Stearns. They were not real estate insiders, but they managed to get quite a few of them on board. As the Wall Street Journal article states, "it didn't take a rocket scientist to steal a fortune from mortgage lenders in recent years". The article also contains a pretty nice diagram on how the scheme was done.
Fitzgerald and Abrams: These two successful Realtors in the affluent Beverly Hills area managed to secure more than $140 million in fraudulent loans from Lehman Bros. Bank. This is an extremely professional ring that included people in every step of the mortgage process. This pair also managed to recruit "straw buyers" in Utah through friends and family at a price of $15,000 per pop. Finally, other Realtors who were jealous of their "success" in selling house for ridiculously high amounts of money became suspicious and reported their concerns to the authorities.
Click here to view FBI Flyer Special Alert on Mortgage Fraud
Click here to view FBI “fact sheet” on what to look for with mortgage fraud
Recent mortgage fraud cases, including Sacramento, are discussed here
Click here to view answers to frequenlty asked questions and potential defense strategies.
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