Mortgage Fraud-Appraiser Risk Management • Course Number 027 • Instructor ______ Phone: _______ cell or _______home/office Email: ____@______ © 2011 Kaplan, Inc. 1
Mortgage Fraud and Predatory Lending: What Every Agent Should Know Second Edition Written By Marie S. Spodek, DREI, GRI®, and Jerome Mayne Appraisal Supplement, George Harrison, phd ed
Course Learning Objectives • When you complete this course you will be able to: 1. Understand USPAP’s directives on fraud 2. Review the history of mortgage fraud in the mortgage system 3. Identify the fraud indicators 4. Read how frequently mortgage fraud occurs and is detected 5. Understand the characteristics of Predatory Lending and Illegal Flipping 6. Review Federal Activities regarding fraud © 2011 Kaplan, Inc. 3
Introduction • Historically mortgage fraud has always been in existence • Fraud is the “intentional perversion of truth in order to induce someone to part with something of value or to surrender a legal right” (Webster’s Dictionary) © 2011 Kaplan, Inc. 4
Introduction • Borrowers greed prompted misrepresentation on loan applications such as stating their intent to occupy a residence when their real intent was to rent. • Mid-2000 s other types of fraud became more prevalent such as the acts to deceit and conspiracy to deceive primary and/or secondary market lenders for the purpose of pocketing large sums of money. © 2011 Kaplan, Inc. 5
The Appraiser and Risk Management • The appraiser is a member of the real property financing system appraiser The appraiser is expected (under USPAP) to be independent, impartial and objective • The appraiser is also required to be competent to complete any appraisal assignment they accept • Unfortunately in most cases the scheme of mortgage fraud would not have been successful without the participation of the appraiser • One of the appraiser’s most significant tool to manage their risk is their workfile • Included in this handout is the extract from the Ethics and competency rule of USPAP. Its critical to review those rules to protect from potential involvement with fraud through adherence © 2011 Kaplan, Inc. 6
The Appraiser and Risk Management • Special emphasis must be given to the NEW Record Keeping Rule • Included in this handout is the extract from Chapter 5 of the HUD Handbook which provides a guide that may be used for discussion in the class of what might be expected to be found in the appraiser’s workfile. • Although the book used is primarily written for real estate agents it is also beneficial for appraisers. © 2011 Kaplan, Inc. 7
FHA Work File Example extract HUD Handbook 4150. 2 Sec 5 -3 Section Supporting Data Acceptance of assignment File Memorandum Property Description Legal description Photographs, Floor plans, Tax Map and info from Field notes during inspection, Listing info, Offers to purchase Neighborhood Notes from field visit, Photographs, Demographic data Cost Approach Relevant Cost New data, Land Sales Details © 2011 Kaplan, Inc. 8
FHA Work File Example extract HUD Handbook 4150. 2 Sec 5 -3 Section Supporting Data Sales Approach Sales details and photos Transaction information Derivation of adjustments Interview notes Income Approach (if applicable) Market rent comparable information, Cap rate justification, Historical financial statements VC Conditions Noted (the VC is retired but many of the required notations about the conditions have not been retired) Photo of condition, Field notes supporting any assumed repairs, Calculation of cost to repair a condition © 2011 Kaplan, Inc. 9
FHA Work File Example extract HUD Handbook 4150. 2 Sec 5 -3 Section Supporting Data Additional Information Relevant Surveys, Market data and, Other sources of data such as property inspections or CC&Rs, etc. © 2011 Kaplan, Inc. 10
Introductory Case Studies Case Study 1 -Fraud in a Down Market • “The appraiser was in collusion with the broker and, • Knowing that the house was worth about $200, 000 owing a balance of about $180, 000; he appraised it for $250, 000. • The broker told the owner how lucky she was and that they would ask the full $250, 000 in a listing. • The broker reported the property was under contract but there was no real subsequent offer • Under the advice of this broker (implying to the seller the market was falling) the seller took the property off of the market • The seller being desperate to sell and telling the broker that foreclosure was imminent the broker agreed to purchase the property for $165, 000 • After the sale the seller declared bankruptcy and during the hearings the suspicious judge reported the matter to the FBI © 2011 Kaplan, Inc. 11
Introductory Case Studies Case Study 1 -Fraud in a Down Market (cont) Questions 1. Might the broker have committed some illegal act? If so, what? 2. Might the appraiser have committed some illegal acts? If so what? 3. Might both (broker and appraiser) be liable to the homeowner for damages? 4. What was necessary for this to occur? 5. Is it still possible for this to occur? © 2011 Kaplan, Inc. 12
Case Study 2 -Fraud in a Stable Market • • • Residential area is constructed near a major urban area by a real estate developer The cost to construct, including the lots, is $400, 000 +/- each Spec houses were built on several lots as has as $500, 000 The developer’s broker and he jointly decided to improve productivity which included soliciting the help of a mortgage broker who: • Identified local celebrities (primarily television) who acted as straw buyers • The deed would actually be in their name but a side contract existed retaining ownership by the developer • Three of these transactions were completed without appraisals, for more than $600, 000 each Other properties were listed in the $600, 000 range Appraisal was provided using the three “straw buyer sales” for which the state appraisal board asked “why those three sales” • Appraiser did not mention the source being the developer stated he often relied on builder data in new subdivisions of non-MLS sales © 2011 Kaplan, Inc. 13
Introductory Case Studies Case Study 2 -Fraud in a Stable Market Questions 1. Did the developer do anything unethical? 2. Did the developer do anything illegal? 3. Did the broker do anything unethical? 4. Did the broker do anything illegal? 5. Did the appraiser do anything unethical? 6. Did the appraiser do anything illegal” © 2011 Kaplan, Inc. 14
Chapter 1: Financial Crisis
Housing Market Collapse • Record number of foreclosures • Continued mortgage fraud schemes • Appraiser reforms © 2011 Kaplan, Inc. 16
Dodd-Frank Reform Act • Residential loan originators • Minimum standards for mortgages • Standards for appraisals © 2011 Kaplan, Inc. 17
Industry Insiders • Collaboration • Collusion © 2011 Kaplan, Inc. 18
U. S. Mortgage Fraud • Affects real estate values • Rental markets State 2009 Fraud 2005 Fraud Ranking 1 1 New York 2 — California 3 8 Arizona 4 — Michigan 5 9 Maryland 6 — New Jersey © 2011 Kaplan, Inc. Florida 7 — 19
Mortgage Fraud in the United States • Fraud • 1974– 1975 • 2000– 2005 © 2011 Kaplan, Inc. 20
Effects of Foreclosures • Boarded up homes • Negative feelings • Difficult to find buyers • Lower tax appraisals • Eroded tax base • Fewer community services © 2011 Kaplan, Inc. 21
Effects of Foreclosures • Foreclosed property – Lowers for one-eighth mile – 0. 9% to 1. 44% • Each foreclosed Property – Reduces by 1. 8% – There goes the neighborhood © 2011 Kaplan, Inc. 22
Factors Leading to Foreclosures • • Effect of credit scores Personal bankruptcy Poor loan servicing ARM adjustments Identity theft Mortgage fraud and illegal flipping Predatory lending © 2011 Kaplan, Inc. www. ftc. gov/idtheft 23
SAFE Act • • License mortgage loan originators (MLOs) Exemption individuals Minimum standards NMLSR © 2011 Kaplan, Inc. 24
Chapter 2: Mortgage Basics for Real Estate Licensees
Loan Application • Qualify borrowers – Income – Asset – Credit information • Qualify security (appraisal) © 2011 Kaplan, Inc. 26
Roles of Professionals • • • Mortgage loan originators (MLOs) Loan processors Underwriters Appraisers Importance of proper risk assessment © 2011 Kaplan, Inc. 27
Impact of Liens • Promissory/mortgage note • Mortgage/deed of trust © 2011 Kaplan, Inc. 28
Cost of Borrowing Money Factors • • • Term of loan Time value of money Assessing borrower’s borrowing history Loan amount Security for loan Value © 2011 Kaplan, Inc. Time 29
Loan Sources • Government-assisted programs – FHA – VA • Private sector programs © 2011 Kaplan, Inc. 30
Loan Types • Fixed-rate mortgage (FRM) • Adjustable-rate mortgage (ARM) © 2011 Kaplan, Inc. 31
Exotic Loans • Interest-only (IO) loans • Pay-option ARMs • Negative outcomes © 2011 Kaplan, Inc. 32
Underwriting Criteria • • Income Credit Assets/down payment Occupancy © 2011 Kaplan, Inc. 33
Alternatives to Traditional Requirements • • • Full documentation loan Lite doc/alt doc loan No doc loan Stated income loan Seller carryback loan Combinations © 2011 Kaplan, Inc. 34
Role of Secondary Market • Primary market • Secondary market – Securitization – Tighter standards – More losses © 2011 Kaplan, Inc. 35
Manage Buyer Expectations • Lenders who specialize – Meet buyers’ needs – Use reputable lenders • Avoid unrealistic expectations © 2011 Kaplan, Inc. 36
Chapter 3: Mortgage Fraud
Tracking Suspected Fraud • Financial Crimes Enforcement Network (Fin. CEN) • Financial Institution Fraud Unit (FIFU) • Suspicious Activities Reports (SARs) • Suspicious Mortgage Activity Report (SMARt Form) © 2011 Kaplan, Inc. 38
Fighting Identity Theft • Fair and Accurate Credit Transactions Act (FACTA) – Identify warning signs – How to detect – Actions to be taken – Update programs • Mortgage buy backs © 2011 Kaplan, Inc. 39
Mortgage Fraud • Define – Deception, false facts – Collusion, false premises – Lying • Types – Fraud for housing – Fraud for profit (and business) © 2011 Kaplan, Inc. 40
Penalties for Fraud • Felonies – Lying on loan application – Lying about purchase price – Lying on mortgage application • Federal and state fines • Imprisonment © 2011 Kaplan, Inc. 41
Red Flags Possible Mortgage Fraud • Shady practices • Dual contracts/double HUDs • Hidden addenda • Silent mortgage • Inflated appraisals © 2011 Kaplan, Inc. 42
Red Flags Possible Mortgage Fraud • False information on applications – Straw buyers – Unreported debt • Rebates to borrowers • Creative financing © 2011 Kaplan, Inc. 43
Chapter 4: Predatory Lending
Dilemma for Low Income and Poor Credit • Federal Housing Administration (FHA) loans – Lost market share – Regained popularity • Growth of subprime market – Concentration of credit problems – Little or no credit history © 2011 Kaplan, Inc. 45
Signs of Predatory Lending • Subprime – Not always predatory – Legal interests not in best interest of borrower • Lack of competition from prime lenders © 2011 Kaplan, Inc. 46
Predatory Lending • • • Higher interest rates Adjustable-rate mortgages (ARMs) Excessive origination and closing fees Prepayment penalty fees Binding mandatory arbitration (BMA) Yield spread premiums (YSPs) as kickbacks © 2011 Kaplan, Inc. 47
Signs of Predatory Lending 1. Large origination fees 2. Prepayment penalties 3. YSP to loan originator 4. Steering and targeting 5. Low entry arms 6. Promise to fix with more loans 7. Flipping loans 8. Hiding tax and insurance payments © 2011 Kaplan, Inc. 48
Steering and Targeting • • Elderly Reverse mortgages Racial profiling Immigrants Those with low credit scores Flipping loans Unnecessary products Misleading or no information © 2011 Kaplan, Inc. 49
Changing the Climate • Automated underwriting systems • More regulation/SAFE Act – Prohibit appraisal fraud/Dodd-Frank Reform Act • Consumer education © 2011 Kaplan, Inc. 50
Chapter 5: Illegal Flipping
Real Estate Flips • Positive effects – Gentrification – Construction jobs – Increase tax base • Negative effects – Locals forced out – Tenants displaced © 2011 Kaplan, Inc. 52
Real Estate Flips • Equitable title – Beneficiary – Developer – Foreclosed property purchaser – Vendee in installment sale • Back-to-back closings © 2011 Kaplan, Inc. 53
Illegal Flipping • Schemes – Use of kickbacks – Fake documents – Straw buyers – False identities – Flopping • FHA anti-flipping waiver © 2011 Kaplan, Inc. 54
Signs of Illegal Flipping • Lender fraud • Possible activities – Deed not in seller’s name and lender unaware – Owned for short period – Seller orders appraisal – Rapid increase in value – Unusual payments © 2011 Kaplan, Inc. 55
Results of Illegal Flipping • Neighborhood responses • Neighbor. Works America • Georgia real estate fraud prevention and awareness (GREFPAC) © 2011 Kaplan, Inc. 56
Protect Against Illegal Flipping • • • Know market Use competitive market analysis (CMA) Thoroughly inspect Know extent of repairs Meticulous documentation © 2011 Kaplan, Inc. 57
Chapter 6: Federal Protections
Federal Laws • • • Fair Housing Act Equal Credit Opportunity Act (ECOA) Home Mortgage Disclosure Act (HMDA) Community Reinvestment Act (CRA) Real Estate Settlement Procedures Act (RESPA) • Truth-in-Lending Act (TILA) © 2011 Kaplan, Inc. 59
Federal Laws • Mortgage Disclosure Improvement Act (MDIA) • Dodd-Frank Wall Street Reform Act • Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) • Fair and Accurate Credit Transactions Act of 2003 (FACTA) (Red Flags Rule) • FHA Anti-Flipping Waiver © 2011 Kaplan, Inc. 60
Educate Buyer Borrowers • HUD Web Site • HUD Pamphlet – English – Spanish © 2011 Kaplan, Inc. 61
MDIA 3 -7 -3 1. Three business days after application to provide good-faith estimate (GFE) 2. Seven business days between GFE and signing loan documents 3. Three business days to close if lender changes GFE and/or APR © 2011 Kaplan, Inc. 62
Real Estate Settlement Procedures Act (RESPA) • Federally related residential loans • Disclosures at time of application – Information booklet – Good-faith estimate (GFE) – Affiliated business arrangement (Af. BA) – Seller cannot require certain title insurance company © 2011 Kaplan, Inc. 63
RESPA (continued) • Prohibits kickbacks • Disclosures at settlement/closing • Disclosure after settlement/closing – Escrow account rules – Servicing transfer statement • Possible scams www. realtor. org © 2011 Kaplan, Inc. 64
RESPA Enforcement • Section 6: Servicing of loans • Section 8: Anti-kickbacks and unearned referral fees • Section 9: No specific title insurance company • Section 10: Limits on escrow accounts © 2011 Kaplan, Inc. 65
RESPA Enforcement • Injunctive Relief • File a Complaint with HUD – In Writing – Confidentiality © 2011 Kaplan, Inc. 66
Truth-in-Lending Act (TILA) • Implemented by Regulation Z • No coverage – Business, commercial, agricultural, organizational loans – More than $25, 000 loan – Student loan programs © 2011 Kaplan, Inc. 67
Truth-in-Lending Act (TILA) • Right of rescission – Three days – Not for first mortgage loan • Trigger items • Penalties – Fines – Imprisonment • Missing information from disclosure © 2011 Kaplan, Inc. 68
Home Mortgage Disclosure Act (HMDA) • Implemented by Regulation C • Monitors reporting of loan data – Serving community needs? – Investments attracting private investments? – Possible discriminatory lending patterns? © 2011 Kaplan, Inc. 69
Community Reinvestment Act (CRA) • Regulations 12 CFR • Meet credit needs of community • Loan applicants asked – Ethnicity, race, and color – Applicants should answer honestly – Used to monitor compliance © 2011 Kaplan, Inc. 70
Tips for Real Estate Licensees • Know the laws • Find buyers earlier – Help find appropriate lender – Manage expectations © 2011 Kaplan, Inc. 71
Reporting Appraisal and Mortgage Fraud • Federal Bureau of Investigation (FBI) • Federal Trade Commission (FTC) • Department of Housing and Urban Development (HUD) • Department of Justice (DOJ) © 2011 Kaplan, Inc. 72
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