Mortgage fraud is a problem which forces costs on everyone, “on homeowners, who must indirectly pay for the increased costs that fraud imposes; on neighborhoods, afflicted by fraud; and on taxpayers, who must shoulder the cost of combating it” (Sandler et al., 2006). It is a growing international concern, affecting millions of people worldwide. This article presents broad definitions of mortgage fraud, common schemes used by industry insiders, and examples of mortgage fraud from around the world. These examples by no means encompass the entire spectrum of mortgage fraud; rather, they are cases to demonstrate the pervasiveness of mortgage fraud in international markets.

Types of Mortgage Fraud

Mortgage fraud falls into two categories, fraud for profit and fraud for housing (FBI, May 2005, Mortgage Fraud: General Overview), although the American Banking Association Banking Journal (ABABJ) added a category: fraud for other criminal activities. According to the ABABJ, fraud for other criminal activities “involves the perpetrator’s use of illegally obtained funds in real estate transactions,” such as a terrorist who may buy a safe house (Sandler et al., 2006).

The Federal Bureau of Investigation (FBI) investigates two categories of mortgage fraud: fraud for profit and fraud for housing. Fraud for profit, also known as “industry insider fraud,” involves a perpetrator whose motive is to “revolve equity, falsely inflates the value of the property, or issues loans based on fictitious properties” (FBI, 2005). Approximately 80 percent of reported fraud losses involve collaboration or collusion by industry insiders (FBI, 2005). Fraud for housing, on the other hand, “represents illegal actions perpetrated solely by the borrower” (FBI, 2005). In these cases, the borrower makes misrepresentations and false statements regarding his or her income or employment history; the borrower has a personal vested interest in acquiring the house and does not seek to defraud lenders for profit.

The practice of defrauding lenders should not be equated with predatory lending, which “forces borrowers to pay exorbitant loan origination/settlement fees, sub-prime or higher interest rates, and in some cases, unreasonable service fees” (FBI, 2005). Predatory lending schemes usually involve senior citizens, lower income and challenged credit borrowers (FBI, 2005).

Common Schemes

Common mortgage fraud schemes include: property flipping, silent second, straw buyers, stolen identity, inflated appraisals, foreclosure schemes, equity skimming, and air loans. Property flipping occurs when “property is purchased, falsely appraised at a higher value, and then quickly sold” using fraudulent appraisal information (FBI, 2005). Kickbacks to accomplices are common in this scheme; accomplices include investors, buyers, property/loan brokers, appraisers, title company employees (FBI, 2005). Silent seconds refer to a non-disclosed second mortgage which is used to pay the down payment on a property. However, the primary lender thinks the “borrower has invested his own money in the down payment when, in fact, it is borrowed” (FBI, 2005). Straw buyers, also called straw borrowers or nominee loans, conceal the identity of the borrower and this “allows the borrower to use the nominee’s name and credit history to apply for a loan” (FBI, 2005).

Fictitious identity is another scheme in mortgage fraud in which the perpetrator uses a fictitious or stolen identity on the loan application. In inflated appraisals, an appraiser “acts in collusion with a borrower and provides a misleading appraisal report to the lender which inaccurately states an inflated property value” (FBI, 2005). Foreclosure schemes involve perpetrators who identify homeowners whose houses are already in foreclosure or who are at risk of defaulting on loans. Perpetrators then “mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees” (FBI, 2005).

Equity skimming includes a variety of frauds, such as the use of a straw buyer or false income documentation, to “obtain a mortgage loan in the straw buyer’s name…subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title” (FBI, 2005). The investor discontinues mortgage payments and rents the property until foreclosure occurs months later. Finally, an air loan is defined by the FBI as “a non-existent property loan where there is usually no collateral” (FBI, 2005). One example presented in the Financial Crimes Report to the Public is when a “broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows” (FBI, 2005).

Mortgage Fraud on the Rise

For the past four years, mortgage rates have been at an all-time low, prompting many individuals to enter the mortgage industry. However, due to recently increasing rates, many of these lenders have turned to unethical methods of financing, promising below-market rates and rock-bottom deals. Insiders comprise the majority of mortgage fraud offenders. Lenders have literally “made it easier to lie and get away with it…by letting people borrow money without showing bank statements, pay stubs or tax returns that would indicate whether the borrowers would be in a good position to pay back the loan” (Patterson, 2006). While lenders claim noble motives, to help self-employed and retired individuals whose income and assets were more difficult to determine, dishonest industry insiders have taken advantage of weaknesses in the mortgage industry process in order to make a quick dollar.

As FBI Agent Chris Swecker testified to Congress, “Mortgage fraud in the secondary market is often under-reported. Therefore, the true level of fraud is largely unknown.…Each fraud case contains some type of material misstatement, misrepresentation or omission relied on by an underwriter or lender to fund, purchase or insure the loan” (Spiegel, 2006).

Mortgage Fraud in the United States

Federal authorities recently arrested Rebecca Hauck, the “Bonnie” to Matthew Cox’s “Clyde” of mortgage fraud. Matthew Cox can accurately be termed one of the U.S. mortgage industry’s worst nightmares. Cox and his girlfriend, Rebecca Hauck, defrauded at least 10 different lenders using nearly a dozen stolen identities (Foust and Grow, 2005). The co-conspirators began their fraud scheme in Florida, moved on to Atlanta and then South Carolina. Authorities in each state caught on to their schemes but both individuals managed to evade law enforcement agencies, at least for a time in the case of one of them (Hauck).

The couple forged “deeds of satisfaction” “to convince banks that they had paid off loans for – and thus owned – homes that, in fact, they were renting from the true owners” (Foust and Grow, 2005). Interestingly, Cox’s arrogance reached such proportions that he began to write a semi-autobiographical novel titled, “The Associates.” According to Foust and Grow, the novel is “little more than a barely fictionalized account of his escapades” (2005). Hauck seems to be cooperating with investigators who are still searching for Cox. Rumors are circulating that he is hiding out in Florida, where he and Hauck first met through an online dating service (Cowan, 2006).

Mortgage fraud has also been used to fund other criminal activities. In 2004, the FBI indicted two men in Detroit “who used mortgage fraud, along with a variety of schemes, to secure more than $200,000 to buy military equipment for Hezbollah, a Lebanese terrorist organization” (Pfotenhauer, 2006). Mortgage fraud helped a Chicago drug-dealing gang fund its other criminal activities, drug-dealing, smuggling and prostitution (Pfotenhauer, 2006).

One reason that mortgage fraud has increased in recent years is the simple fact that “lenders, to cut costs, have outsourced the origination of most mortgages to independent mortgage brokers, who now initiate more than two-thirds of all home loans – meaning that banks don’t know borrowers the way they did in decades past” (Foust and Grow, 2005). Technological advances in identity theft have also led to a rise in fraudulent loan documentation schemes.
Mortgage Fraud Internationally

Canada

Canada is experiencing increased mortgage fraud complaints. According to industry insiders in Canada, fraud usually occurs in the entry-level new home market (Waters, 1993). Sources in Calgary state that, while the number of realtors is small, the primary offenders are the top producers, with the incentive of a substantial commission on the fraudulent loan (Waters, 1993).

According to a recent estimate by the Quebec Association of Real Estate Agents and Brokers, mortgage fraud causes $1.5 billion in losses a year (Somerset, 2006). The Real Estate Council of Alberta recently did its own measurement of fraud over a 12-month period and found 2,700 cases in Alberta alone (Somerset, 2006). Mortgage fraud is a complex crime and, according to Barry Elliott, Ontario-based creator and coordinator of Phone-busters, a national police-sponsored call center that tracks fraud, “The problem with mortgage fraud is you’re dealing with identity theft....You can be victimized with a mortgage on your property and not be aware of it, or have property purchased in your name and not even know about it” (McLellan, 2006).

As in the United States, many cases of mortgage fraud in Canada use straw buyers and fraudulent loan documentation. Susan Leslie, vice president of claims and underwriting for First Canadian Title, stated, “In 2004, mortgage fraud accounted for 36 percent of the claims we [First Canadian Title] paid, whereas in 2000, it would have been closer to 15 percent” (Somerset, 2006). The Law Society of Upper Canada explains the increase in mortgage fraud is a result of “the easier access ascribed by the electronic land registry system, the increased competitiveness of money lenders, and the amplified pressure placed by clients on lawyers to close deals without due diligence” (Somerset, 2006).

New Zealand

The Auckland government has recently taken steps to safeguard homes from mortgage fraud by putting special stipulations on property titles. Registrar-General of Land, Robbie Muir, said that Land Information NZ “put caveats on the house titles to stop fraud recurring.…This means no one, including the victims, can raise a mortgage against the houses and the victims would have to go through a legal process to have the special orders removed or sell their properties” (The New Zealand Herald, January 17, 2006).

One example of mortgage fraud in New Zealand is Richard Albert Essex of Onehunga, who admitted to defrauding four banks of nearly $1.5 million. He pleaded guilty to one charge of using a document with intent to defraud and could receive up to seven years in jail (The New Zealand Herald, May 30, 2006). As the owner of New Zealand Debt Repay, Essex “offered financial assistance to homeowners in financial difficulty….It would enter into ‘sell and buy-back’ agreements where clients would sell their properties to the company and agree to re-purchase the property 12 months later for a higher price (The New Zealand Herald, May 30, 2006). Prosecutors determined that Essex “refinanced the mortgages on the properties with various banks, supporting his applications with false documents and information relating to his income, employment, and his ownership of the properties (The New Zealand Herald, January 17, 2006).

Great Britain

Accountants KPMG revealed that the cost of fraud in the North-East and Yorkshire regions of England has quadrupled from 2004 to 2005, costing businesses 21.5 million pounds; similarly, the number of cases of mortgage fraud investigated by law enforcement in the regions rose, from 10 to 18 (Anderson, 2004). Detective Inspector Phil Butler, chairman of the North-East Fraud Forum and head of the Northumbria Police Economic Crime Unit, was encouraged by the numbers, stating, “Now people are much more open to talking to the police and one of our aims is to remove the stigma of talking about fraud. It was under-reported in the past” (Anderson, 2004).

The Financial Services Authority (FSA) joined forces with mortgage brokers in an effort to crack down on fraudulent loan applications and eliminate mortgage fraud. This proactive resolution, supported by the Council of Mortgage Lenders, requests mortgage firms to “pass on information to the FSA if they suspect a fraudulent application has been made through an intermediary” (Guardian Unlimited, 2006). Regulators are interested in cases in which “the mortgage broker has been aware of the fraud, as well as incidents where they failed to spot it” (Guardian Unlimited, 2006). Such proactive approaches to mortgage fraud are occurring more frequently as fraud continues to increase worldwide.

China

In South China, five men are alleged to have conspired to defraud $12.5 million from four banks, Liu Chong Hing Bank, Bank of America, Bank of East Asia, and Bank of China. The Eastern Court held that “the defendants had allegedly created bogus provisional agreements for the sale and purchase of a Tuen Mun housing project, Villa Pinada, to apply for mortgages totaling about $12.5 million” (Yan, 2004).

Hong Kong

A Hong Kong man was sentenced to 16 months imprisonment following the conviction of one count of “Obtaining a Pecuniary Advantage by Deception” in a case of mortgage fraud (Xinhua General News Service, 2005). To support his mortgage loan application for the amount of 926,820 Hong Kong (HK) dollars (119,412 US dollars), the defendant “submitted a letter of employment and four Mandatory Provident Fund (MPF) records to the bank, showing that he had been employed as a programmer from September 2001 with a monthly salary of 25,900 HK dollars (3,337 US dollars)” (Xinhua General News Service, 2005).

Japan

The mortgage securities firm Daiwa Toshi Kanzai collapsed in Japan in 2001, after being declared insolvent with liabilities exceeding assets by 5 billion yen. Following its downfall, more than 500 victims of mortgage fraud sued the Japanese government in 2003, claiming that it was the state’s failure to prevent the firm Daiwa Toshi Kanzai from continuing to carry on fraudulent business, including mortgage fraud (Japan Economic Newswire, 2003). The Osaka-based Daiwa Toshi Kanzai is estimated to have caused over 110 billion yen in losses to approximately 17,000 people (Japan Economic Newswire, 2003). This is the first group action over the responsibility of the state to regulate mortgage securities firms (Japan Economic Newswire, 2003). It is the second-largest consumer damages suit against the state, following the “Toyota Shoji affair in which victims claimed the government did not supervise Toyota Trading Corp., which conducted a nationwide scam involving sales of gold to elderly investors in the 1980s” (Japan Economic Newswire, 2003).

Mortgage Fraud Outlook

Mortgage fraud has been called “the fastest growing white-collar crime in the United States,” by Karen Spangenberg, Chief of the Financial Crimes Division of the FBI. Losses exceeded $1 billion in fiscal year 2005, according to data collected by the FBI (2005). In addition, 33% more suspicious activity reports (SARs) have been filed in 2005 than in 2004 (FBI, 2005).

According to John Robbins, the chairman-elect of the Mortgage Bankers Association, law enforcement agencies told lenders that they “didn’t have the resources” to investigate and prosecute cases of mortgage fraud (Sichelman, 2006). In response, the mortgage industry, including the Mortgage Bankers Association, “developed a habit of dealing with fraud internally” (Sichelman, 2006). Times are changing, however. Law enforcement agencies are encouraging lenders and other industry insiders to come forward with information regarding mortgage fraud. Laws are changing, especially in Georgia, USA, which has consistently been ranked in the top 10 “hot spots” by the Mortgage Asset Research Institute (2001-2006). To combat mortgage fraud, Georgia has implemented new laws, which also help judges better understand what mortgage fraud involves (Sichelman, 2006). Policymakers have passed the Georgia Residential Mortgage Fraud Act. This law “makes it punishable by one to 10 years in prison to misstate, misrepresent or omit facts in a real estate transaction, with intent to defraud…the law also provides for fines of up to $100,000 an offense if a pattern of illegality is proved” (Derus, 2006).

The legislation enables law enforcement agents to apprehend suspects before the lending institutions have been defrauded of millions of dollars. Agents are now able to intervene as soon as a supposed fraud has been committed. Four states have modeled laws after Georgia’s, and California is considering following as well. As Atlanta lawyer Peter Lubin explains, “Before, we weren’t getting any attention. They wanted to know who Fannie Mae was and how they could reach her….Now they’re better educated, and we’re getting indictments” (Sichelman, 2006).

To this end, Senator Barack Obama of Illinois is trying to push legislation through that would criminalize mortgage fraud. The Stopping Transactions which Operate to Promote Fraud, Risk and Underdevelopment Act, known as the STOP FRAUD Act, would “expand the SARs reporting requirement, establish a database for censured and debarred mortgage professionals, and provide funding for a number of enforcement activities” (Sichelman, 2006).

Experienced and ethical mortgage professionals can take steps to avoid the pitfalls of unethical behavior. Homeowners can take several precautions when choosing a mortgage broker such as asking probing questions about their application, including questions about current interest rates. In addition, borrowers should never be asked to falsify any data or asked to leave any signature lines blank. Informed borrowers should ask for credentials from prospective lenders as well as referrals from realtors or other home buyers.

Notes

Anderson, G. (2004). “Fraud costs quadruple to 21.5m for North firms.” The Journal. Retrieved July 7, 2006, from LexisNexis database.
Cowan, C. and D. Stead. (2006). “The Feds reel in a great white.” Business Week 3984. Retrieved June 28, 2006, from LexisNexis database.
Derus, M. (2006). “Mortgage fraud growing rapidly, agencies say: Scams netted $1 billion last year.” Milwaukee Journal Sentinel Online. Retrieved June 1, 2006, from http://originatortimes.com.
Federal Bureau of Investigation. (2005). Financial crimes report to the public: Mortgage fraud. Retrieved June 28, 2006, from http://www.fbi.gov/publications.htm.
Foust, D. and B. Grow. (2005). “Sharks in the housing pool.” Business Week 3949. Retrieved June 28, 2006, from LexisNexis database.
Guardian Unlimited. (2006). “Move to tackle mortgage fraud.” Retrieved July 7, 2006, from LexisNexis database.
Japan Economic Newswire. (2003). “537 seek 3 billion yen from state over mortgage fraud.” Retrieved July 7, 2006, from LexisNexis database.
McLellan, W. (2006). “Hot market fuel mortgage fraud in Canada: Crime, including identity theft, costs Canadians as much as $1.5 billion a year.” CanWest News Service. Retrieved July 7, 2006, from LexisNexis database.
Mortgage Asset Research Institute (MARI). (2001-2006). “Ranking of top 10 states based on MARI’s Fraud Index (MFI) Score – Years 2001-2006.” Received July 7, 2006, from http://www.mari-inc.com
The New Zealand Herald. (2006, January 17). “Department protects homes from more fraud.” Retrieved July 7, 2006, from LexisNexis database.
The New Zealand Herald. (2006, May 30). “Ex-finance company owner admits $1.5m mortgage fraud.” Retrieved July 7, 2006, from LexisNexis database.
Patterson, S. (2006). “Loan lies: How insiders cheat lenders with dishonest mortgages.” The Florida Times-Union. Retrieved June 9, 2006, from LexisNexis database.
Pfotenhauer, K. (2006). “The growing threat of fraud against lenders.” Mortgage Banking 66 (7). Retrieved July 7, 2006, from LexisNexis database.
Roberts, R. (2006). “‘Bonnie and Clyde’ mortgage broker caught in Texas.” Realty Times. Retrieved June 28, 2006, from http://realtytimes.com.
Sandler, A.L., Raman, A.S., and A.K. Mitchell. (2006). “Mortgage fraud wave requires strict regimen to resist.” American Banking Association Banking Journal. Retrieved June 28, 2006, from www.ababj.com.
Sichelman, L. (2006). “Regulators seek lender input on fraud.” Mortgage servicing news, 10 (6). Retrieved July 7, 2006, from EBSCOhost database.
Somerset, J. (2006). “Sold from under us.” Maclean’s. Retrieved July 7, 2006, from LexisNexis database.
Spiegel, R.M. (2006). “Ethical mortgage lenders avoid temptations of mortgage fraud.” Houston Business Journal Online. Retrieved June 1, 2006, from http://houston.bizjournals.com/houston.
Waters, G. (1993). “The art of mortgage fraud.” Alberta Report, 20 (38). Retrieved July 7, 2006, from EBSCOhost database.
Xinhua General News Service. (2005). “HK man sentenced for mortgage fraud.” Retrieved July 7, 2006, from LexisNexis database.
Yan, L. (2004). “Alleged conspirators in $12m mortgage fraud case granted bail.” South China Morning Post. Retrieved July 7, 2006, from LexisNexis database.

Laura Ann Lindholm is currently working on her Master of Arts in Criminal Justice and Criminology at the College of Criminal Justice at Sam Houston State University. She worked as an intern with the Mortgage Fraud Squad at the Houston Division of the Federal Bureau of Investigation.