Mortgage FraudThe Lender’s Perspective

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WWW.MORTGAGEFRAUDBLOG.COM

FOCUS

• Lender Perspective• National vs. Regional• Criminal v. Civil

– Blog is mainly criminal and administrative– Civil lawsuits underlie practice– Criminal and administrative reporting

Statistics

Mortgage Fraud

• Mortgage fraud is defined as material misrepresentation - the giving of false information that deceives or misleads a lender into extending credit beyond the limits of what would normally be extended if the facts were known. – Mortgage Fraud Perpetrated Against

Residential Mortgage Lenders (MBA)

FBI Financial Crimes Report

• The number of suspicious activity reports to the FBI nearly tripled in 2004

– 2003 = 6936– 2004 -= 17,127

26 states have significant mortgage fraud problemsCalifornia is in the top 10

FBI Financial Crimes Report

• 80% of fraud losses involve industry insiders

– appraisers, accountants, attorneys, real estate brokers, mortgage underwriters/ processors, settlement/title company employees, mortgage brokers, loan originators and other mortgage professionals

Despite all the sources . . .

• No authoritative statistics are available on the extent or the cost of the mortgage fraud problem. – SARS– Law Enforcement Investigations– Mortgage Asset Research Institute (MARI)

Appraisals in Perspective

• Three Trillion in Mortgages (MBA – 2004)

• Accurate Valuations are the cornerstone of the lending market

• Mortgage Fraud – Appraisal Fraud = Little to No Loss

The Real Numbers

• Small percentage Organized Fraud Schemes

• Large percentage – Meeting Sales Price– Massaging Comps– Overlooking Repairs– Not actually viewing property/comps– Taking comps from brokers

HEADLINES

May 11, 2005 Illinois Appraiser Agrees to Revocation of License

Dennis M. Wiese Jr., Belleville, Illinois, entered into a consent order with the Illinois Department of Financial and Professional Regulation whereby he agreed to a 10 year revocation of his real estate appraiser license. 

According to the consent order, Wiese had a four-year business relationship with Gary Knox, 59, Decatur, Illinois.  During that time, it was alleged that Knox would order appraisals from Wiese, providing him with information about the condition of the properties and information about the sales of what he said were comparable properties. 

May 4, 2005Flip Participants on Trial in Chicago

• Barren and Bishop were indicted in July 2002 along with Carl Miller and Kenneth Washington, in connection with an alleged property flipping scheme in Chicago, Illinois.

• Appraiser, Kenneth Washington, testifies in exchange for plea bargain.

• Washington testified that he overvalued the properties in appraisals at the request of Barren.

• Barron located and purchased dilapidated properties • Appraisers prepared inflated appraisals that concealed the need for

rehabilitation and repair.  • Potential purchasers would be told that no down payments or

closing costs would be required and that Barren would assist with mortgage payments. 

• Loan Applications with False Data

May 2, 2005 Kansas City Appraiser Pleads Guilty in Massive Fraud Scheme

• Phillip D. Thomas, 49, appraiser, Kansas City, Missouri dba Thomas Appraisal Service plead guilty to three counts

• 177 loans in excess of $12 million• Prepare false and inflated appraisals and

concealed actual poor condition of properties from lenders.

• Fabricated rental income information on properties to support the valuations

Through the Years

• Atlanta Builder Bailouts

• Houston Condo Frauds

• North Carolina Mobile Homes

• Poconos “Why Rent?”

Other Issues

• Fraud or negligence– “I inspected the interior”

• Stolen Identities– New York, Atlanta

• Allowing other appraisers / people access to offices and systems– Atlanta

• Failure to supervise a fraudster

The broker made me do it • Is not a recognized defense

• Does not preclude negligence liability

• Will not keep you off an ineligibility list

MORTGAGE BANKER’S ASSOCIATION

Mortgage Bankers Association

• Fraud is a Growing Issue– Issue Paper– Congressional Testimony– Mortgage Fraud Summit– Mortgage Fraud Against Lenders Resource

Center (www.mbaa.org/mbafightsfraud)

Mortgage Fraud Summit• Protecting the Real Estate Finance System:

Combating Mortgage Fraud Against Lenders

• Washington D.C., March 10, 2005– 80 Industry Leaders

• Lenders• Appraisers• Title Companies• Settlement Agents• Notaries• Brokers

Break Out Sessions

• Four Areas

– Fraud Schemes and Information Sharing

– Oversight of Industry Professionals

– Law Enforcement

– THE IMPORTANCE OF ACCURATE VALUATIONS

The Importance of Accurate Valuations

• The importance of accurate valuations cannot be overstated. Lenders assert that an accurate appraisal is a key to preventing losses from fraud. Lenders, appraisers and borrowers all have a vested interest in ensuring accurate and reliable valuations on the collateral underlying residential mortgages.

Recommendations

• Standardize licensing, education and continuing professional education requirements for appraisers, including requiring E&O Coverage.

• Improve appraiser enforcement actions, either through direct action with the state licensing boards or by legislating authority to a national organization (e.g. Appraisal Subcommittee).

Recommendations• Investigate the establishment of an industry best

practice segregating the duties of the loan officer/underwriter (or anyone else who has a financial stake in the origination) from the appraisal order, selection of appraiser or receipt of the appraisal.

• Support the elimination of nondisclosure provisions within states and localities that prevent access to valuable information.

• Facilitate the computerization of land records and the automation of lien recordings and releases, ensuring timely and accurate recordings and access to information.

• Investigate the establishment of an appraiser scorecard that may be used on a voluntary basis to encourage independent evaluation of performance.

Recommendations

• Investigate the development of an independent hotline for appraisers to report pressure to meet a particular value by parties to the transaction. Lenders could create an internal hotline for reporting appraiser pressure.

The Last Honest Appraiser

• How can appraisers and lenders work together to solve the problem?

Rachel M. DollarDollar & Graves LLPwww.mortgagefraudblog.com

QUESTIONS?