PROSECUTING MORTGAGE FRAUD - TexasBarCLE · PROSECUTING MORTGAGE FRAUD James R. Buchanan Chief,...

PROSECUTING MORTGAGE FRAUD

JAMES R. BUCHANAN Assistant United States Attorney

Chief, Fraud Section Southern District of Texas

713/567-9378

State Bar of Texas 30TH ANNUAL

ADVANCED REAL ESTATE LAW COURSE July 10 – 12, 2008

San Antonio

CHAPTER 2

JAMES BUCHANAN Assistant United States Attorney

A career prosecutor, Jim Buchanan served as an Assistant District Attorney for Harris

County, (Houston) Texas for 11 years and has been an Assistant United States Attorney since 1993. As an A.U.S.A., Jim has served as a white collar crimes prosecutor, an Organized Crime Strike Force prosecutor, and as Chief of the Violent Offenders Group.

He is currently assigned as the Chief of the White Collar Enforcement Group where he supervises 15 attorneys involved in the prosecution of complex fraud cases, including health care fraud, bank fraud, wire fraud, mail fraud, corporate and securities fraud, tax fraud, and mortgage fraud.

He currently serves as the Chair of both the Department of Justice Securities Fraud Task

Force and the Procurement Fraud Task Force for the Southern District of Texas

In 2002, U.S. Attorney General John Ashcroft presented Jim with the Attorney General=s Award for Fraud Prevention for his work prosecuting Nigerian Organized Crime. In 1998, he received the Director=s Award from Attorney General Janet Reno for his prosecution of insurance / health care fraud in South Texas.

He has served as the chairman of the Government Lawyer=s Section of the State Bar of Texas.

From 1998 - 2001, he served as the Director of the Attorney General=s Nigerian Crime Initiative for the Southern District of Texas.

He has taught federal agents, local law enforcement and private investigators, and has traveled to Europe to lecture on prosecuting organized criminal activity.

He also serves as an adjunct professor at the College of Criminal Justice at Sam Houston State University.

An experienced trial attorney, Mr. Buchanan has been lead prosecutor in over 100 jury trials ranging from simple forgery to capital murder to organized crime.

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James R. BuchananChief, Fraud Section

Southern District of Texas

Mortgage Industry is key to our growing economy!

• Home ownership is the great American Dream

• Over $3 trillion in mortgages originated in• Over $3 trillion in mortgages originated in 2006, including refinancing.

Prosecuting Mortgage Fraud Chapter 2

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In 2007, the mortgage industry estimated more than $60 billion

in fraudulent mortgage loans were processed, resulting in

$4 - $6 billion in losses.

• According to the mortgage industry and the F.B.I., that number is growing!

For the fiscal year ending 9/30/07, the F.B.I. received over 46,000 SARs of mortgage fraud.

• In 2003, only 6900 reports of mortgage fraud.

• As of May, 2008, there were 1380 active FBI t f d i ti timortgage fraud investigations.

• Doesn’t include investigations by other federal agencies or State authorities.


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Top Ten “Hot Spots”

• Florida • Georgia• Florida• Nevada• Michigan• California• Utah

• Georgia• Virginia• Illinois• New York• Minnesota

The next savings & loan crisis?

• In the late 1980s many S&Ls failed• In the late- 1980s, many S&Ls failed because of …– Poor Management– Risky loans

Riskier investments– Riskier investments– FRAUD– Cost to taxpayers? - $132 billion


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Consequences?

• Typical mortgage fraud flipping scheme• Typical mortgage fraud flipping scheme• Property is quickly sold & resold • At jacked up prices (inflated appraisals)• Result: The ultimate buyer is left with a

home that is less valuable than the loanhome that is less valuable than the loan amount.

• Buyer walks, loan defaults

Property is abandoned and lender forecloses

• Property becomes neglected• Surrounding property loses value• Criminals move in

Drugs– Drugs– Prostitution– Auto theft rings


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Every mortgage fraud scheme will have two things in common

• A material misrepresentation or omission• A material misrepresentation or omission which is relied upon by the underwriter or lender to fund, purchase, or insure the loan.

• GREEDG

Mortgage Fraud Indicators

• Inflated Appraisals• Inflated Appraisals– Exclusive use of one appraiser

• Increased Commissions/Bonuses– Bonuses paid for fee-based services– Higher than customary feesg y

• Falsification on loan applications– Buyers are told how to falsify mortgage apps.– Buyers requested to sign blank apps.


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Mortgage Fraud Indicators

• Fake Supporting Loan Documentation• Fake Supporting Loan Documentation– Buyers sign blank employee or bank account

verifications• Purchase Loan disguised as Refinance

– Less documentation, less lender scrutiny• Investment w/ Guaranteed Re-Purchase

– Used to flip properties– Often involves multiple “holding companies”

Participants include . . .

• Loan brokers • Accountants• Loan brokers• Loan originators• R.E. owners• R.E. investors• Home builders

• Accountants

• Lawyers• Bank employees• Credit officers• Appraisers

• Home improvement contractors

Appraisers• Closing agents• Title Co. employees


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Common Mortgage Fraud Schemes

• Property Flipping:• Property Flipping:– Property purchased, falsely appraised, quickly

resold– Fraudulent appraisal– Doctored loan documentation– Kickbacks to buyers, appraisers, and title

company employees


• Silent Second• Silent Second– Buyer borrows the down payment from the

seller– Non-disclosed 2nd mortgage– Loan docs lead lender to believe buyer has

invested his own money in the down payment


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• Nominee Loans / Straw Buyers• Nominee Loans / Straw Buyers– True identity of the borrower is concealed from

the lender through the use of a nominee borrower

– Borrower uses the name, d.o.b., and credit histor of the nominee to appl for a mortgagehistory of the nominee to apply for a mortgage loan for which he otherwise would not qualify


• Fictitious / Stolen Identities• Fictitious / Stolen Identities– A fraudulent or stolen identity is used on the

loan application– Name, Personal Identifying Information (PII)

and SSN are used without the owner’s kno ledgeknowledge


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• Foreclosure schemes• Foreclosure schemes– Actor identifies homeowners at risk of

defaulting or already in foreclosure– Actor misleads homeowner into believing they

can save their homes in return for …T f f d d• Transfer of deed

• Up front fees– Actor remortgages the home & pockets the fees

Recent federal prosecutions

• GHANDI BEN MORKA (Dallas)• GHANDI BEN MORKA (Dallas)– A real estate appraiser who participated in a

scheme to recruit straw buyers, submit fraudulent applications, and inflate appraisals of the properties to be purchasedDefra ded Co ntr ide of more than $2 3– Defrauded Countrywide of more than $2.3 million

– 1/23/08, sentenced to 60 months in federal prison


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Federal Prosecutions, cont.

• LAWRENCE BENHAM (Houston)• LAWRENCE BENHAM (Houston)– Recruited nominee borrowers to submit

mortgage loan applications on which he exaggerated income

– Inflated property appraisals$– At closing, siphoned off $1.5 million to

accounts under his control– Sentenced to 97 months in federal prison

Federal prosecutions, cont.

• MICHAEL HARRIS & MARJORIE• MICHAEL HARRIS & MARJORIE FORD (Houston)– Harris recruited “investors” who applied for

new home loans using false information– Used Ford, an escrow agent, to close the loans– Submitted invoices at closing for work never

done on the properties– Ford created multiple HUD-1s by Xeroxing the

signature page


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Federal Prosecutions, cont.

• HARRIS & FORD• HARRIS & FORD– Both were caught when an “investor” agreed to

wear a wire to the closing– Harris pleaded guilty, testified against Ford,

was sentenced to 25 months federal prison– Ford was convicted by a federal jury, sentenced

to 71 months in prison


• JOHN TURNER (Houston)• JOHN TURNER (Houston)– Licensed RE Agent– Skimmed $2 million from 44 residential

property closings using shell companies– Submitted invoices for work never performed

at the residences– Awaiting sentencing


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Federal prosecutions cont.

• U S v GOODSON TARRANCE &• U.S. v. GOODSON, TARRANCE, & BOOTH (Houston)– R.E. Broker Goodson recruited straw buyers– Builder Tarrance inflated the price of the homes

and kicked back money to Goodson & Booth– Loan Officer Booth made the fraudulent loans– All three convicted in a scheme that caused $11

million in losses & awaiting sentencing

Federal prosecutions cont.

• RICHARD BELL (Houston)• RICHARD BELL (Houston)– Real Estate Developer in Clear Lake

• Made false statements to FDIC insured banks to obtain RE loans

• Submitted false tax returns and financials as proof of his inflated net worth

• Pleaded guilty to bank fraud and money laundering• Awaiting sentencing


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• U S v RAYBON et al (Houston)• U.S. v. RAYBON et. al. (Houston)– Nine defendants charged, including owners,

appraisers, brokers and closers– Closing transactions on manufactured homes as

refinancing instead of new loans– Engaged in “pre-closing” transaction to vest

title in the buyer– Then, did a 100% refinance at an inflated price


• U S v Charles Head et al (Sacramento)• U.S. v. Charles Head, et. al. (Sacramento)– Nineteen people charged in a foreclosure scam– Convinced struggling homeowners with resetting

ARMs to add an “investor” to their home’s title– Homeowners believed they were paying rent to

investor– Head and others would refinance the home under

the investor’s name & walk away with any equity– 155 homeowners, 22 states, $13 million fraud– Awaiting trial


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• Greensboro N C July 2005• Greensboro, N.C., July 2005• 2 businessmen & a real estate attorney were

indicted by a federal grand jury on charges of wire fraud & mail fraud

• Properties purchased in the names of straw bborrowers

• False applications, inflated appraisals, double closings

Federal Statutes

• Conspiracy – Title 18 • False statement toConspiracy Title 18, U.S.C. §371

• Mail fraud/wire fraud Title 18, U.S.C. §1341 & 1343

False statement to obtain credit, Title 18, U.S.C. §1014

• Aggravated Identity Theft – Title 18, U S C §1028

• Bank fraud – Title 18, U.S.C. §1344

U.S.C. §1028

• Money Laundering Title 18, U.S.C. §1956


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Conspiracy

• Allows us to bring all players into the courtroom• Allows us to bring all players into the courtroom• Does not require the successful completion of the

criminal activity• A person commits an offense if he and at least one

other person make an agreement to commit a federal offense and one of the conspirators does anfederal offense and one of the conspirators does an act in furtherance of the agreement.

Mail fraud / Wire fraud

• A person commits an offense if he executes• A person commits an offense if he executes or attempts to execute a scheme or artifice to defraud,

• And the scheme or artifice involves the use of the mail or interstate wire communications

• Maximum 20 year sentence


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Bank fraud

• A person commits an offense if he executes• A person commits an offense if he executes or attempts to execute a scheme or artifice to defraud,

• A federally insured financial institution

• 30 year maximum sentence

False statement to obtain credit

• A person commits an offense if he makes a• A person commits an offense if he makes a false statement for the purpose of influencing a federally insured financial institution to make or renew a loan

• Includes overvaluing collateral, false name, inflated income, or material omission

• 30 year maximum sentence


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Aggravated Identity theft

• A person commits an offense if he• A person commits an offense if he intentionally and without lawful authority uses a means of identification of another person in relation to certain enumerated offenses (includes wire, mail, & bank fraud)

• Mandatory 2 year sentence stacked on any sentence for the underlying offense

Money laundering

• Not just for drug cases anymore!• Not just for drug cases anymore!• A person commits an offense if he engages in a

financial transaction with proceeds of specified unlawful activity when the defendant knows the funds were the proceeds of unlawful activity and the purpose of the transaction is to conceal thethe purpose of the transaction is to conceal the source or ownership of the funds or to promote the criminal activity


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To prosecute a case, we need…

• Bank records• Bank records• Title company closing files• Lender files• Spreadsheets and charts

Wit h ’t t b t• Witnesses who aren’t too busy to come testify

How can you help?

• Institute a mandatory system of reportingInstitute a mandatory system of reporting fraudulent activities

• Seriously scrutinize loans for properties where the sellers have held title for less than 90 days

• ZERO TOLERANCE

• Call us!


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James R. BuchananAssistant United States AttorneyAssistant United States Attorney

Chief, Fraud SectionSouthern District of Texas

713/567-9378



ADDENDUM

JAMES R. BUCHANAN Assistant United States Attorney

Chief, Fraud Section Southern District of Texas

713/567-9378

State Bar of Texas 30TH ANNUAL

ADVANCED REAL ESTATE LAW COURSE July 10 – 12, 2008

San Antonio

CHAPTER 2

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