Re-emerging Scheme: Re-emerging Scheme: Builder-Bailout ExampleBuilder-Bailout Example

Builder wishes to sell a property worth Builder wishes to sell a property worth $200,000 to a buyer. $200,000 to a buyer.

The property’s value is fraudulently inflated The property’s value is fraudulently inflated to $240,000. to $240,000.

The lender funds a mortgage loan of The lender funds a mortgage loan of $200,000 believing that $40,000 was paid to $200,000 believing that $40,000 was paid to the builder, creating home equity. The the builder, creating home equity. The builder forgives the buyers $40,000 down builder forgives the buyers $40,000 down payment. Hence, the lender unknowingly payment. Hence, the lender unknowingly funds 100 percent of the home’s value. funds 100 percent of the home’s value.

Re-emerging Scheme: Builder-BailoutRe-emerging Scheme: Builder-Bailout

Emerging Scheme: Emerging Scheme: Seller AssistanceSeller Assistance

Perpetrators are exploiting the depreciating Perpetrators are exploiting the depreciating housing market by assisting sellers and housing market by assisting sellers and providing buyers to conduct property sales providing buyers to conduct property sales that are based on inflated appraisals. that are based on inflated appraisals.

In a typical seller assistance scam, a In a typical seller assistance scam, a perpetrator solicits an anxious seller or his perpetrator solicits an anxious seller or his realtor and offers to find a property buyer. realtor and offers to find a property buyer. The perpetrator negotiates the amount that The perpetrator negotiates the amount that the property seller is willing to accept for the the property seller is willing to accept for the home. home.

The perpetrator then hires an The perpetrator then hires an appraiser to inflate the property’s appraiser to inflate the property’s value. value.

The property is sold at the inflated The property is sold at the inflated rate to a buyer who is recruited by the rate to a buyer who is recruited by the perpetrator. perpetrator.

The buyer takes out a mortgage for The buyer takes out a mortgage for the inflated amount. the inflated amount.

Emerging Scheme: Emerging Scheme: Seller AssistanceSeller Assistance

Emerging Scheme: Emerging Scheme: Seller Assistance Seller Assistance

The seller then receives the asking The seller then receives the asking price for the home, and the perpetrator price for the home, and the perpetrator pockets a “servicing fee”: the pockets a “servicing fee”: the difference between the home’s market difference between the home’s market value and the fraudulently inflated value and the fraudulently inflated value. value.

Emerging Scheme: Emerging Scheme: Seller Assistance Seller Assistance

Some industry sources have coined the Some industry sources have coined the phrase “cash back purchase” or “one phrase “cash back purchase” or “one transaction flip” to describe the transaction flip” to describe the scheme because it eliminates the need scheme because it eliminates the need for two property transactions to for two property transactions to generate a profit.generate a profit.

Emerging Scheme: Emerging Scheme: Short-Sale FraudShort-Sale Fraud

A real estate short sale is a type of pre-A real estate short sale is a type of pre-foreclosure sale in which the lender agrees foreclosure sale in which the lender agrees to sell a property for less than the mortgage to sell a property for less than the mortgage owed.owed.

Short-sale fraud schemes are difficult to Short-sale fraud schemes are difficult to detect since the lender agrees to the detect since the lender agrees to the transaction, and the incident is not reported transaction, and the incident is not reported to internal bank investigators or the to internal bank investigators or the authorities. authorities.

Emerging Scheme: Short-Sale FraudEmerging Scheme: Short-Sale Fraud

Perpetrators convince homeowners that Perpetrators convince homeowners that they can save their homes through deed they can save their homes through deed transfers and up-front fees. transfers and up-front fees.

Involves a Involves a manipulated deedmanipulated deed process that process that results in the preparation of forged deeds.results in the preparation of forged deeds.

Perpetrators may sell the homePerpetrators may sell the home or or secure secure a second loana second loan without the homeowners’ without the homeowners’ knowledge. knowledge.

Re-emerging Scheme: Re-emerging Scheme: Foreclosure Rescue Foreclosure Rescue

ScamsScams

Re-emerging Scheme: Foreclosure Rescue ScamsRe-emerging Scheme: Foreclosure Rescue Scams

Emerging Scheme: ID Theft and HELOCs

Stolen customer identification information Stolen customer identification information is being used to compromise Home Equity is being used to compromise Home Equity Lines of Credit (HELOC) accounts. Lines of Credit (HELOC) accounts.

The Sub-Prime Loan ProcessPotential Areas for Criminal Activity

UNCLASSIFIED//FOUO

20042004Federal Reserve began a series of Fed Funds Rate increases. By June 2006, there will have been 17 consecutive increases raising the rate from 1% to 5.25%.

20062006

The weakest subprime mortgage originators begin to fail; by December 2007, over 110 mortgage origination companies will have closed their doors.

June

December

Sub-Prime Meltdown Timeline

UNCLASSIFIED//FOUO

20072007

New Century (2nd largest originator of Sub-Prime loans) filed for bankruptcy.

April

Sub-Prime Meltdown Timeline

UNCLASSIFIED//FOUO

Bear Stearns announced that investors in their sub-prime hedge funds would receive little or no recovery; the two funds had lost 90% of their value.

July

20072007

RealtyTrac announced that foreclosures had risen 93% in one year.

August

Goldman Sachs forecasted Sub-Prime losses for the financial sector would reach $400 billion.

November

20082008

AprilSub-Prime losses reached $232 billion and the IMF estimated that financial institutions world-wide may face losses of $945 billion over the next two years.

Investors Securitize loan and

sell to investors

Secondary MarketLoan Origination

Mortgage Broker

Broker Loan Mortgage

Banker

BankSell Loan Investment Bank, Brokerage House, or

Real Estate Investment Trust

Cre

ate

spec

ial

purp

ose

entit

ies

Special Purpose EntitiesSell ownership

interest to investors

Hold in portfolio

Pension FundsLife Insurance CompaniesOther Commercial Banks

State & Local GovernmentsCentral Banks

Fund ManagersThe Public

Brokerage Firms

UNCLASSIFIED//FOUO

The Sub-Prime Loan Process

Sub-Prime Investigations

Mortgage Lenders

Builders/ Developers

Hedge FundsInvestment Banks

Real Estate Investment Trusts

Brokerage Houses

Mortgage Brokers

UNCLASSIFIED//FOUO

FBI Sub-Prime Fraud Investigations

UNCLASSIFIED//FOUO

80.2% of securitized sub-prime loans originated during 2005 had 80.2% of securitized sub-prime loans originated during 2005 had adjustable adjustable ratesrates; 74.9% of these loans were 2/28 adjustable-rate loans. ; 74.9% of these loans were 2/28 adjustable-rate loans.

These ARMS had fixed mortgage rates for the These ARMS had fixed mortgage rates for the first two yearsfirst two years after after origination and were subject to reset in 2007.origination and were subject to reset in 2007.

Source: First American CoreLogic’s LoanPerformance Source: First American CoreLogic’s LoanPerformance The MarketPulseThe MarketPulse

SUB-PRIME COLLAPSE

Impact of Sub-Prime “Crisis”Problems Related to Credit Contraction• Economy slows• Reduced available credit for new development• More difficult for people to obtain mortgages• Refinancing opportunities are less available• Financing becomes more expensive• Reduced interest from foreign investors in MBSs

Problems Related to Poor Underwriting• Increased number of foreclosures• Depreciating real estate values• No room for equity withdrawals

Problems Related to Write-downs• Stock market declines• Reductions in dividends• Increased need for capital infusions: (sources include sovereign wealth funds)

UNCLASSIFIED//FOUO

$232 billion as of April ‘08

MoneyMoney LaunderingLaundering

Money LaunderingMoney Laundering

Money laundering is the process by which Money laundering is the process by which criminals conceal or disguise the proceeds of criminals conceal or disguise the proceeds of their crimes or convert those proceeds into their crimes or convert those proceeds into goods and services. It allows criminals to goods and services. It allows criminals to infuse their illegal money into the stream of infuse their illegal money into the stream of commerce, thus corrupting financial commerce, thus corrupting financial institutions and the money supply and giving institutions and the money supply and giving criminals unwarranted economic power – U.S. criminals unwarranted economic power – U.S. Department of JusticeDepartment of Justice

In Effect,In Effect,

Any Knowing Use of the Any Knowing Use of the Proceeds of Criminal ActivityProceeds of Criminal Activity

Is Money Laundering!Is Money Laundering!

Case in PointCase in Point

Martin Frankel, et. al.Martin Frankel, et. al.