The FBI takes 'fraud-for-profit' seriously -- can you?

Jennifer Stokley, attorney, Katten Muchin Rosenman LLP

As published in Scotsman Guide's Residential Edition, September 2005.

No matter what role your company plays in mortgage origination, loan fraud has affected you. With countless reports of overstaffing in every component of the industry and much talk of a housing bubble, loan fraud is on the rise — fueled in large part by inflated property values.

The FBI’s “Financial Crimes Report to the Public,” released this past May, highlights mortgage fraud as an enforcement priority. The problem is nationwide, even though the report identifies the top 10 “hot spots” for mortgage fraud. The FBI report also describes two main categories of fraud: “fraud for housing,” perpetrated by borrowers misrepresenting income or other information to obtain housing, and “fraud-for-profit,” perpetrated by industry insiders to inflate property values for their own gain.

With the FBI focusing its efforts on industry-insider schemes, we look at fraud-for-profit as well as the issues surrounding it.

How it happens
Fraud-for-profit often takes the form of a flipping scheme, with a property changing hands several times in a short time. With each purchase, the value is increased — but perhaps not so dramatically to draw attention, particularly in a market that is otherwise “hot.” In addition, if an owner has made any improvements to a property, even at a negligible cost, this may or may not justify a disproportionate value increase.

It can be difficult for a borrower, a lender or even an appraiser to distinguish true appreciation based on legitimate market factors from a fraudulent flipping scheme. The more-sophisticated fraudsters exploit this ambiguity by concentrating on neighborhoods already experiencing rapid turnover. Flipping can breed upon itself, which makes bad comps harder to identify.

In many other cases, however, the perpetrators need not resort to flipping; only one loan is needed with one grossly inflated appraisal. After the loan has gone bad and the lender has reason to investigate, it’s increasingly common to find value variances approaching 100 percent. These cases aren’t subject to legitimate differences of opinion about value. By the time the problem is detected, the players — including the mortgage broker and/or the Realtor — might no longer be in business or can be subject to criminal investigation if multiple properties were involved.

Appraisers might use a range of techniques to inflate value. They can be selecting comps that aren’t quite appropriate, omitting sales or listing information or misstating square footage or recent improvements. In extreme cases, they can use false property photographs. Appraisers even experience “identity theft,” when a rogue loan officer or another insider submits a fabricated appraisal using an appraiser’s license and forges the appraiser’s name.

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