Mortgage Fraud-Appraiser Risk
Management
• Course Number 027
• Instructor ____________
Phone: ______________ cell or
______________home/office
Email: ________@______
©2011 Kaplan, Inc.
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Mortgage Fraud and Predatory
Lending: What Every Agent Should
Know Second Edition
Written By Marie S. Spodek, DREI,
GRI®, and Jerome Mayne
Appraisal Supplement, George
Harrison, phd ed
Course Learning Objectives
• When you complete this course you will be able to:
1. Understand USPAP’s directives on fraud
2. Review the history of mortgage fraud in the
mortgage system
3. Identify the fraud indicators
4. Read how frequently mortgage fraud occurs and is
detected
5. Understand the characteristics of Predatory Lending
and Illegal Flipping
6. Review Federal Activities regarding fraud
©2011 Kaplan, Inc.
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Introduction
• Historically mortgage fraud has
always been in existence
• Fraud is the “intentional perversion of truth
in order to induce someone to part with
something of value or to surrender a legal
right” (Webster’s Dictionary)
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Introduction
• Borrowers greed prompted
misrepresentation on loan applications such
as stating their intent to occupy a residence
when their real intent was to rent.
• Mid-2000s other types of fraud became
more prevalent such as the acts to deceit
and conspiracy to deceive primary and/or
secondary market lenders for the purpose of
pocketing large sums of money.
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The Appraiser and Risk Management
• The appraiser is a member of the real property financing system
appraiser The appraiser is expected (under USPAP) to be
independent, impartial and objective
• The appraiser is also required to be competent to complete any
appraisal assignment they accept
• Unfortunately in most cases the scheme of mortgage fraud would not
have been successful without the participation of the appraiser
• One of the appraiser’s most significant tool to manage their risk is
their workfile
• Included in this handout is the extract from the Ethics and
competency rule of USPAP. Its critical to review those rules to
protect from potential involvement with fraud through adherence
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The Appraiser and Risk Management
• Special emphasis must be given to the NEW Record Keeping Rule
• Included in this handout is the extract from Chapter 5 of the HUD
Handbook which provides a guide that may be used for discussion in
the class of what might be expected to be found in the appraiser’s
workfile.
• Although the book used is primarily written for real estate agents it is
also beneficial for appraisers.
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FHA Work File Example
extract HUD Handbook 4150.2 Sec 5-3
Section
Supporting Data
Acceptance of assignment File Memorandum
Property Description
Legal description
Photographs, Floor plans,
Tax Map and info from
Field notes during
inspection, Listing info,
Offers to purchase
Neighborhood
Notes from field visit,
Photographs,
Demographic data
Cost Approach
Relevant Cost New data,
Land Sales Details
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FHA Work File Example
extract HUD Handbook 4150.2 Sec 5-3
Section
Supporting Data
Sales Approach
Sales details and photos
Transaction information
Derivation of adjustments
Interview notes
Income Approach
(if applicable)
Market rent comparable
information,
Cap rate justification,
Historical financial statements
VC Conditions Noted
(the VC is retired but many of
the required notations about
the conditions have not been
retired)
Photo of condition, Field
notes supporting any
assumed repairs, Calculation
of cost to repair a condition
©2011 Kaplan, Inc.
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FHA Work File Example
extract HUD Handbook 4150.2 Sec 5-3
Section
Supporting Data
Additional Information
Relevant Surveys,
Market data and,
Other sources of data such as
property inspections or
CC&Rs, etc.
©2011 Kaplan, Inc.
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Introductory Case Studies
Case Study 1-Fraud in a Down Market
•“The appraiser was in collusion with the broker and,
•Knowing that the house was worth about $200,000 owing a
balance of about $180,000; he appraised it for $250,000.
•The broker told the owner how lucky she was and that they
would ask the full $250,000 in a listing.
•The broker reported the property was under contract but there
was no real subsequent offer
•Under the advice of this broker (implying to the seller the
market was falling) the seller took the property off of the market
•The seller being desperate to sell and telling the broker that
foreclosure was imminent the broker agreed to purchase the
property for $165,000
•After the sale the seller declared bankruptcy and during the
hearings the suspicious judge reported the matter to the FBI
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Introductory Case Studies
Case Study 1-Fraud in a Down Market (cont)
Questions
1. Might the broker have committed some illegal act? If so,
what?
2. Might the appraiser have committed some illegal acts? If so
what?
3. Might both (broker and appraiser) be liable to the homeowner
for damages?
4. What was necessary for this to occur?
5. Is it still possible for this to occur?
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Case Study 2-Fraud in a Stable Market
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Residential area is constructed near a major urban area by a real
estate developer
The cost to construct, including the lots, is $400,000 +/- each
Spec houses were built on several lots as has as $500,000
The developer’s broker and he jointly decided to improve productivity
which included soliciting the help of a mortgage broker who:
• Identified local celebrities (primarily television) who acted as
straw buyers
• The deed would actually be in their name but a side contract
existed retaining ownership by the developer
• Three of these transactions were completed without appraisals,
for more than $600,000 each
Other properties were listed in the $600,000 range
Appraisal was provided using the three “straw buyer sales” for which
the state appraisal board asked “why those three sales”
• Appraiser did not mention the source being the developer stated
he often relied on builder data in new subdivisions of non-MLS
sales
©2011 Kaplan, Inc.
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Introductory Case Studies
Case Study 2-Fraud in a Stable Market
Questions
1. Did the developer do anything unethical?
2. Did the developer do anything illegal?
3. Did the broker do anything unethical?
4. Did the broker do anything illegal?
5. Did the appraiser do anything unethical?
6. Did the appraiser do anything illegal”
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Chapter 1: Financial Crisis
Housing Market Collapse
• Record number of foreclosures
• Continued mortgage fraud schemes
• Appraiser reforms
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Dodd-Frank Reform Act
• Residential loan originators
• Minimum standards for mortgages
• Standards for appraisals
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Industry Insiders
• Collaboration
• Collusion
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U.S. Mortgage Fraud
• Affects real estate
values
• Rental markets
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State
2009 Fraud 2005 Fraud
Ranking
Ranking
Florida
1
1
New York
2
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California
3
8
Arizona
4
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Michigan
5
9
Maryland
6
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New Jersey
7
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Mortgage Fraud in the United States
• Fraud
• 1974–1975
• 2000–2005
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Effects of Foreclosures
• Boarded up homes
• Negative feelings
• Difficult to find
buyers
• Lower tax appraisals
• Eroded tax base
• Fewer community
services
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Effects of Foreclosures
• Foreclosed property
– Lowers for one-eighth
mile
– 0.9% to 1.44%
• Each foreclosed
Property
– Reduces by 1.8%
– There goes the
neighborhood
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Factors Leading to Foreclosures
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Effect of credit scores
Personal bankruptcy
Poor loan servicing
ARM adjustments
Identity theft
Mortgage fraud and illegal flipping
Predatory lending
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www.ftc.gov/idtheft
SAFE Act
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License mortgage loan originators (MLOs)
Exemption individuals
Minimum standards
NMLSR
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Chapter 2: Mortgage Basics for
Real Estate Licensees
Loan Application
• Qualify borrowers
– Income
– Asset
– Credit information
• Qualify security (appraisal)
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Roles of Professionals
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Mortgage loan originators (MLOs)
Loan processors
Underwriters
Appraisers
Importance of proper risk assessment
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Impact of Liens
• Promissory/mortgage note
• Mortgage/deed of trust
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Cost of Borrowing Money Factors
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Term of loan
Time value of money
Assessing borrower’s borrowing history
Loan amount
Security for loan
Value
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Time
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Loan Sources
• Government-assisted programs
– FHA
– VA
• Private sector programs
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Loan Types
• Fixed-rate mortgage (FRM)
• Adjustable-rate mortgage (ARM)
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Exotic Loans
• Interest-only (IO) loans
• Pay-option ARMs
• Negative outcomes
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Underwriting Criteria
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Income
Credit
Assets/down payment
Occupancy
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Alternatives to Traditional Requirements
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Full documentation loan
Lite doc/alt doc loan
No doc loan
Stated income loan
Seller carryback loan
Combinations
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Role of Secondary Market
• Primary market
• Secondary market
– Securitization
– Tighter standards
– More losses
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Manage Buyer Expectations
• Lenders who specialize
– Meet buyers’ needs
– Use reputable lenders
• Avoid unrealistic expectations
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Chapter 3: Mortgage Fraud
Tracking Suspected Fraud
• Financial Crimes Enforcement Network
(FinCEN)
• Financial Institution Fraud Unit (FIFU)
• Suspicious Activities Reports (SARs)
• Suspicious Mortgage Activity Report (SMARt
Form)
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Fighting Identity Theft
• Fair and Accurate Credit Transactions Act
(FACTA)
– Identify warning signs
– How to detect
– Actions to be taken
– Update programs
• Mortgage buy backs
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Mortgage Fraud
• Define
– Deception, false facts
– Collusion, false premises
– Lying
• Types
– Fraud for housing
– Fraud for profit (and business)
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Penalties for Fraud
• Felonies
– Lying on loan application
– Lying about purchase price
– Lying on mortgage application
• Federal and state fines
• Imprisonment
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Red Flags
Possible Mortgage Fraud
• Shady practices
• Dual contracts/double HUDs
• Hidden addenda
• Silent mortgage
• Inflated appraisals
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Red Flags
Possible Mortgage Fraud
• False information on applications
– Straw buyers
– Unreported debt
• Rebates to borrowers
• Creative financing
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Chapter 4: Predatory Lending
Dilemma for Low Income and Poor Credit
• Federal Housing Administration (FHA) loans
– Lost market share
– Regained popularity
• Growth of subprime market
– Concentration of credit problems
– Little or no credit history
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Signs of Predatory Lending
• Subprime
– Not always predatory
– Legal interests not in best interest of borrower
• Lack of competition from prime lenders
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Predatory Lending
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Higher interest rates
Adjustable-rate mortgages (ARMs)
Excessive origination and closing fees
Prepayment penalty fees
Binding mandatory arbitration (BMA)
Yield spread premiums (YSPs) as kickbacks
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Signs of Predatory Lending
1. Large origination fees
2. Prepayment penalties
3. YSP to loan originator
4. Steering and targeting
5. Low entry arms
6. Promise to fix with more loans
7. Flipping loans
8. Hiding tax and insurance payments
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Steering and Targeting
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Elderly
Reverse mortgages
Racial profiling
Immigrants
Those with low credit scores
Flipping loans
Unnecessary products
Misleading or no information
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Changing the Climate
• Automated underwriting systems
• More regulation/SAFE Act
– Prohibit appraisal fraud/Dodd-Frank Reform Act
• Consumer education
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Chapter 5: Illegal Flipping
Real Estate Flips
• Positive effects
– Gentrification
– Construction jobs
– Increase tax base
• Negative effects
– Locals forced out
– Tenants displaced
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Real Estate Flips
• Equitable title
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Beneficiary
Developer
Foreclosed property purchaser
Vendee in installment sale
• Back-to-back closings
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Illegal Flipping
• Schemes
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Use of kickbacks
Fake documents
Straw buyers
False identities
Flopping
• FHA anti-flipping waiver
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Signs of Illegal Flipping
• Lender fraud
• Possible activities
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Deed not in seller’s name and lender unaware
Owned for short period
Seller orders appraisal
Rapid increase in value
Unusual payments
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Results of Illegal Flipping
• Neighborhood responses
• NeighborWorks America
• Georgia real estate fraud prevention and
awareness (GREFPAC)
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Protect Against Illegal Flipping
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Know market
Use competitive market analysis (CMA)
Thoroughly inspect
Know extent of repairs
Meticulous documentation
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Chapter 6: Federal Protections
Federal Laws
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Fair Housing Act
Equal Credit Opportunity Act (ECOA)
Home Mortgage Disclosure Act (HMDA)
Community Reinvestment Act (CRA)
Real Estate Settlement Procedures Act
(RESPA)
• Truth-in-Lending Act (TILA)
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Federal Laws
• Mortgage Disclosure Improvement Act
(MDIA)
• Dodd-Frank Wall Street Reform Act
• Secure and Fair Enforcement for Mortgage
Licensing Act of 2008 (SAFE Act)
• Fair and Accurate Credit Transactions Act of
2003 (FACTA) (Red Flags Rule)
• FHA Anti-Flipping Waiver
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Educate Buyer Borrowers
• HUD Web Site
• HUD Pamphlet
– English
– Spanish
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MDIA 3-7-3
1. Three business days after application to
provide good-faith estimate (GFE)
2. Seven business days between GFE and
signing loan documents
3. Three business days to close if lender
changes GFE and/or APR
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Real Estate Settlement Procedures Act
(RESPA)
• Federally related residential loans
• Disclosures at time of application
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Information booklet
Good-faith estimate (GFE)
Affiliated business arrangement (AfBA)
Seller cannot require certain title insurance
company
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RESPA
(continued)
• Prohibits kickbacks
• Disclosures at settlement/closing
• Disclosure after settlement/closing
– Escrow account rules
– Servicing transfer statement
• Possible scams
www.realtor.org
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RESPA Enforcement
• Section 6: Servicing of loans
• Section 8: Anti-kickbacks and unearned
referral fees
• Section 9: No specific title insurance
company
• Section 10: Limits on escrow accounts
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RESPA Enforcement
• Injunctive Relief
• File a Complaint with HUD
– In Writing
– Confidentiality
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Truth-in-Lending Act (TILA)
• Implemented by Regulation Z
• No coverage
– Business, commercial, agricultural,
organizational loans
– More than $25,000 loan
– Student loan programs
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Truth-in-Lending Act (TILA)
• Right of rescission
– Three days
– Not for first mortgage loan
• Trigger items
• Penalties
– Fines
– Imprisonment
• Missing information from disclosure
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Home Mortgage Disclosure Act (HMDA)
• Implemented by Regulation C
• Monitors reporting of loan data
– Serving community needs?
– Investments attracting private investments?
– Possible discriminatory lending patterns?
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Community Reinvestment Act (CRA)
• Regulations 12 CFR
• Meet credit needs of community
• Loan applicants asked
– Ethnicity, race, and color
– Applicants should answer honestly
– Used to monitor compliance
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Tips for Real Estate Licensees
• Know the laws
• Find buyers earlier
– Help find appropriate lender
– Manage expectations
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Reporting Appraisal and Mortgage Fraud
• Federal Bureau of Investigation (FBI)
• Federal Trade Commission (FTC)
• Department of Housing and Urban
Development (HUD)
• Department of Justice (DOJ)
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