March 11th, 2007 08:23 EST
Partnership to Combat Equity skimming
Equity skimming. Property flipping. Straw buyers. Inflated appraisals. These are some of the fraud schemes criminals are using to take advantage of a $2.37 trillion mortgage market in the United States.
To fight this growing scourge, we announced a partnership on March 8 with the Mortgage Bankers Association, which represents an industry hit by fraud costs last year of between $946 million and $4.2 billion.
First, some basics. There are two kinds mortgage fraud: fraud for property and fraud for profit. In general, fraud for property is when a home buyer lies about income, debt, or other information in order to buy a home. This type of fraud accounts for about 20 percent of mortgage fraud cases.
Then there's fraud for profit. These crimes involve industry insiders, and generally include multiple loan transactions with several financial institutions. There are numerous kinds of for-profit mortgage fraud:
Property flipping: the property is bought, falsely appraised at a higher value and quickly sold, sometimes several times in rapid succession. Eventually, the mortgage goes into default. The profits, of course, disappear with the criminal.
Nominee loans/Straw buyers: the identity of the borrower is concealed by using the name and credit history of a willing accomplice.
Fake/Stolen identity: stolen identities—along with credit histories—are used on a loan application.
Inflated appraisals: an appraiser agrees to inflate the property of the house.
Equity skimming: One of the more complicated schemes, an investor uses a straw buyer to get a mortgage. Prior to closing, the straw buyer signs the property over to the investor, who in turn rents the property out without making any mortgage payments.
The problem is growing: in September of 2002, the FBI had 436 mortgage fraud investigations. Currently, we have more than 1,036. That's an increase of 237 percent in less than five years.
And of the 1,036 current cases, more than half have expected losses of more than $1 million. Of the victims, about 57 percent are federally insured financial institutions; 8 percent are government entities like the Department of Housing and Urban Development; and 35 percent are investors.
Here's what we're doing about it. We're working with the Mortgage Bankers Association by providing their members with an advisory for their customers outlining federal mortgage fraud laws—and penalties. It comes with an assurance that we will aggressively investigate fraud claims.
"This is clearly a crime problem in need of a real answer. That answer is team work," says Special Agent Karen Spangenberg, chief of the Financial Crimes Section of the FBI's Criminal Investigative Division. "The newly developed Mortgage Fraud Warning enhances our joint effort to combat this financial crime problem by putting would-be wrong-doers on notice, and potentially stopping the crime before it is committed."
Read the Mortgage Fraud section of our 2006 Financial Crimes Report to the Public for more details about mortgage fraud, including more types of schemes, successful investigations, and common indicators that a borrower may be attempting to defraud a lender.