Financial hard times have hit lending institutions from coast to coast. Under these conditions, in the wake of the sub-prime mortgage crisis, they are becoming more vulnerable to a serious threat not often mentioned in the media – – – mortgage fraud.

If your firm is involved in mortgage lending, directly or indirectly, it is affected to some degree by this growing criminal threat. Only recognizing the warning signs and knowing what to do about mortgage fraud can mitigate your company’s vulnerability.mortgagefraudinvestigation

The following account is a real mortgage fraud case file taken from our Criminal Investigation Division. Only the names have been changed.

At age 35, “John Doe”, a married man and father of one, felt he needed to move to a larger home to provide his family a better standard of living. He owned and was living in a one room mobile home within a trailer park and was recently the victim of burglary. Someone had broken into his home and stolen a 19” television and a stereo system. Break-ins were a common occurrence in this trailer park and John no longer felt it was a safe place for his family to live.

John started looking for single-dwelling homes. He wanted a three bedroom home with a front yard and a backyard so his child would have room to play. John quickly became disillusioned with the idea of purchasing a new home. The prices were just too high and John did not feel he would be able to afford the required mortgage payments. Furthermore, he did not have sufficient money to make a significant down payment on a house.

Shortly thereafter, John met a pleasant real estate agent who re-fueled John’s confidence in purchasing a home. The real estate agent, whom we will call “Janet”, assured John there were new and exciting loans available.

Janet found a home for John. John loved it, but again had doubts about being able to afford the home. Janet insisted on introducing John to her preferred loan officer, whom we will call “Jason”. John agreed to meet Jason.

In his initial meeting with Jason, John described his current financial position:

  • He was the sole provider in the family and had recently been injured at work. He was assigned to light duty and was earning $2,150.56 per month, but his employer was in the process of closing the down the business.
  • He had paid off the mortgage on the mobile home he owned. John estimated the value of the mobile home to be $110,000.
  • He paid the trailer park’s management company an average of $375 per month for utilities.
  • He had a side business cutting people’s grass, but it was a cash business and he did not have a business license. Furthermore, the work was inconsistent.
  • Finally, John said he had $9,500 in his savings account.

Jason also ran John’s credit. At the time, John had excellent credit, but he would still need to obtain a $473,000 loan to purchase the home Janet introduced to him.

Shortly thereafter, John received a phone call from Jason. It was good news. John had been approved for the loan.

Initially, John was excited, but he quickly became concerned. John had his doubts about being able to afford such an expensive home.

The home closed quickly, even though John never reviewed the closing documents. John now had a house he was proud of, but knew he would quickly need money if he was to keep this home.

John decided to sell his mobile home. Janet offered to sell the home for John and even though John estimated the value of the home to be $110,000, Janet was unsuccessful at selling the house for anything near $110,000.

After realizing he was going to have trouble selling the mobile home, John decided it would be best to rent the home he recently purchased. Having only lived at the new home for approximately one week, John moved back to the mobile home he could not sell and rented out the home he recently purchased.

After a few months, John’s tenant stopped paying the rent, which was $1,700 a month. John’s mortgage payment was approximately $3,500. Having to put up a big fight, John was finally able to evict the tenant, but by that time it was too late to rent the house out to a new tenant. John was behind on three mortgage payments and his mortgage lender was ready to foreclose on the home.

We became involved in the case after John’s mortgage lender was ready to foreclose on the home.

During our investigation we discovered several misrepresentations in John’s loan application.

The loan application indicated John earned $10,000 a month, when he was actually earning $2,150.56 per month. Since John used a “stated income” loan program, he did not have to provide income verification.

The loan application also indicated John was an investor and owned his own business and even though John did not have a mortgage payment and didn’t pay rent, it was reported that John paid $1,500 for rent a month.

A letter from a CPA firm was also turned in with the loan application. In the letter, the alleged President of the CPA firm declared that his firm had completed John’s tax returns for five years and that the last two years, John’s income solely stemmed from being self-employed. This was an absolute misrepresentation of the truth. During our investigation, we determined the CPA Firm referenced on the letter did not actually exist.

One of our investigators subsequently traveled to John’s residence to interview him. When we first saw John, he was limping, due to his work related injury, and was looking for a job. He was now struggling just to pay his utilities.

John cooperated during the interview, but claimed he did not know the truth had been misrepresented in the loan application.

John indicated he had never heard of the CPA Firm represented in the letter described above. Another firm had prepared his taxes for the past five years. Although the loan application indicated he earned $10,000 a month, John said he never earned more than $6,000 a month and was only earning $2,150.56 per month when he was going through the loan process.

John said he was not confident he could make the monthly mortgage payments when he purchased the home, but he felt pressured by the loan officer and the real estate agent. He was also hoping he would be able to sell his mobile home, which would have helped him make the mortgage payments on the house he purchased.

Unfortunately for John, he may now be facing criminal charges because his signature is on a loan application with many misrepresentations. The loan officer and real estate agent are now also under investigation.

The FBI labels this type of fraud “Fraud for Housing” or committing fraud to obtain a home. This includes lying or misrepresenting the truth about one’s income or employment history to qualify for a loan.

The FBI reported that in September of 2002, it had 436 mortgage fraud investigations, but as of March 9, 2007, the FBI has more than 1,036, a 138 percent increase. This drastic increase has now prompted lending institutions and companies insuring loans to allocate resources for investigating cases where there is suspicion of fraud, specifically after a home has been foreclosed, like John Doe’s. Investigating these cases is a means for lending institutions and for companies insuring these loans to seek criminal prosecution and/or restitution when evidence of fraud is proven.

The first thing lending institutions and companies insuring these loans need to do when a property is foreclosed and suspicion of fraud exists, is to retain a qualified licensed investigation firm that meets the required insurance coverage mandated by the state in which it presides (licensing and insurance requirements vary from state to state). Today, professional fraud investigators specializing in mortgage fraud are in great demand.

Your competent investigator should proceed with some or all (depending on what is discovered) of the following steps, to determine if fraud was committed. These steps could also be used to prevent fraud when a loan application is first submitted:

  1. Verifying and tracing the borrower’s Social Security number (SSN) – to determine if the borrower has used additional names, as identities are often stolen in conjunction with mortgage fraud. If several names are linked to one SSN number, it is possible someone’s stolen identity was used during the loan process.Tracing the borrower’s SSN identifies where the borrower currently resides and where this person has resided in the past. This is an important tool for two reasons: first, some loans, specifically Federal Housing Administration (FHA) and Fannie Mae loans require the borrower to agree to reside in the property being purchased. If there is no record of the borrower ever having lived in the property, then there is strong evidence the borrower did not comply with the loan’s terms. Secondly, knowing where the borrower currently resides is necessary if the borrower is to be interviewed (more on that below).
  2. Carefully reviewing all documents submitted by the borrower, especially those pertaining to employment history, earnings, and assets. If a borrower claimed to be employed by a certain company and claimed to earn a certain dollar amount, then there should have been documentation submitted to support those claims. Fraud often occurs in these areas.In the past few years, using “stated income” became a very popular method of committing mortgage fraud. In essence, with “stated income” a borrower claims to own a business and simply states or estimates his monthly earnings. Rather than providing documentation to support their earnings, such as payroll check stubs, borrowers were generally required to generate few documents. For example, a business license and a letter from a Certified Public Accountant (CPA), claiming the CPA had filed the borrower’s taxes for many years, would have been accepted as suitable documentation. These documents should be looked at closely. During our investigations, we have found that many business licenses were obtained just immediately before a loan application was submitted. We have also found many CPA letters to be fraudulent or that many of the CPA’s referenced on loan applications we reviewed do not exist, just like in John’s example. Anyone using a computer can generate impressive fake letterheads with a little practice.
  3. Field Investigation (Interviews) – If the first two steps described above point towards fraud, then it would be a good idea to travel to the property in question or the borrower’s last known address to interview the borrower. When executing the interview, the investigator should have a copy of the loan application available, since the investigator will have to refer to it throughout the interview. In order to be effective, the investigator must cover the loan transaction from start to finish, starting with the names of the Real Estate Agent and Loan Officer they dealt with (it may be different than what’s on file), verifying their earnings reported, and clearing up inconsistencies between information on the loan application or documents submitted and the information developed during the initial phase of the fraud investigation. If the borrower has defaulted, then it would be appropriate to ask why the borrower did not pay their mortgage.In cases where the borrower cannot not be found, either because they fled the country or because they are hiding and do not want to be found, the next step would be to interview the borrower’s neighbors. Both the neighbors of the property in question and the neighbors of the borrower’s previous address should be interviewed. This will give the investigator insight into the borrower’s activities. The borrower may have confided in a neighbor and admitted he or she was “working the system”.
  4. Reporting Fraud to the FBI – If it is determined fraud was committed, the case should be reported to the FBI. In the past few years, mainly due to the rise in this type of fraud, the FBI has started to develop a stronger relationship with the mortgage industry in an attempt to work collectively and solve these cases.

Unfortunately, it appears mortgage fraud is still on the rise and the fraud is often not discovered until after borrowers like John Doe defaulted on their loans. Now you know how to protect your firm by taking a strong stance, in partnership with your investigators, against those who seek to prey upon an industry already weakened by unscrupulous opportunists. Make it hard for perpetrators to commit mortgage fraud in the first place, and very bad for them when they do.