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Fraud report

23 September 2009

The key findings are briefly as follows:

  • Mortgage fraud is an escalating problem, with fraud filings having increased by 36 percent.
  • Industry experts agree that there is a direct correlation between fraud and a distressed property market, where loan originations decreased and defaults and foreclosures increased.
  • Increases in foreclosures, declining housing prices, and decreased demand place pressure on lenders, builders, and home sellers, has created a favourable climate for fraud schemes. Market participants are perpetuating and modifying old schemes, including property flipping, builder-bailouts, short sales, and foreclosure rescues. Additionally, they are facilitating new schemes, including reverse mortgage fraud, credit enhancements, condo conversion, loan modifications, and pump and pay in response to tighter lending practices.

Mortgage fraud is seen by its perpetrators as criminal activity which is relatively low-risk with high-yield returns, yet it can destroy much property value. It has been defined by the FBI as follows:
Mortgage fraud is a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan. Mortgage loan fraud is divided into two categories: fraud for property and fraud for profit. Fraud for property/housing entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan. Fraud for profit, however, often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation. Although there is no centralized reporting mechanism for mortgage fraud complaints or investigations, numerous regulatory, industry, and law enforcement agencies collaborate to share information used to assess the current fraud climate.

Prominent schemes include builder bail-out, short sale, foreclosure rescue, credit enhancement, loan modification, illegal property flipping, seller assistance, bust-out, debt elimination, mortgage backed securities, real estate investment, multiple loan, assignment fee, air loan, asset rental, backwards application, reverse mortgage fraud, and equity skimming. Many of these schemes employ various techniques such as the use of straw buyers, identity theft, silent seconds, quit claims, land trusts, shell companies, fraudulent loan documents (to include forged applications, settlement statements, and verification of employment, rental, occupancy, income, and deposit), double sold loans to secondary investors, leasebacks, and inflated appraisals.

South Africa is not immune, and it is with this in mind that Korbitec's Executive Consulting Division in association with Glenrand MIB will be presenting a full day seminar on the subject.

See Mortgage Fraud Seminar and the FBI Mortgage Fraud Report

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