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Rachel Dollar Attorney and Editor of Mortgage Fraud blog
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This week Bruce is joined by Rachel Dollar. Rachel is recognized as one of the nation’s leading experts in the mortgage lending industry and editor of the acclaimed public service industry website Mortgage Fraud blog (www.mortgagefraudblog.com). Her website is committed to raising awareness of growing problem associated with mortgage fraud. Rachel is a certified mortgage banker, and she has been repeatedly named by Inman News as one of the 100 most influential real estate leaders.
Bruce will often refer people to her website because they will come to him with a solution to a real estate problem they think is tricky. When they visit the site, it turns out what they thought was a good solution has a 5-8 year sentence behind it. The site was initially started as a way to get information to lenders who lend on a national base space even though they are geographically located in certain areas of the country, and she wanted to make them aware of what fraud schemes were happening. Her site has been very educational to real estate professionals and mortgage brokers, and she hopes it will also be a good deterrent for other people. Rachel sees a lot of people coming out of prison starting to commit mortgage fraud because they learned about it in prison. Bruce was surprised to hear that as he thought from being in prison people would have learned their lesson and not wanted to commit fraud because they heard about the consequences from someone else, not the other way around. Rachel said in the wider community this is true, but in the prison system and for hardened criminals, mortgage fraud is an easier and less risky way for them to make money criminally than other ways.
The definition of mortgage fraud is any misrepresentation or omission that is used to defraud a lender into lending more money than they would have around different terms. Usually criminals don’t come up with new schemes as much as they come up with new twists on the schemes. There are basic schemes that people utilize consistently, such as flipping schemes, which she said doesn’t really change. However, people have also utilized flopping schemes, which means coming in on the short-sale side and undervaluing property, then increasing it when they turn around and sell it. It’s the same basic scheme because in both instances because you have to pay something and get it for less than it’s worth, then turn around and sell it for more than it’s worth in order to make money on it. They find different ways to get around the controls put in place in the lending institutions, which is a constant process. She constantly sees the fraudsters shifting the way they do things in order to get through controls.
Flipping by itself is not a bad thing and is absolutely legal. Legitimate flipping refers to buying something below market then fixing it up and repairing it before reselling it. Flipping is illegal, however, when the person sends the property off to another price level without any reason for that to have occurred. In these cases a fraudulent appraisal is used where the value of the property is not supported. This is often seen in large schemes, for instance, properties that are picked up for $6,000 and sold in a simultaneous transaction for $50,000-70,000 with bank financing that are sold to a person who has paid for the use of their credit but then defaults. This person would be referred to as a straw buyer.
Sometimes Bruce comes in contact with people who think they have dreamed up a good plan or an easy way out, and they have no recognition that it’s wrong and that it might even be something that will send them to jail. They’re complicated financial transactions, and sometimes lawyers will even call Ms. Dollar about a situation where their client has come up with a solution that does not sound right, but the lawyers are not sure why. Sometimes you have to dissect the financial situation to come up with what it is that’s illegal. For the populous, whether consumers or sometimes real estate professionals, it’s hard to determine what is wrong with the transaction. Some schemes may take a team to pull off, usually depending on what kind of a scheme is used. If, for instance, it’s a fraud-for-profit type scheme where the criminals are going to, for example, make money on 100 houses and they are taking money out of the escrows and diverting it, they would need several people for that kind of a scheme. The escrow agent or closing agent would be involved as well as a ringleader, sometimes an investor, the real estate mortgage broker, and the real estate agent; so there are several different layers of involvement. However, in other situations, such as one where a person is lying to enter into a mortgage, there wouldn’t necessarily be other people involved. An FBI report was released in 2009 that discussed fraud for ownership and fraud for profit. The former is generally not pursued unless there is something else at work, such as terrorism, the involvement of public officials, or simply some other motivation. It’s at this point the government brings charges and when there are usually prosecutions for mortgage fraud.
In general, an owner occupant is much safer committing fraud than someone who is an investor. At the same time, however, it usually depends on whether or not the fraud is discovered. One of the reasons they’re “safer” is because it’s more difficult to discover because you have an isolated incident of default rather than a pattern. For instance, you could have a mortgage broker who decides that they want to move a group into homes and help them but to do so falsifies their employment records and credit history. However, if it is only one isolated incident and the loan defaulted, there would not be any knowledge there was something wrong with the transaction. However, if he works 100 transactions and 90 of them default, then the lenders will go in and start looking at default patterns and will notice the pattern out of that particular mortgage broker, and then they can target their audit. It’s more likely to get picked up when there is a professional involved.
When there are multiple party schemes, the escrow agent usually goes to jail because they are the ones touching the money and, if they are involved; they are often falsifying HUD-1 settlement statements and lying about where the money went. There will often times also be a mortgage broker who will also be indicted or go to prison, and that’s because of the falsification of documents. Surprisingly, appraisers are the ones who walk away the most.
In 2006, the Norris Group held an event with 400 investors who were in the audience, and Bruce interviewed a mortgage broker in front of them, asking her, “The stated income, where did that number come from?” And she honestly said in front of 400 people, “Oh, we just made it up.” It was a pretty fearless statement. In other words, that’s just common, and most of that was stated income for ownership. So, the problem we have right now certainly has been created by the greed of the owner who probably wasn’t capable of buying the next-level house. Yet, it seems to be the least punishable, maybe because there are too many people. That could be part of the problem. The fact that it’s not being criminally prosecuted is not to say the lending industry is not looking at it or that government agencies are not necessarily looking at it. There could be repercussions coming through some of the administrative agencies, whether Fannie or Freddie, or through the FDIC or various other parties. A recent SARS report stated that 33% of all cases that were eventually brought existed for four years. There was quite a length of time before somebody actually knew they had been caught before it was reported. With suspicious activity reports, it just wasn’t discovered, and a lot of suspicious activity reports are being filed right now around the repurchase process. So when the lenders are going in and auditing files and discovering a basis for repurchase, they’re also discovering criminal conduct and following SARS as a result of that.
When a mortgage insurance company notices mistakes in a file and resends insurance coverage for repurchase, that’s usually when they’ll discover the fraudulent activity and alert the lender, who then files a suspicious activity report. There’s also within the loan industry talk of securitizations and the sale of loans up into the secondary market. The secondary market purchasers have the right to send the loan back if there are certain problems with it, and fraud is one of those issues. If they discover fraud within the loan, they can send the loan back to the originator, the mortgage lender that originally made the loan, and require that they buy back the loan and give them the money back.
Stated income loans necessitated exaggerating income, and now you have a loan mod that probably necessitates minimizing income. This is fraud as well. It’s not always minimizing income to get a loan mod that’s fraud. A lot of people are inflating income in order to qualify for loan mods. It really depends on the situation. Some people can’t qualify because they don’t have enough money; some can’t qualify because they have too much. That’s the interesting thing when you see certain homeowners going to the loan mod companies that instead of asking the questions are giving the information. Instead of asking “How much money do you make?”, the response is “This is how much money you need to make in order to qualify.” It’s like when they used to alter applications in order to qualify for the loan. Now they’re making up the information to qualify for the modification. They did, however, eliminate stated income modifications, which was going on for a while.
The short sale process tends to be ripe with fraud. There’s an interesting conviction out of a lending institution this last week where one of the Taylor, Bean & Whitaker loss mitigation employees was lying to the bank about the amount of the sales, and they were sending the payoff checks in through their own company, cashing them and sending a portion in to Taylor, Bean & Whitaker. So that was an interesting inside scam. They were netting about 10% because they were paying off 80% when it was really 90%, and that’s pretty involved and audacious. These people dream these things up as if they’re a good idea, for example, if two neighbors bought a new house and owe $500 grand on a $300 grand house; and they’re going to short sale it to each other and then exchange ownership later. That just sounds so clean to them somehow. That can’t be good either. When you already have agreements in place that aren’t disclosed, you’re generally asking for trouble. What I always ask people when they are coming up with ideas is “Why aren’t you just telling the bank what you’re doing?”
Bruce had read an FBI report that said that people who were buying and flipping short sales were referred to as perpetrators, which probably isn’t a good word. He mentioned it in front of an audience, and about half of them almost dropped out of their chairs because he said, “You have to tell the lender what it is you intend to do and for how much, and then you buy it.” Everybody knows the whole score. The comment usually is, “Well, they would never agree to it,” to which the reply would be, “Then you can’t do it.” The exact question is, “Why are you not telling them the truth?” They respond, “Because they wouldn’t agree to it.” That tells you there is a problem. If your answer is that they wouldn’t do it because I told them the truth, that’s the answer. If they’re purchasing property at a short sale, and then they’re going to fix it up and sell it, or they’re buying it to live in it, there’s nothing wrong with that. It’s only when there’s a deal in place, especially if it leads right back to the homeowners, that it really becomes an issue. The lenders are actually now requiring Arms length affidavits in most of the transactions. Rachel has seen convictions, for example in the case of Connecticut, when two real estate agents signed arms length affidavits as a part of the short-sale process. They had been the bank’s real estate agents, and they had already done an auction and had a sales contract in place at a higher amount. Even though it wasn’t an egregious difference, only about $30 grand, it was still fraud. That’s another misconception that it’s only a little amount of money, so no one’s going to bother chasing it down, and that isn’t true.
Rachel often works with authorities to prosecute some of the smaller cases and bring the smaller cases to their attention. That is how she makes an example that she can point to on other cases. She loves the clean little cases where somebody is convicted of falsifying or inflating income on a stated income loan and there’s nothing else involved in it. That’s her favorite case because she can point at that and say, “Look, you can go to jail for this.” She has had other cases where people have told her to send them to one case where there is a prosecution for just inflated stated income. If you send them to anything where they also falsify down payments, the justification they try to use is that they were falsifying down payments too, and it’s really not illegal to inflate stated income. The clean cases where there is one issue, it’s a small issue, and there’s not a lot of money involved, are her favorite ones.
At the Norris Group, they buy at trustee sales about 100 houses a year and in about 1 of 10, somebody decides they have earned the right to take their kitchen and anything else that they want. Bruce wondered if there were any court cases dealing with this kind of situation where they were told that action was fraud for which they could go to jail. Rachel replied that there are some cases pending in Arizona on the stripping issue. It is difficult to get criminal law enforcement involved in it, but the lending industry will often pursue the borrower in those cases because it is a violation of the trust deed and it is actually fast because the house now belongs to the lender and you’re stealing. Once that foreclosure sale has taken place, the appliances, wiring, copper tubing all belongs to the lender; so it is fast. She knows in Arizona that they are prosecuting some of those cases.
Bruce said the problem for a trustee sale buyer is they don’t have a trust deed that anybody signs, so they are not in breech of that, they’re just in breach of stealing his belongings. With very different laws in states, it seems that if someone was in Texas they would have a lot harder time pulling off a stunt he just described than in California. In California, it is not easy to come into a house and photograph the place the person just bought for cash. However, Rachel said even though someone doesn’t have the right to do that, it is still a theft situation. The real issue is proving whether the stripping occurred before or after the sale, but someone would have to justify that someone else had broken in and stolen all the copper tubing out of the house. The question then would be, “Why didn’t you file a police report?” Bruce agreed with this.
There is the waste provision, which is civil and which exists in every state. However, Bruce said the problem still is you have a judgment that’s very difficult to collect on and expensive to pursue. Rachel plans on putting it in her blog if she sees a stripping conviction.
Bruce wondered if there were any new schemes emerging in 2011. However, Rachel said she pretty much sees the same things going on with an increase in short-sale and flipping frauds, continued modification frauds. She also said it’s the same groups of people who are vulnerable and being taken advantage. One of these groups is the elderly. There are other groups of people who will literally deed a property away from an owner and do a loan or a sale, which boggled Bruce’s mind. However, it happens often, especially in the larger fraud-for-property schemes. People who are out there to steal are going to steal the easiest way they can. The penalty phase for such crimes is serious time, but it’s also as Rachel put it “white collar” time. She has seen 30-year sentences handed down, sometimes 50, other times 100, so there have been some really stiff penalties associated with mortgage fraud. As the judiciary becomes more educated, she expected to see increasing penalties. She has seen a doubling in the average sentence for mortgage fraud over the last couple years. Yet for some reason mortgage fraud percentage-wise is up year over year. Rachel had recorded on her website $2 billion in fines, 5,000 years in jail, and 850 cases that are waiting for jail sentencing, so it is still a serious problem.
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