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                                          FFIEC: Mortgage Fraud - White Paper
                                                 Detection and Deterrence

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Overview

The Federal Financial Institutions Examination Council (FFIEC) has published an updated edition of its February 2005 white paper on mortgage fraud detection and deterrence. The paper is intended to help bank examiners understand, identify and detect mortgage fraud schemes and elements. Entitled The Detection and Deterrence of Mortgage Fraud Against Financial Institutions: A White Paper, the document is an extensive synopsis of FFIEC's July 2009 Fraud Investigations Symposium.

The report outlines the types of fraud, provides examples of how individuals commit fraud, lists fraud red flags and describes best practices. The FFIEC states in its report that market participants are perpetrating mortgage fraud by modifying old schemes as well as employing newer schemes, such as buy and bail, reverse mortgage fraud, loan modification and refinance fraud, and mortgage servicing fraud.

Highlights

Mortgage Fraud Schemes

Builder bailout: This scheme is used when a builder who has unsold units in a tract, subdivision or condominium complex employs various fraudulent schemes to sell the remaining properties.

Buy and bail: This scheme typically involves a borrower who is current on a mortgage loan, but the value of the house has fallen below the amount owed. The borrower continues to make loan payments while applying for a purchase money mortgage loan on a similar house that costs less because of the decline in market value. After obtaining the new property, the borrower bails on the first loan.

Chunking: Chunking occurs when a third party convinces an uninformed borrower to invest in a property with no money down and with the third party acting as the borrower's agent. The third party typically is the owner of the property or part of a larger group organizing the scheme. Without the borrower's knowledge, the third party submits loan applications to multiple financial institutions for various properties. The third party retains the loan proceeds, leaving the borrower with multiple loans that cannot be repaid. The financial institutions are forced to foreclose on the properties.

Double selling: Double selling occurs when a mortgage loan originator accepts a legitimate application and documentation from a buyer, reproduces or copies the loan file and sends the loan package to separate warehouse lenders to each fund the loan.

Equity skimming: Equity skimming is the use of a fraudulent appraisal that over-values a property, creating phantom equity that subsequently is stripped out through various schemes.

Fictitious loan: A fictitious loan is the fabrication of loan documents or use of a real person's information to apply for a loan which the applicant has no intention of paying. A fictitious loan can be perpetrated by an insider of the financial institution or by external parties such as loan originators, real estate agents, title companies or appraisers.

Mortgage servicing fraud: This fraud is perpetrated by the loan servicer and generally involves the diversion or misuse of loan payments, proceeds from loan prepayments or escrow funds for the benefit of the service provider.

Phantom sale: This scheme involves an individual who falsely transfers title to a property or properties and fraudulently obtains funds via mortgage loans or sales to third parties.

Property flip fraud: A fraudulent property flip is a scheme in which individuals, businesses or straw borrowers buy and sell properties among themselves to artificially inflate the value of the property.

Reverse mortgage fraud: Reverse mortgage fraud involves a scheme using a reverse mortgage loan to defraud a financial institution by stripping legitimate or fictitious equity from the collateral property

Short sale fraud: Fraud occurs in a short sale when a borrower purposely withholds mortgage payments, forcing the loan into default, so that an accomplice can submit a straw short-sale offer at a purchase price less than the borrower's loan balance.

Debt elimination:  Debt elimination schemes are illegal schemes that offer to eliminate a borrower's debt for an up-front fee. The organizers of these schemes create phony legal documents based on the borrowers' loans for presentment to the borrower's financial institution or other lending institution in an attempt to falsely satisfy the loans. The threat this fraud scheme presents to a financial institution is the borrower's cessation of loan payments. Financial institutions may find that the use of the false documents complicates the collection process and may temporarily prevent any final action against the borrower.

Foreclosure rescue: Foreclosure rescue schemes prey upon homeowners in financial distress or facing foreclosure, with the promise to help save their home. There are multiple variations of this scheme, often charging up-front fees or convincing the homeowner to deed the property to the fraudster, with the premise that the homeowner can rent or buy the property back once the individual's credit has improved. The goal of the fraud is to collect fees or mortgage payments that are intended for the lender, but are not delivered, usually resulting in the loan going into default and ultimately foreclosure, causing loss to the financial institution.


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The Detection and Deterrence of Mortgage Fraud Against Financial Institutions: A White Paper, Produced by the July 13 - 24, 2009
FFIEC Fraud Investigations Symposium (2/16/10)





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