The following presentation highlights a white-collar crime activity that has flourished within American neighborhoods since the late 1990s and early 2000s. The slide show not only provides a description of mortgage fraud, but also highlights some of the academic research findings by the author over the past five years.
Mortgage Fraud: A Description and Community Research Results
1. MORTGAGE FRAUD: ITS LEGAL, POLITICAL,
COMMUNITY, AND CONSUMER IMPLICATIONS
Presented by: Andy Carswell, Ph.D.
University of Georgia HACE Department
JURIS 5540
September 12, 2013
2. QUESTIONS TO BE ADDRESSED
DURING TODAY’S PRESENTATION
What exactly is (isn’t)
mortgage fraud?
How pervasive is it?
What are the consequences of
mortgage fraud?
What are some of the warning
signs for mortgage fraud within
communities?
Why has it taken so long for
mortgage fraud to become
newsworthy?
How does mortgage fraud
change over time?
What can be done about
mortgage fraud for the long-
term?
4. Mortgage Fraud Is…
1. A crime whereby property values are artificially
inflated in order to take significant funds out of the
property’s equity
2. A crime in which a party knowingly makes any
deliberate misstatement, misrepresentation, or
omission during the mortgage lending process.
3. A scheme to defraud banks and usually requires
collusion by:
Buyer / Seller
Real Estate Agent
Real Estate Appraiser
Mortgage Broker
Real Estate Attorney
Source: Scott Smith
5. Mortgage Fraud Is NOT…
“Flipping” properties for the sake of turning a profit after
improvements have been made
A reference to non owner-occupied property used for
speculative purposes over time
Predatory lending
6. Illustration of a Common Fraud Scheme
Property flipper purchases house for $100,000.
Obtains fraudulent appraisal for $400,000.
Sells house for $400,000 and walks away with $300,000 profit.
Home usually results in foreclosure.
Bank takes a $300,000 loss. If FHA insured, government absorbs
loss.
Source: Sgt. Terry Joyner, ATL Police
15. Mortgage Fraud in Georgia Declines in
2005
“The dramatic reduction in mortgage fraud in Georgia…is due to very
aggressive efforts by many parties, including this department, local,
state and federal law enforcement and prosecutors, lenders and
GREFPAC. It has been a coordinated effort, which is what it takes to
adequately address such a widespread problem.”
Department of Banking of Finance
Commissioner Rob Braswell
May 26, 2006
16. What are some of the consequences of
mortgage fraud?
17. Some Common Misperceptions
About Mortgage Fraud
Banks are the only victims
Surrounding communities should not be concerned
This is a white-collar crime only
This only happens in a few neighborhoods
Source: Scott Smith
18. Economic Consequences of
Mortgage Fraud
• Falsely escalated property
values
• Increases in property taxes
and home owner’s insurance
• Increases in foreclosures
• Neighborhood decline
Source: Sarah Gillespie
19. Falsely Escalated Property Values
• Comparative analysis
becomes difficult to
determine
• Buyers and sellers
assume market value
based on fraudulent sales
• Buyers purchase homes
overpriced for the current
sustainable market
• Sellers expect to sell
their homes at escalated
prices.
• Create affordability
issues within your
communities.
Source: Sarah Gillespie
20. Increases in Property Taxes,
Insurance and Bank Fees
• Tax assessors increase property
taxes based on artificial property
value increases
• Homeowner’s Insurance policies
increase due to artificial values and
fraudulent activity
•The cost of doing business at your
bank just increased considerably
Source: Sarah Gillespie
21. Increases in Foreclosure
• Criminals pull value out without
improving property
• Abandoned properties
• Properties foreclose and fall
below actual market values
(banks sell at a loss)
• Artificial values increase
property taxes forcing some
legitimate low-income owners
to foreclose
Source: Sarah Gillespie
22. Neighborhood Decline
• Instability, caused by high foreclosures, fractures community social fabric
• Ultimately lowers actual values, not just prices, for properties in community
• Legitimate homeowners risk getting no return for real improvements
• Homes are abandoned, vacant and boarded up attracting bad elements
• Crime increases and inevitably the value of property goes down
• Appeal of neighborhood decreases, and neighborhood could become
blighted
Source: Sarah Gillespie
25. Source: Carswell, A., Wade, M., Smith, S., & Huet, B. (2010). Techniques to enhance
the recognition of mortgage fraud in college classrooms and affected communities.
Journal of Forensic Studies in Accounting and Business, 2(1), 73-91.
26. Source: Carswell, A.T. (2009). Effects of mortgage fraud on property tax assessments.
Journal of Property Tax Assessment and Administration, 6(2), 5-17.
Mortgage Fraud Helps Push
Assessment Values Upward
27. Source: Carswell, A.T. (2009). Effects of mortgage fraud on property tax assessments.
Journal of Property Tax Assessment and Administration, 6(2), 5-17.
Mortgage Fraud Helps Push
Assessment Values Upward
28. WHAT ARE SOME OF THE WARNING
SIGNS OF MORTGAGE FRAUD?
29. Table 1: Concentration of Mortgage Fraud
Area
# of Census Tracts Analyzed
Total No Fraud Single Fraud Multiple Frauds
Ohio 1587 1508 24 55
Georgia (Atlanta
metro) 186 129 21 36
Missouri 573 504 7 62
CONCENTRATION OF MORTGAGE FRAUD
Source: Carswell, A., & Bachtel, D. (2009). Mortgage fraud: A risk factor analysis of affected communities.
Crime, Law, & Social Change, 52(4), 347-364.
30. MORTGAGE FRAUD INDICATORS – BY STATE
Unemployment
Rate
Poverty
Rate
Vacancy
Rate
Median
House
Price
Underserved
Status
Ohio
Fraud Census Tracts 8.35% 20.42% 10.89% $108,851 N/A
Non-Fraud Census
Tracts 6.59% 14.32% 7.69% $192,496 N/A
Georgia (Atlanta
metro)
Fraud Census Tracts 9.27% 16.31% 7.13% $189,349 25.64%
Non-Fraud Census
Tracts 11.74% 22.68% 8.89% $157,263 39.13%
Missouri
Fraud Census Tracts 9.49% 20.80% 53.46% $ 67,701 21.27%
Non-Fraud Census
Tracts 7.37% 12.82% 24.51% $105,249 4.03%
Source: Carswell, A., & Bachtel, D. (2009). Mortgage fraud: A risk factor analysis of affected communities.
Crime, Law, & Social Change, 52(4), 347-364.
31. INDICATORS BY SEVERITY OF MORTGAGE FRAUD
Census Tract
Underserved
Areas
Unemployment
Rate
Poverty
Rate
Vacancy
Rate
Median House
Price
No Fraud 49.63% 7.08% 14.47% 11.73% $115,920
Moderate Fraud
(1-8 occurrences) 70.21% 8.61% 19.18% 20.69% $112,618
Heavy Fraud
(over 8
occurrences) 65.63% 11.47% 20.85% 47.16% $100,944
Source: Carswell, A., & Bachtel, D. (2009). Mortgage fraud: A risk factor analysis of affected communities.
Crime, Law, & Social Change, 52(4), 347-364.
32. Source: Carswell, A., & Bachtel, D. (2009). Mortgage fraud: A risk factor analysis of affected communities.
Crime, Law, & Social Change, 52(4), 347-364.
33. Why am I just now learning
about mortgage fraud?
35. Why am I just now learning
about mortgage fraud?
Mortgage fraud has actually existed for a long
time.
State of the housing economy
Rise of Internet banking
Increased use of 3rd
party brokers/lack of
regulation
Popularity of real estate investor groups
Concurrent with rise in identity theft
Decline of neighborhood cohesiveness
38. DIFFERENCES BETWEEN FORECLOSURE
RESCUE AND OTHER TYPES OF MORTGAGE
FRAUD
Instead of occurring at the beginning of the loan transaction, this
occurs sometime within the duration of the mortgage period.
Bank not really the victim here, it is the homeowner!
There are varying punishments and legal remedies for this type of
fraud.
41. HOW DO REVERSE MORTGAGES
WORK EXACTLY?
Traditional Refi
Must be 62 or older
Must claim the home as primary residence
A portion of the home owner’s equity is made available to
homeowner based on:
- home’s value
- owner’s age
- prevailing interest rates
Proceeds are available through either:
- lump sum payment
- annuity stream
- line of credit
42. POTENTIAL MARKET FOR
REVERSE MORTGAGES
Nearly 7 million elderly households fit the profile of “house-rich,
cash-poor” Rasmussen, Megbolugbe, & Morgan (1995)
Just under 1 million low- to moderate-income would see a
significant increase to their financial well-being Merrill, Finkel,
& Kutty (1994)
Kutty (1998) estimated that RMs could effectively lower the
poverty rate by 2.4%
43. Source: Carswell, A., Seay, M.C., & Polanowski, M. (2013). Reverse mortgage fraud against seniors:
Recognition and education of a burgeoning problem. Journal of Housing for the Elderly, 27(1/2), 146-160.
44. MORE REASONS FOR GROWTH
IN REVERSE MORTGAGES
Lack of retirement preparedness, as stated by EBRI’s
Retirement Confidence Survey
Recent economic downturn exacerbated the problem
(VanDerhei, 2011)
An increasing desire for older households to “age in place”
(Bayer & Harper, 2000)
Astonishing rise in medical expenses (Skinner, 2007)
45. Source: Carswell, A., Seay, M.C., & Polanowski, M. (2013). Reverse mortgage fraud against seniors:
Recognition and education of a burgeoning problem. Journal of Housing for the Elderly, 27(1/2), 146-160.
47. TRADITIONALLY HECM HOUSING
COUNSELORS ARE EXPECTED TO:
Serve as a “trusted gatekeeper” by closing the information
asymmetry gap between buyer and seller
Be higher trained than other types of housing counselors
Provide some follow-up with clients even after the HECM has
been transacted
49. Warning Signs of Fraud
Unkempt lawn/yard
No sign of person
living there
People arriving at
location only at night
Houses selling
unusually quickly
Source: Derrick Duckworth, Jeannie Mills
50. Problem Resolution Requires
Communication and Action on a
Variety of Fronts
Community/HOA’s
Mayor/City Council
Local Police Force
Real Estate Industry Professionals
Source: Scott Smith
51. Some Inconsistencies with
Technological Tools
Inconsistencies in ownership between title
commitment, appraisal and sales contract
More than 5 mortgage inquiries reflected
on credit report within last 90 days
Bank statement deposits do not coincide
with income/payroll deposits
Seller is corporation
Cross-outs on title commitments, sales
contracts, or other loan documents
A small % of fraud transactions are
automatically flagged by technological
tools
A large majority of some banks’ claims
include loans that “passed” technological
tool screening
Over-reliance on technological tools costs
the industry billions of dollars in losses on
an annual basis
52. Know Some of the Targets for
Mortgage Fraud
Out-of-Town Investors
Young Women
Military
Older, More Mature Neighborhood
Elderly Residents
Elderly Investors
Appraisers…yes, Appraisers!
No HOA/Weak HOA
Source: Scott Smith
53. Places To Turn For Help In Mortgage
Fraud Situations
GREFPAC
Local law enforcement
Housing/building code
inspectors
Community Association
Institute
Legitimate appraisers
DO NOT hostilely confront
fraudsters!
Source: Scott Smith