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The Scheme of Things: What you Should Know About Mortgage Fraud. Protecting Homeowners Empowering Victims

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(1)

The Scheme of Things:

What you Should Know About

Mortgage Fraud

Protecting Homeowners Empowering Victims

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U.S Department of

Housing and Urban

Development –

Office of Inspector

General

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Session Speaker

Michael H. Stolworthy

Director, Fraud Prevention and Program Integrity U.S. Department of Housing and Urban Development Office of Inspector General

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Session Objectives

• Discuss the Role of the Office of Inspector General

• Provide history and background of the FHA Mortgage Insurance Program

• Describe Home Mortgage Basics

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Session Objectives

• Outline Common Mortgage Fraud Schemes • Discuss Current Mortgage Fraud Trends

• Detail the Impact of Mortgage Fraud on Borrowers and Communities

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Inspector General Act

• Enacted in October 1978

• Created Inspectors General in 12 of the largest Federal agencies

• Currently authorizes IGs in more than 50 agencies

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HUD-OIG MISSION

• Prevent and detect fraud, waste, and abuse

• Promote integrity, efficiency and effectiveness

in HUD programs and operations

• Seek administrative sanctions, civil, and/or

criminal prosecution

• Independent and objective reporting to the

Secretary and Congress

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What is the Federal Housing

Administration (FHA)?

• The FHA is a wholly-owned government

corporation created by Congress in 1934

• The FHA was consolidated into HUD in 1965

• FHA provides mortgage insurance on loans

made by FHA-approved lenders

• It is the largest mortgage insurer in the world

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Ups and Downs of FHA

• In the early 90s, FHA had about 15% of the home purchase mortgage market

• Through the 90s FHA lost business to the sub-prime • By 2006 FHA market share was a marginal 3%-- and

dropping

• People asked if we still needed the FHA

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The Perfect Storm

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Mortgage Crisis

• FHA was left as the only game in town

• Market conditions, new products and a Congressionally

mandated expanded role caused a resurgence in FHA’s market share

• Mortgage limits raised to $729,750

• Now about 35% market share

• In some markets, FHA loans constitute about 70% of the

new loan market

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FHA’s Resurgence

• Today, FHA insures 7.636 million mortgages

Totaling $1.1 trillion

• More than 75% of First-Time Homebuyers • Nearly 1/3 Minority Households

• Nearly one-quarter of all refinances

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Negative Trends

• 284,196 Claims Paid FY 2012

– 102,236 Conveyances

• 100,000 REO Sales

• 9.6 % of FHA Loans are Seriously Delinquent (739,000 loans)

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FHA’s Impact on HUD-OIG

Realignment of investigative priorities:

• Single Family investigations are an investigative priority • Established nationwide

mortgage fraud initiatives • Special Agents participate in

numerous task forces and working groups

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Financial Fraud Enforcement Task

Force (FFETF)

• Created by President in November 2009

• HUD-OIG is co-chair of

Mortgage Fraud Working Group

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Mortgage Fraud Summits

Miami, FL

Phoenix, AZ

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The Lending Process

Types of Mortgages

The Paperwork

The Players

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Types of Mortgages

Government

Conventional

HELOCs

Reverse

Mortgages

19

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Types of Mortgages

• Government Mortgages – FHA • 203b • 203k – VA – AG • Conventional – Fixed Rate – ARMs – Interest Only – Option ARMs – Piggy Back (80/20) 20

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Types of Mortgages

• HELOCs • Reverse Mortgages

– HECMs

– Proprietary

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Processes and

Players

• Application • Processing • Underwriting • Post-Closing Review 22

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23

Loan Origination

Loan Officer

Application (Form 1003)

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Loan Processing

Verification of Employment (VOE)

Verification of Rent (VOR)

Verification of Deposit (VOD)

Alternative forms of Credit

4506 – Tax Return Request

Appraisal

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25

Underwriting

Underwriter Review Credit review Adequate income Ratios Stability of income

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26

Closing

Bank Attorney or Escrow or Title Company

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27

Post-Closing

Quality Control (QC)

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Paperwork

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Reverse Mortgages

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Home Equity Conversion Mortgages

(HECMs)

• Created by HUD in 1989. • Allow seniors to draw

equity from their homes. • Major FHA product.

• FHA dominates HECM market.

(47)

What is a Home Equity Conversion Mortgage (HECM)?

• Most commonly known as a reverse mortgage it is a home

loan that allows homeowners over age 62 to convert a portion of their equity into cash

• No repayment is required until the borrower(s) no longer

use the home as their principal residence

• A HECM can even be used to purchase a primary residence

in some cases

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FY 2012 HECMs

• 51,124 HECMs

– 44,714 Typical HECMs – 1,335 HECM Refinances – 1,487 HECMs for Purchase – 3,591 HECM Savers

(49)

HECM Application

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Mortgage Fraud Schemes

Basic Schemes

– False Statements – Straw Borrowers – Flipping

– Silent Second Mortgages – Inflated Appraisals – Bogus Gifts

More Schemes

– Flopping – Builder Bailouts – HECM Schemes – Foreclosure Rescue – Bankruptcy – Loan Modification Schemes 51

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WKYC.com | Cleveland, OH | Video

http://www.wkyc.com/video/default.aspx?bctid=86686616001

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Trends

• False Statements • Rescue Schemes • Flopping

(56)

ABC News Report

Loan Modification Scams Target Desperate Homeowners - YouTube 56

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Common Loan Modification Scams

• Phony Counseling or Foreclosure Rescue Schemes • Forensic Loan Audits

• Rent to Own or Leaseback Schemes • Short Sale Scams

• Bankruptcy to Avoid Foreclosure

(58)

Mortgage Forensics

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Property Flipping/Flopping

(60)

Flopping

• Short sales up 33% over last year

• FBI and Freddie Mac have warned that flopping may be on the rise

• HAFA

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For More Information

National Crime Prevention Council

2001 Jefferson Davis Highway Suite 901 Arlington, VA 22202 202-466-6272 www.ncpc.org HUD-OIG 451 7th Street, SW Washington, DC 20410 Hotline: 1-800-347-3735 www.hudoig.gov 61

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Don’t Forget…

Visit the Exhibition Hall

to meet our exhibitors!

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