PROSECUTING MORTGAGE FRAUD

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JAMES R. BUCHANAN

Assistant United States Attorney

Chief, Fraud Section

Southern District of Texas

713/567-9378

State Bar of Texas

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ANNUAL

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He is currently assigned as the Chief of the White Collar Enforcement Group where he supervises 15 attorneys involved in the prosecution of complex fraud cases, including health care fraud, bank fraud, wire fraud, mail fraud, corporate and securities fraud, tax fraud, and mortgage fraud.

He currently serves as the Chair of both the Department of Justice Securities Fraud Task Force and the Procurement Fraud Task Force for the Southern District of Texas

In 2002, U.S. Attorney General John Ashcroft presented Jim with the Attorney General=s Award for Fraud Prevention for his work prosecuting Nigerian Organized Crime. In 1998, he received the Director=s Award from Attorney General Janet Reno for his prosecution of insurance / health care fraud in South Texas.

He has served as the chairman of the Government Lawyer=s Section of the State Bar of Texas.

From 1998 - 2001, he served as the Director of the Attorney General=s Nigerian Crime Initiative for the Southern District of Texas.

He has taught federal agents, local law enforcement and private investigators, and has traveled to Europe to lecture on prosecuting organized criminal activity.

He also serves as an adjunct professor at the College of Criminal Justice at Sam Houston State University.

An experienced trial attorney, Mr. Buchanan has been lead prosecutor in over 100 jury trials ranging from simple forgery to capital murder to organized crime.

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PROSECUTING MORTGAGE

FRAUD

James R. Buchanan

Chief, Fraud Section

Southern District of Texas

Mortgage Industry is key to our

growing economy!

• Home ownership is the great American

Dream

• Over $3 trillion in mortgages originated in

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In 2007, the mortgage industry

estimated more than $60 billion

in fraudulent mortgage loans

were processed, resulting in

$4 - $6 billion in losses.

• According to the mortgage industry

and the F.B.I., that number is growing!

For the fiscal year ending

9/30/07, the F.B.I. received over

46,000 SARs of mortgage fraud.

• In 2003, only 6900 reports of mortgage fraud.

• As of May, 2008, there were 1380 active FBI

t

f

d i

ti

mortgage fraud investigations.

• Doesn’t include investigations by other federal

agencies or State authorities.

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Top Ten “Hot Spots”

• Florida • Georgia • Florida • Nevada • Michigan • California • Utah • Georgia • Virginia • Illinois • New York • Minnesota

The next savings & loan crisis?

• In the late 1980s many S&Ls failed

• In the late- 1980s, many S&Ls failed

because of …

– Poor Management

– Risky loans

Riskier investments

– Riskier investments

– FRAUD

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Consequences?

• Typical mortgage fraud flipping scheme

• Property is quickly sold & resold

• At jacked up prices (inflated appraisals)

• Result: The ultimate buyer is left with a

home that is less valuable than the loan

amount.

• Buyer walks, loan defaults

Property is abandoned and lender

forecloses

• Property becomes neglected

• Surrounding property loses value

• Criminals move in

Drugs – Drugs – Prostitution – Auto theft rings

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Every mortgage fraud scheme

will have two things in common

• A material misrepresentation or omission

which is relied upon by the underwriter or

lender to fund, purchase, or insure the loan.

• GREED

G

Mortgage Fraud Indicators

• Inflated Appraisals

– Exclusive use of one appraiser

• Increased Commissions/Bonuses

– Bonuses paid for fee-based services

– Higher than customary feesg y

• Falsification on loan applications

– Buyers are told how to falsify mortgage apps. – Buyers requested to sign blank apps.

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Mortgage Fraud Indicators

• Fake Supporting Loan Documentation

– Buyers sign blank employee or bank account verifications

• Purchase Loan disguised as Refinance

– Less documentation, less lender scrutiny

• Investment w/ Guaranteed Re-Purchase

– Used to flip properties

– Often involves multiple “holding companies”

Participants include . . .

• Loan brokers • Accountants

• Loan brokers • Loan originators • R.E. owners • R.E. investors • Home builders • Accountants

• Lawyers

• Bank employees • Credit officers • Appraisers • Home improvement contractors Appraisers • Closing agents • Title Co. employees

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Common Mortgage Fraud

Schemes

• Property Flipping:

– Property purchased, falsely appraised, quickly resold

– Fraudulent appraisal

– Doctored loan documentation

– Kickbacks to buyers, appraisers, and title company employees

Common Mortgage Fraud

Schemes

• Silent Second

– Buyer borrows the down payment from the seller

– Non-disclosed 2nd_mortgage

– Loan docs lead lender to believe buyer has invested his own money in the down payment

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Common Mortgage Fraud

Schemes

• Nominee Loans / Straw Buyers

– True identity of the borrower is concealed from the lender through the use of a nominee

borrower

– Borrower uses the name, d.o.b., and credit histor of the nominee to appl for a mortgage history of the nominee to apply for a mortgage loan for which he otherwise would not qualify

Common Mortgage Fraud

Schemes

• Fictitious / Stolen Identities

– A fraudulent or stolen identity is used on the loan application

– Name, Personal Identifying Information (PII) and SSN are used without the owner’s

kno ledge knowledge

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Common Mortgage Fraud

Schemes

• Foreclosure schemes

– Actor identifies homeowners at risk of defaulting or already in foreclosure

– Actor misleads homeowner into believing they can save their homes in return for …

T f f d d • Transfer of deed • Up front fees

– Actor remortgages the home & pockets the fees

Recent federal prosecutions

• GHANDI BEN MORKA (Dallas)

– A real estate appraiser who participated in a scheme to recruit straw buyers, submit

fraudulent applications, and inflate appraisals of the properties to be purchased

Defra ded Co ntr ide of more than $2 3

– Defrauded Countrywide of more than $2.3 million

– 1/23/08, sentenced to 60 months in federal prison

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Federal Prosecutions, cont.

• LAWRENCE BENHAM (Houston)

– Recruited nominee borrowers to submit mortgage loan applications on which he exaggerated income

– Inflated property appraisals $

– At closing, siphoned off $1.5 million to accounts under his control

– Sentenced to 97 months in federal prison

Federal prosecutions, cont.

• MICHAEL HARRIS & MARJORIE

FORD (Houston)

– Harris recruited “investors” who applied for new home loans using false information

– Used Ford, an escrow agent, to close the loans – Submitted invoices at closing for work never

done on the properties

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Federal Prosecutions, cont.

• HARRIS & FORD

– Both were caught when an “investor” agreed to wear a wire to the closing

– Harris pleaded guilty, testified against Ford, was sentenced to 25 months federal prison – Ford was convicted by a federal jury, sentenced

to 71 months in prison

Federal prosecutions, cont.

• JOHN TURNER (Houston)

– Licensed RE Agent

– Skimmed $2 million from 44 residential property closings using shell companies

– Submitted invoices for work never performed at the residences

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Federal prosecutions cont.

• U S v GOODSON TARRANCE &

• U.S. v. GOODSON, TARRANCE, &

BOOTH (Houston)

– R.E. Broker Goodson recruited straw buyers – Builder Tarrance inflated the price of the homes

and kicked back money to Goodson & Booth – Loan Officer Booth made the fraudulent loans – All three convicted in a scheme that caused $11

million in losses & awaiting sentencing

Federal prosecutions cont.

• RICHARD BELL (Houston)

– Real Estate Developer in Clear Lake

• Made false statements to FDIC insured banks to obtain RE loans

• Submitted false tax returns and financials as proof of his inflated net worth

• Pleaded guilty to bank fraud and money laundering • Awaiting sentencing

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Federal prosecutions, cont.

• U S v RAYBON et al (Houston)

• U.S. v. RAYBON et. al. (Houston)

– Nine defendants charged, including owners, appraisers, brokers and closers

– Closing transactions on manufactured homes as refinancing instead of new loans

– Engaged in “pre-closing” transaction to vest title in the buyer

– Then, did a 100% refinance at an inflated price

Federal prosecutions, cont.

• U S v Charles Head et al (Sacramento)

• U.S. v. Charles Head, et. al. (Sacramento)

– Nineteen people charged in a foreclosure scam – Convinced struggling homeowners with resetting

ARMs to add an “investor” to their home’s title – Homeowners believed they were paying rent to

investor

– Head and others would refinance the home under the investor’s name & walk away with any equity – 155 homeowners, 22 states, $13 million fraud – Awaiting trial

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Federal prosecutions, cont.

• Greensboro N C July 2005

• Greensboro, N.C., July 2005

• 2 businessmen & a real estate attorney were

indicted by a federal grand jury on charges

of wire fraud & mail fraud

• Properties purchased in the names of straw

b

borrowers

• False applications, inflated appraisals,

double closings

Federal Statutes

• Conspiracy – Title 18Conspiracy Title 18, • False statement to U.S.C. §371

• Mail fraud/wire fraud Title 18, U.S.C. §1341 & 1343

False statement to obtain credit, Title 18, U.S.C. §1014

• Aggravated Identity Theft – Title 18, U S C §1028 • Bank fraud – Title 18,

U.S.C. §1344

U.S.C. §1028

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Conspiracy

• Allows us to bring all players into the courtroom • Allows us to bring all players into the courtroom • Does not require the successful completion of the

criminal activity

• A person commits an offense if he and at least one other person make an agreement to commit a federal offense and one of the conspirators does an federal offense and one of the conspirators does an act in furtherance of the agreement.

Mail fraud / Wire fraud

• A person commits an offense if he executes

or attempts to execute a scheme or artifice

to defraud,

• And the scheme or artifice involves the use

of the mail or interstate wire

communications

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Bank fraud

• A person commits an offense if he executes

or attempts to execute a scheme or artifice

to defraud,

• A federally insured financial institution

• 30 year maximum sentence

False statement to obtain credit

• A person commits an offense if he makes a

false statement for the purpose of

influencing a federally insured financial

institution to make or renew a loan

• Includes overvaluing collateral, false name,

inflated income, or material omission

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Aggravated Identity theft

• A person commits an offense if he

intentionally and without lawful authority

uses a means of identification of another

person in relation to certain enumerated

offenses (includes wire, mail, & bank fraud)

• Mandatory 2 year sentence stacked on any

sentence for the underlying offense

Money laundering

• Not just for drug cases anymore! • Not just for drug cases anymore!

• A person commits an offense if he engages in a financial transaction with proceeds of specified unlawful activity when the defendant knows the funds were the proceeds of unlawful activity and the purpose of the transaction is to conceal the the purpose of the transaction is to conceal the source or ownership of the funds or to promote the criminal activity

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To prosecute a case, we need…

• Bank records

• Title company closing files

• Lender files

• Spreadsheets and charts

Wit

h

’t t

b

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• Witnesses who aren’t too busy to come

testify

How can you help?

• Institute a mandatory system of reportingInstitute a mandatory system of reporting fraudulent activities

• Seriously scrutinize loans for properties where the sellers have held title for less than 90 days

• ZERO TOLERANCE • Call us!

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James R. Buchanan

Assistant United States Attorney

Chief, Fraud Section

Southern District of Texas

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JAMES R. BUCHANAN

Assistant United States Attorney

Chief, Fraud Section

Southern District of Texas

713/567-9378

State Bar of Texas

30

TH

ANNUAL

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