Assisting Victims of Mortgage Fraud National Crime Prevention Council

Assisting Victims of Mortgage Fraud National Crime Prevention Council 2015 www.ncpc.org

Introduction The National Crime Prevention Council has prepared this course to inform and educate Victim Service Providers, attorneys, and other allied organizations about the many types of crimes, frauds and schemes associated with mortgage fraud today and how to best serve its victims. The course is divided into three modules. Part One provides an overview of how the economy and marketplace today present opportunities for new types of mortgage fraud. Part Two provides background on the marketing and persuasion tactics used by fraudsters to commit mortgage fraud and on how homeowners can defend themselves against fraud. Part Three offers instruction on reporting mortgage fraud and the steps victims can take to restore and remedy their situation. Cover image from :http://www.yogakriya.org/php/pujananda/meanderings15.php 2015 National Crime Prevention Council, Inc. www.ncpc.org 2

Objectives To provide professionals who work with victims of mortgage fraud with the knowledge to recognize current mortgage frauds. the tools and resources to help those who are at risk or have fallen victim already. Specifically, the goals of this course are to help Victim Service Providers to recognize current mortgage scams and identify who is at risk learn the steps that victims can take to recognize, and defend themselves against, mortgage fraud understand why it is so important for victims to report mortgage fraud and the best way to help them do it examine how to help victims by using best practices and by informing them of the programs and resources available understand how to help victims to recover from mortgage fraud and to help them regain good financial standing. 2015 National Crime Prevention Council, Inc. www.ncpc.org 3

In the beginning

First wave of mortgage fraud: loan originations Most Americans understand that the housing boom that peaked in 2005-2006 laid the groundwork for the financial crisis of 2008. Interest rates were low, so the cost of debt and financing a home became more affordable. Many individuals entered the housing market. Housing prices rose. Existing homeowners applied for second mortgages to take equity out of their homes and support their spending. Housing prices continued to rise; more buyers entered the market. With buyers feeling the pressure to qualify for a mortgage and profit from rapidly increasing home prices, the first wave of mortgage fraud occurred in loan originations. Loan origination includes all the steps from taking a loan application through actual disbursal of funds. 2015 National Crime Prevention Council, Inc. www.ncpc.org 5

First wave of mortgage fraud Financial institutions sought to increase profits by adding features to their loans, including adjustable interest rates and prepayment penalties, which increased costs for borrowers. To generate more income from fees, lenders directed many borrowers into higher cost loans even when they qualified for loans with more conventional terms. As a result of these actions, many borrowers took out loans much larger than they could afford, assuming they would be able to sell or refinance their homes at a higher price later. Countless borrowers also took out adjustable rate mortgages (ARMs), where initial interest rates were lower than those on fixed-rate loans. With the flood of buyers seeking financing, and the pressure to generate fee income, many mortgage lenders approved “no doc” loans—waiving the documentation borrowers normally would need to support their ability to repay them. 2015 National Crime Prevention Council, Inc. www.ncpc.org 6

First wave of mortgage fraud, cont’d By 2004, the FBI warned that mortgage fraud was becoming so rampant that the resulting “epidemic” of crimes could trigger a massive financial crisis. In 2005, the FBI reported that “mortgage fraud is one of the fastest growing white collar crimes in the United States.” 2015 National Crime Prevention Council, Inc. www.ncpc.org 7

Common loan origination scams Inflated income or assets Stated income loan Straw buyer Air loans Identity theft Inflated appraisal Inflated deposits & soft second mortgages Flipping Money laundering Altered documents Predatory lending Multiple loans 2015 National Crime Prevention Council, Inc. www.ncpc.org 8

Loan origination fraud by type between 2008-2012 2015 National Crime Prevention Council, Inc. www.ncpc.org 9

Housing boom collapse The financial rewards of rising house prices also led to a boom in new home construction. By 2007, there were more houses on the market than people willing to buy them. The inventory of available single-family homes, which had been expanding rapidly in a real estate construction boom that coincided with price increases, had grown to the point where downward pressure was now exerted on prices. A long and slow correction began as real estate prices began to fall. The housing market collapsed in 2007. 2015 National Crime Prevention Council, Inc. www.ncpc.org 10

Housing boom collapse, cont’d At the same time, the interest rates on many adjustable rate mortgages (ARMs) changed to the higher rates. Borrowers with ARMs who had planned to sell their homes before the high interest rates kicked in found that, because of the dramatic drop in housing prices, they were “under water”, i.e., their mortgage balance was higher than the market price for their homes. Other borrowers who had planned to refinance their homes before the adjustments kicked in were unable to refinance, again because the equity in their homes had disappeared. Homeowners began to default on their mortgages when the adjustments began. Default rates on subprime and ARMs began to climb. 2015 National Crime Prevention Council, Inc. www.ncpc.org 11

Foreclosure crisis Foreclosure filings nationwide increased from 1.3 million in 2006 to 2.2 million in 2007, 3.2 million in 2008, and 4 million in 2009. The financial crisis that began in 2008, rooted in the massive mortgage defaults that were occurring, compounded the problem. Millions of people lost their jobs and could not afford to pay their mortgages, whether they were adjustable or fixed rate. By the end of 2010, 11 million residential properties, or 23 percent of all U.S. homes, were under water—that is, they had negative equity. The impact of a foreclosure can be devastating, including loss of home (often a family’s most significant financial asset), severe damage to a credit rating, and strains on emotional health. 2015 National Crime Prevention Council, Inc. www.ncpc.org 12

Foreclosure crisis opens door for new fraud Today, the US housing market is still in distress, with ample opportunity for fraud. This new wave of mortgage fraud is expanding beyond loan origination to new schemes. Government agencies warn of an epidemic of loan modification and foreclosurerescue scams. There is good news. More information and resources are available to deal with mortgage scams than ever before. 2015 National Crime Prevention Council, Inc. www.ncpc.org 13

Top locations for mortgage fraud in the U.S. 2012 Top 10 states with loans under investigation 1. Michigan 2. Nevada 3. Arizona Top five metropolitan areas San Francisco (Oakland, Fremont) CA 4. Delaware Philadelphia (Camden, Wilmington) PA/ NJ/DE/MD 5. Illinois Los Angeles (Long Beach, Santa Ana) CA 6. New Jersey 7. California 8. Michigan 9. Georgia 10. New York New York (Northern New Jersey, Long Island) NY/ NJ/PA Miami (Ft. Lauderdale, Pompano Beach) FL 2015 National Crime Prevention Council, Inc. www.ncpc.org 14

Assisting Victims of Mortgage Fraud Part One: New Trends in Mortgage Fraud 2015 National Crime Prevention Council, Inc. www.ncpc.org 15

Part One goals Identify how mortgage fraud has “evolved” since the financial crisis. Recognize current mortgage scams and identify who is at risk. 2015 National Crime Prevention Council, Inc. www.ncpc.org 16

Government action has curtailed loan origination fraud In the years following the financial crisis, new laws and regulations have been put in place to quash origination fraud. Examples include 2010 Dodd-Frank Act - regulation across the financial services industry 2008 Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act mandatory originator registration Real Estate Settlement Procedures Act (RESPA) - new disclosures and closing procedures FHA Certified Brokers - tighter procedures for professionals involved in all aspects of the mortgage transaction Office of the Comptroller of the Currency - examination of closed loans. These actions appear to be working: fewer loan origination cases are being reported. 2015 National Crime Prevention Council, Inc. www.ncpc.org 17

Mortgage fraud evolved after the financial crisis The US housing market is still in distress, creating ample opportunity for fraud. This new wave of mortgage fraud is expanding beyond loan origination to new schemes. Fraudsters moved into less scrutinized corners of the mortgage market and created new schemes. Today, loan origination fraud has been replaced by distressed homeowner frauds. These new schemes are hard to recognize because mortgage fraud and the methods of committing it are constantly changing. 2015 National Crime Prevention Council, Inc. www.ncpc.org 18

Loan origination vs. distressed homeowner fraud Who is the victim? Loan origination fraud Typically, the lender Distressed homeowner fraud Typically, the homeowner 2015 National Crime Prevention Council, Inc. www.ncpc.org 19

Distressed homeowner fraud Distressed homeowner fraud can be divided roughly into two categories Loan modification Homeowners having difficulty paying their current mortgages often seek a loan modification, a permanent change in one or more of the terms of a borrower's loan. In the cases discussed here, the modification sought would result in a lower payment that the borrower can afford. A loan modification is fraudulent when fees are paid upfront but favorable modifications are not delivered. Foreclosure rescue Homeowners facing imminent foreclosure fall prey to foreclosure rescue scams. Foreclosure rescue refers to funds that enable a homeowner to prevent foreclosure, or that allow the homeowner to purchase the property at or after foreclosure. A foreclosure rescue is fraudulent when the promised funds fail to materialize and the foreclosure process continues. 2015 National Crime Prevention Council, Inc. www.ncpc.org 20

The new wave of mortgage fraud Mortgage delinquency and foreclosure rates in the US continue to improve from their peaks in the financial crisis. Delinquencies stand at 6.39 percent—down from a high of more than 10 percent in 2010. 2.86 percent of mortgages are in foreclosure.* Homeowners can face foreclosure due to personal financial crises such as unemployment and underemployment divorce death in the family unforeseen medical expenses. The threat of losing their homes has prompted many homeowners to turn to mortgage rescue companies only to realize down the road that they’ve been scammed. 2015 National Crime Prevention Council, Inc. www.ncpc.org 21

Typical distressed homeowner frauds Phantom help Fake “government” programs Bait and switch Forensic audit Reverse mortgage/HECM Rent-to-own Equity stripping Illegal flipping (flopping) Bankruptcy 2015 National Crime Prevention Council, Inc. www.ncpc.org 22

Loan Modification Scams

Types of loan modification scams Phantom help Fake government programs Bait and switch Forensic audit Reverse mortgage/HECM 2015 National Crime Prevention Council, Inc. www.ncpc.org 24

Phantom help (or phony counseling) The Victim Homeowners who can’t meet their financial obligations; uncomfortable dealing with authority, who want someone to act as an intermediary. Background to the Scam Scammers target homeowners who are delinquent on their mortgage, on the brink of foreclosure, or in foreclosure and offer to negotiate new terms with their lender. 2015 National Crime Prevention Council, Inc. www.ncpc.org 25

Phantom help, cont’d The Scam Phantom help scammers tell homeowners that, for an upfront fee, they'll negotiate reduced mortgage payments with their lender. They may claim to be attorneys or represent a law firm. Often they instruct homeowners not to contact their lender, lawyer, or credit counselor. They promise to handle all the details once the fee is paid. The fee may be called a processing fee or an administrative fee. The scammer may insist that the homeowners make all mortgage payments directly to him while the scammer negotiates with the lender. Impact/Outcomes The scammer stops returning calls and, like a phantom, vanish with the fee and sometimes, with the “mortgage payments.” Homeowners find themselves in even more dire situations than before they met the phantom scammer. 2015 National Crime Prevention Council, Inc. www.ncpc.org 26

Phantom help – real life example Sandra S., Long Island, New York* Twenty years ago, Sandra and her husband bought a home in Long Island, New York. After raising four children, they were struggling to make their mortgage payments because of high medical expenses they had incurred. A friend suggested that Sandra contact a local financial company for a loan modification. Sandra met with representatives of the company who guaranteed they could modify her loan and help her family avoid foreclosure. They required her to sign a contract and pay an upfront fee of nearly 4,000. Sandra borrowed money for the fee from her family. She felt comfortable doing this since the company's contract stated “in the event we are not able to successfully modify your mortgage, we will return 100 percent of this fee.” 2015 National Crime Prevention Council, Inc. www.ncpc.org 27

Phantom help – real life example, cont’d Sandra signed a contract with the loan modification company and ceased communication with her lender, following the company’s specific instructions. Two months passed and Sandra had not heard anything from the loan modification company. She was shocked to be served court papers stating that her lender had filed a foreclosure action with a court date set for later that year. When Sandra contacted her representative at the loan modification company, she was advised not to worry—they would handle the situation. Months later, Sandra learned that the company had failed to appear in court on her behalf and realized she had been scammed. The scammer did not help Sandra secure a loan modification yet pocketed a significant fee for his promise to provide services. 2015 National Crime Prevention Council, Inc. www.ncpc.org 28

Fake government programs The Victim Homeowners who are financially stretched and decide to seek help through government programs. Background to the Scam There are many legitimate nonprofit agencies that offer homeowner assistance programs under government sponsorship. The existence of legitimate programs creates a cover for scammers to present themselves as just another government program. Scammers rely on their targets having a certain state of mind: “if the program is sponsored by the government then I can’t go wrong; there is no risk to me.” 2015 National Crime Prevention Council, Inc. www.ncpc.org 29

Fake government programs, cont’d The Scam Scammers claim to be affiliated with, or approved by, the government. The scammers’ website may appear to be a valid governmental agency, but the website may end with .com or .net instead of .gov. They use terms or words associated with official government programs like “federal,” “HAMP,” “MHA,” and “HARP.” They ask for high, upfront fees to “qualify” the homeowner for government mortgage modification programs. Authentic government-supported homeowner assistance programs charge little or no fee for their services. Impact/Outcomes Once the fee is paid, scammers disappear with the money. 2015 National Crime Prevention Council, Inc. www.ncpc.org 30

Fake government programs - real life example Alicia G., Los Angeles, California* Alicia was proud to be a homeowner, diligently making her mortgage payments each month. When she lost her job in 2009 she fell behind in her payments. Shortly afterwards, Alicia received a brochure from a company offering loan modification services. The company claimed to be affiliated with the government, presented itself in a professional manner, and had a website with an “official-looking” logo. A company representative came to her home and offered to help Alicia obtain a modification to her mortgage. She agreed to pay a 1,250 upfront fee for assistance with the loan modification application. The upfront fee seemed reasonable for the services and guarantees the representative had given. The company representative offered her a money-back guarantee if she did not get a government-sponsored loan modification. Alicia felt protected because she had signed a contract. 2015 National Crime Prevention Council, Inc. www.ncpc.org 31

Fake government programs - real life example, cont’d As time passed, Alicia became concerned when she didn’t receive any updates on her loan modification application and heard nothing from her lender. The loan modification company soon stopped returning her calls. Before long, Alicia realized that the company had done nothing to obtain her loan modification, despite the representative’s promises and the fees she had paid. When Alicia asked for a refund, the company refused. Distressed by her situation and looking for a solution, Alicia attended a foreclosure prevention event sponsored by local non-profits and lenders. At the event she learned of a local HUDapproved counseling agency that could help her free of charge. Alicia filed a scam report against the loan modification company and won a small claims court settlement against the company with the help of the Lawyer’s Committee for Civil Rights under Law. By ultimately tapping into legitimate government resources, Alicia was able to save her home. 2015 National Crime Prevention Council, Inc. www.ncpc.org 32

Bait and switch The Victim Typically, homeowners who cannot afford current mortgage payments and are anxious to refinance Background to the Scam This scam requires a receptive frame of mind - bait and switch is most effective when homeowners are desperate and anxious. Some homeowners will catch on and remove themselves from the process—but many will not. Many homeowners look back after the fact and can’t believe that they fell for the bait and switch—again, the target’s frame of mind is key to this scam. 2015 National Crime Prevention Council, Inc. www.ncpc.org 33

Bait and switch, cont’d The Scam Scammers offer to refinance the homeowners’ mortgage—for an upfront fee —at much more favorable rates. There are two main ways scammers use the bait and switch tactic. Scenario 1: Unknowingly signing over the deed to the house In a bait-and-switch scam, con artists give the homeowners papers they claim need to be signed to get a loan to make their mortgage current. But buried in the stack is a document that surrenders the title to their house to the scammers in exchange for a “rescue” loan. The homeowners sign all the papers, unaware that they have just signed over their home to the scammer. Impact/Outcomes The scammer now has access to any equity that was in the home as well as has been paid an upfront fee. 2015 National Crime Prevention Council, Inc. www.ncpc.org 34

Bait and switch, cont’d The Scam, cont’d Scenario 2: Unknowingly signing new loan with bad terms The scammer presents the homeowners with new loan documents that show great rates. But hidden in the mound of documents are pages with much less favorable terms than those that lured the homeowner. The homeowner signs everything and pays the closing costs. The scammer sends the documents with the less favorable terms to the bank/mortgager. Impact/Outcomes When the homeowners realize that not only have their mortgage payments not improved but they have paid the upfront fee—as much as 20,000 in some cases, the scammer no longer returns phone calls or is long gone. 2015 National Crime Prevention Council, Inc. www.ncpc.org 35

Bait and switch - real life example Sally L. of Albuquerque, NM Sally had recently been laid off from her job but was actively searching for a new one. When she found that her mortgage payments were getting too difficult to make she thought about refinancing. She had some savings but a refinance of her home would allow her to cut back significantly on her expenses. Sally found a flyer in her door with a tremendous offer to refinance at great rates. She called the number on the flyer. The voice on the phone said he could offer her a 3.25% fixed interest rate in the first year and 5% fixed for the remainder of the loan. She told him that she was interested. She also told him that he was very high pressure and making her uncomfortable – this was the first red flag that Sally ignored! The man apologized but because of the attractive rates, Sally decided to proceed with the financing . The man came to Sally’s house to finalize the closing. She signed the documents that stated the very favorable loan rates. But she also signed some other documents, the ones that the scammer planned to send to her bank 2015 National Crime Prevention Council, Inc. www.ncpc.org 36

Bait and switch - real life example, cont’d Sally later learned that the document going to the bank actually stated that her loan would start at 8% the first year and go as high as 15% after that. The documents that Sally was left with did not tell her what the terms of the loan actually were. That was on purpose because, in some jurisdictions, the loan can be cancelled within three days and the fraudster didn’t want Sally to realize within that timeframe that she had been scammed. Sally paid more than 20,000 in closing costs to the scammer, but all he did was get her a loan less favorable than her existing loan. In Sally’s case, the ring leader of this scam was sentenced to 17 years in prison and ordered to pay 2 million in restitution; Sally’s immediate scammer was sentenced to nine years in prison. 2015 National Crime Prevention Council, Inc. www.ncpc.org 37

Scam: Forensic audit The Victim Homeowners struggling to make mortgage payments or facing foreclosure. The Scam In exchange for a substantial fee, so-called forensic loan "auditors" offer to have an attorney or other expert review the homeowner’s mortgage documents to determine if their lender complied with the law. Fees can range from several hundred to several thousand dollars, as well as a monthly “subscription” to software programs homeowners unknowingly subscribe to as “free introductory” trials. The "auditors" claim their report can be used to avoid foreclosure, speed the loan modification process, reduce the balance owed, or even cancel the mortgage outright. Impact/Outcomes There is no evidence that forensic loan audits will help homeowners get a loan modification or any other mortgage relief. In cases of fraud the scammers do not perform any of the promised services or give false reports to their victims that provide useless information. 2015 National Crime Prevention Council, Inc. www.ncpc.org 38

Forensic audit: Example William and Cynthia Morton., Nevada Between 2011 and 2012 William and Cynthia Morton paid a total of 7,495 to American Home Rescue (AHR), which claimed if a “forensic audit” of their mortgage uncovered Real Estate Settlement Procedures Act (RESPA) violations the homeowners would be entitled to a legal remedy resulting in the elimination of their mortgage obligation. The Mortons conveyed power of attorney to AHR so the firm could inspect their mortgage documents. They were also instructed to quitclaim their home to AHR and to pay rent to the company for a period of time. AHR would then deed the home back to the Mortons and they would own their home free and clear of their mortgage. The company promised to refund the fees paid if their services did not achieve the promised outcomes. The scammers told the homeowners that the “forensic audit” uncovered numerous violations and that they had arranged for attorneys—led by prominent attorney Kenneth Starr—to represent them. None of the promised services were delivered. In 2013 the principals of AHR were indicted by the state of Nevada for multiple counts of mortgage lending fraud. 2015 National Crime Prevention Council, Inc. www.ncpc.org 39

Reverse mortgages (HECM) The Victim Homeowners age 62 or older who want to use the equity in their homes to make their mortgage payments. Background to the Scam Home Equity Conversion Mortgages (HECM) are the only reverse mortgage insured by U.S. government; available only through an FHA-approved lender. The borrower must be 62 or older, own their home or have only a small mortgage balance, occupy the property as a primary residence, and participate in HECM counselling. No income, credit, or employment qualifications are required; no repayment is required. Closing costs can be financed into the mortgage loan. 2015 National Crime Prevention Council, Inc. www.ncpc.org 40

Reverse mortgages (HECM), cont’d The Scam Because many seniors have equity in their homes and tend to be more trusting than other demographic groups, they are a target for scammers. Unscrupulous loan officers, mortgage companies, investors, loan counselors, appraisers, builders, developers, and real estate agents recruit seniors through local churches, investment seminars, and television, radio, billboard, and mailer advertisements. Scammers claim to able to help seniors obtain a HECM. Seniors feel secure because HECM is a government program. Once the senior has agreed to the plan—and a crooked appraiser inflates the value of the house—the scammers obtain a reverse mortgage in the seniors’ names. Impact/Outcomes The property title is transferred to the perpetrator who takes ownership of the house. 2015 National Crime Prevention Council, Inc. www.ncpc.org 41

Reverse mortgages – real life example Bill and Jean D., Arizona Bill and Jean had a small mortgage on their comfortable home in Tucson, Arizona. However, since both of them were retired, they had no income and had spent a lot of savings due to Bill’s recent illness. When they found it difficult to make mortgage payments, they decided to look into a government-insured reverse mortgage (HECM). Bill responded to a flyer left in their door that advertised reverse mortgages. At the appointed time, a well-dressed, professional-looking woman showed up. She walked Bill and Jean through the requirements; Bill and Jean qualified on all fronts. The woman explained that her company would apply for the HECM in Bill and Jean’s name. The fee they paid upfront for her services would ensure that the couple qualified for the mortgage. Two weeks later, the woman phoned the couple with good news. Their HECM had been approved. Bill and Jean did not know that they would have qualified for a HECM without any outside help and without spending money on an upfront fee. 2015 National Crime Prevention Council, Inc. www.ncpc.org 42

Reverse mortgages – real life example, cont’d Bill and Jean were thrilled to have obtained their HECM. For months, they lived in their house, unaware that they had been scammed out of money. But it got worse. One day the police arrived at their door to tell Bill and Jean that they had arrested a mortgage fraud outfit and that they had found the deed to Bill and Jean’s house in the papers. Bill and Jean had inadvertently signed away the deed to their house and no longer owned any equity in it—in fact, their house now belonged to the scammer! 2015 National Crime Prevention Council, Inc. www.ncpc.org 43

Foreclosure rescue scams

Types of foreclosure rescue scams Rent-to-own Equity stripping Illegal flipping (flopping) Bankruptcy “Foreclosure rescue scams vary in execution but they capitalize on two things: borrower desperation and mind-bogglingly complex mortgage loan documents.” (New York Times) 2015 National Crime Prevention Council, Inc. www.ncpc.org 45

Rent-to-own (leaseback scheme) The Victim Cash-strapped homeowners who are nearing the end of the foreclosure process after failing to make their payments. Background to the Scam Renting a property with an option to purchase is subject to fraud when homeowners wish to stay in their house while seeking rescue from foreclosure. Leaseback schemes often include equity stripping as well. (See Slide 48). The Scam “Rescue artists” step in, and for a fee “temporarily” take title to the house, and agree to lease it back to the homeowner. The homeowner signs a lease and makes monthly payments to the scammer. Terms of the new agreement are more severe than the original mortgage, with higher monthly payments. 2015 National Crime Prevention Council, Inc. www.ncpc.org 46

Rent-to-own (leaseback scheme), cont’d Impact/Outcomes (multiple possibilities) The victim falls behind on payments and defaults on the lease, losing the fees paid up front, the rent payments, and the home to the scammer. The scammer collects the rent money but never makes payments to the mortgage company. The home continues through the foreclosure process, and the homeowner ends up being evicted. Homeowner/renter reestablishes financial health. They offer to buy the house for the price agreed in the contract. The scammer takes the money and runs. The homeowners are evicted. 2015 National Crime Prevention Council, Inc. www.ncpc.org 47

Rent-to-own - real life example Rent-to-own scammers, Philadelphia Between June and December 2008, scammers from REI scoured public records filings to find homeowners in financial distress and pitch a “sale-leaseback” arrangement to them. The pitch was that their company would buy the homeowner’s house, the homeowner would remain in the house and pay rent to REI. When the homeowner became financially stable, the homeowner could buy back the house. The scammers solicited straw buyers for properties, used fraudulent documents to obtain mortgage loans from lenders, and eventually failed to make the mortgage payments. The houses went into foreclosure with the straw buyers listed on the mortgage, the original homeowners faced eviction from their own homes and the mortgage lenders stuck with loans in default. Only one couple ever acquired the means to repurchase their home from REI but, after they wired approximately 245,000 to REI for that purpose, the lead scammer used the money to purchase a Ferrari for himself and jewelry for his girlfriend and pay miscellaneous expenses. A 15-count indictment charged the scammer with conspiracy, mail fraud, wire fraud, bank fraud and money laundering. He faces approximately 210 to 262 months in prison under sentencing guidelines. 2015 National Crime Prevention Council, Inc. www.ncpc.org 48

Equity stripping The Victim Financially distressed homeowner with a significant amount of equity in the home. Background to the Scam Equity stripping involves a scammer liquidating the equity in a home without the homeowners’ knowledge—but with their unintentional consent. The opportunity arises when homeowners are facing financial hardship and look for ways to stay in their home. Equity stripping can occur in several ways. For example: as part of a leaseback scheme by charging large fees for home equity line of credit. 2015 National Crime Prevention Council, Inc. www.ncpc.org 49

Equity stripping, cont’d Scam #1: Equity stripping as part of a leaseback scheme A fraudulent “investor” buys the property from a homeowner facing foreclosure or a tax lien, directly or through an accomplice (straw man). The fraudster agrees to lease the home back to the homeowner who may remain in the home as a tenant. The scammer substitutes his accomplices for the homeowners on the property title. The owner is not aware of the title transfer. The fraudster applies for a mortgage to extract the maximum available equity from the home. The fraudsters split the cash extracted from the equity. 2015 National Crime Prevention Council, Inc. www.ncpc.org 50

Equity stripping, cont’d Scam #2: Home Equity Lines of Credit or Refinancing Fraudsters ply homeowners with offers to secure home equity lines of credit or to refinance their home. The fraudsters make money by charging upfront fees and exorbitant closing costs. The homeowner ends up owing more on the mortgage than before the transaction. Impact/Outcomes Homeowners can lose anywhere from thousands of dollars to the equivalent of all of the equity in their home. 2015 National Crime Prevention Council, Inc. www.ncpc.org 51

Equity stripping - real life example Gloria and Fred J., New York Gloria and Fred J. had scrimped to save the 8,000 down payment for a two-family house and take out a 226,000 mortgage. They now had a home of their own. Several years later an injury forced Gloria to take a leave from her job. They struggled financially on her disability payments and her husband’s income as a construction worker. By summer, they had fallen two months behind on their mortgage. Because the Johnsons’ home had risen in value, they could have sold it and paid off about 275,000 in debt. But they wanted to remain in the house. Gloria called a foreclosure rescue company that advertised help for people facing foreclosure. She met with the company officials and agreed to what she thought was a refinancing of her mortgage at a lower interest rate, with more affordable monthly payments. Unknowingly, they had transferred their deed to the rescue company’s straw buyer. That buyer qualified for a type of mortgage that would let him take cash out as part of the financing. He borrowed 425,000 against the house and pocketed 134,000, which included the equity Gloria and John had built up over the years. Now Fred and Gloria are fighting to stay in their house and recover their equity 2015 National Crime Prevention Council, Inc. www.ncpc.org 52

Illegal flipping (flopping) The Victim The lending institution. Background to the Scam As a result of ARM adjustments or effects of the economic recession of 2008-2009, many homeowners could no longer make their mortgage payments. But because their homes were “underwater” they could not sell the house at a price that would enable them to pay off their mortgage obligation. At that point, they might enter into a “short sale” agreement with the bank. In this case, the bank/lender forgives the mortgage loan and takes ownership of the home. These properties are called “REO” or Real Estate Owned. Banks try to unload the property as expediently as possible, either at auction or on the open market, usually at reduced prices. 2015 National Crime Prevention Council, Inc. www.ncpc.org 53

Illegal flipping (flopping), cont’d The Scam In this scheme, investors or appraisers hire brokers to assess a home for less than its market value and convince banks to accept a sale at that level. The buyer conceals from the lender that he has lined up a higher offer and then quickly resells the property for a profit. Impact/Outcomes “Flopping” occurs in more than 1 percent of short sales and may cost lenders 50 million or more each year. 2015 National Crime Prevention Council, Inc. www.ncpc.org 54

Illegal flipping (flopping) – real life example Hypothetical Example Harry buys a house for 700K at the height of the housing boom, putting 10 percent down, and taking out a 630K mortgage. Four years later, that house is worth 20% less, or 560K. The mortgage hasn’t amortized very much, so Harry still owes the bank 610K. Harry could wait for the markets to recover. He could sell the house and pay the bank the balance owed on the mortgage out of his pocket. Or he could convince the bank to approve a “short sale” for less than what’s owed on the mortgage–in which case the bank, to cut its losses, generally forgives the difference between what’s owed and the sale price. Those are all legitimate choices. The transaction becomes a “flop,” however, when Harry gets greedy. Harry decides to convince the bank that prices have actually declined 30 percent. In that case, it might approve a short sale at 490K. Harry’s friend Barry buys the house for that price. They then sell it for the true market price of 560K. Harry and Barry split the profit of 70K, minus transaction costs. The real estate agent who brokered both sales earned two quick sales commissions. 2015 National Crime Prevention Council, Inc. www.ncpc.org 55

Bankruptcy The Victim People whose home mortgages are in trouble. Background to the Scam Scam operators, posing as “mortgage consultants,” may promise to take care of the homeowner’s problem with their mortgage lender or help them refinance. They may ask the homeowner to make mortgage payments directly to the scam operator. They may even ask the homeowner to hand over the property deed to the operator. The homeowner then has to pay the fraudster in order to stay in their own home. 2015 National Crime Prevention Council, Inc. www.ncpc.org 56

Bankruptcy, cont’d The Scam Instead of contacting the homeowner’s lender or refinancing the loan, the scam operator pockets all the money from the payments, then files a bankruptcy case in the homeowner’s name—sometimes without their knowledge. Creditors’ calls and letters to the homeowners cease, shoring up the perception that the scammers were helpful and, therefore, legitimate. Impact/Outcomes While the homeowners think everything has been taken care of and their problems resolved, the scammers have time to dissolve their company, skip town, etc. When the bankruptcy petition gets to court, the homeowners don’t participate because they are unaware of the petition, so the judge dismisses the case and the foreclosure process resumes. The homeowners lose the money paid to the scam operator, and often lose their home. The homeowners will also have a bankruptcy listed on their credit records for years afterward. 2015 National Crime Prevention Council, Inc. www.ncpc.org 57

Bankruptcy – real life example Jane and Walter F. of Chicago, IL . Jane and Walter F. are a couple with three children approaching college age. Jane has always been a homemaker and Walter was recently fired from his job as an IT advisor with an automotive manufacturer. Despite Walter’s good salary, they lived hand to mouth after they put away money for college and savings. Within a few months after Walter was fired, the couple could not make their mortgage payments. In addition, they started getting harassed by creditors. One day, Walter found an ad on the internet. Walter would be the first to maintain that he would never fall for an ad over the internet, particularly one to do with refinancing a home. But since he was on a reputable bank website at the time the ad popped up, Walter assumed the ad was legitimate and perhaps even endorsed by the bank 2015 National Crime Prevention Council, Inc. www.ncpc.org 58

Bankruptcy – real life example, cont’d A very professional man, well spoken and well dressed, showed up at their home. He spent a . long time with them and he seemed educated and informed. He had even attended the same university as Walter back in Saint Louis and the two reminisced over coffee. The man suggested that his company look after refinancing the couple’s home and he offered some very good rates. He even suggested that the couple make future mortgage payments to his company. Walter and Jane felt comfortable doing that because he was so likeable and he was an alumnus of Walter’s alma mater. The man told the couple that he would contact their creditors and take care of everything. Jane and Walter used some of their savings to pay the upfront fee. 2015 National Crime Prevention Council, Inc. www.ncpc.org 59

Bankruptcy – real life example, cont’d When the phone calls and harassment from creditors stopped, Walter and Jane were thrilled. . They were making mortgage payments at a greatly reduced rate and their lives seemed to be back to normal. Walter was actively looking for a job and had some good leads. Within a few months, however, Walter and Jane received more foreclosure notices. When Walter followed up with what was happening, he learned that a bankruptcy petition had been filed in their name and that they had not been in court to contest it. When Walter tried to contact the man who worked with them, his number had been disconnected. 2015 National Crime Prevention Council, Inc. www.ncpc.org 60

For More Information National Crime Prevention Council 1201 Connecticut Avenue, NW Suite 200 Washington, DC 20036-2636 202-466-6272 www.ncpc.org 2015 National Crime Prevention Council, Inc. www.ncpc.org 61