The Effects of Vacant and Abandoned

Property – Part I, The History

THE HISTORY

Vacant and Abandoned Properties

Print date: February 19, 2013

Target Audience

This course is intended for Law Enforcement

officers who..

• Occupy the front lines

- on streets

- in neighborhoods

• Deal with citizen / stakeholders

-who directly and daily deal with the

negative aspects of abandoned

properties and neighborhood decline

Learning Objectives

At end of training participant will be able to

• Define mortgage fraud

• Distinguish between mortgage and predatory

lending

• Assess the current “state of affairs”

Fraud

• Definition: A false representation of a

matter of fact—whether by words or by

conduct, by false or misleading

allegations, or by concealment of what

should have been disclosed—that

deceives and is intended to deceive

another so that the individual will act upon

it to her or his legal injury.

Fraud

Commonly understood as dishonestly

calculated for advantage

Scope of the Problem

• Mortgage lenders have lost billions as a result of fraud

schemes in recent years.

• Lenders are the direct victims of fraud.

• Yet the harm is much farther reaching

– Honest homeowners, homebuyers,

law enforcement, and communities at large

• The epidemic proportions of this problem has garnered

much attention from local, state and federal governments

prompting needed action.

Mortgage Fraud vs.

Predatory Lending

Mortgage Fraud Predatory Lending

• …“a material misstatement, misrepresentation, or

omission relating to the property or potential mortgage

relied on by an underwriter or lender to fund, purchase or

insure a loan.” FBI 2010 Mortgage Fraud Repot (2011)

• In Laymen’s terms: The intentional enticement of a

financial entity to make, buy or insure a mortgage loan

when it would not otherwise have done so, had it

possessed correct information

Mortgage Fraud

Primary Motivators

• There are many motivating factors that influence

lenders, borrowers, and other professionals to

commit Mortgage Fraud.

• Fraud for Housing

• Fraud for Profit

Typical Mortgage Fraud Schemes

• (Illegal) Property Flipping

• Occupancy Fraud

• Straw Buyer Schemes

• Identity Theft and Income/Asset Falsification

Mortgage Fraud Schemes Can be Committed by BOTH lenders and applicants

• Inflating an appraisal in order to obtain a

mortgage for more than a property is worth

• Claiming income or assets the borrower

does not have

• Posing as a borrower on behalf of another

who's actually making the purchase

• Pretending to provide financial help to an

economically stressed homeowner in

order to skim off equity from the home

Predatory Lending

• Revolves around who the beneficiary is

from the mortgage transaction

– the fact that a homeowner does NOT benefit

is what turns a legal mortgage into a

predatory lending practice.

• Corporate actions may not always be

illegal.

• Targets the financially vulnerable and can

leave victims homeless, their credit ruined

Predatory Lending

• A term used to describe a wide range of

unfair financial practices that are likely to

harm borrowers, for example:

– entice, induce, or assist a borrower in taking a

mortgage that carries high fees, a high

interest rate, strips the borrower of equity, or

places the borrower in a lower credit rated

loan to the benefit of the lender.

Signs of Predatory Lending

• Big Fees (points or discount points)

• Pre-payment Penalties

• Steering and Targeting

• Adjustable Rates that Soar

• Promises to Fix Problems w/ Future Re-Finances

• Repeated Refinances that Drain You

• Not Counting Taxes/Insurance w/Payment

• Loan Flipping

• Mandatory Arbitration

TRACING THE MORTGAGE FRAUD

PROBLEM

Vacant and Abandoned Properties

Loan Products the way we were

Full Documentation Loans

• Advantage to borrowers

- Helps acquire most competitive rates

- Highest loan amounts

- Widest band of lenders available

- Wider variety of loan products available

Loan Products the way we were

Full Documentation Loan Requires

• Detailed documentation supporting income

and assets

-2 or 3 months of asset statements

-Paystubs

-W-2’s

Loan Products the way we were

• Limited Documentation Loan Products

- Borrowers able to state a limited amount

of information on their mortgage application

- Typically have higher interest rates

- Dependent on credit score

Loan Products the way we were

Non–Traditional loan products

- Allow borrowers to defer payment of principal

and sometimes interest

“Interest Only” mortgages

“Payment Option” adjustable rates

Non-Traditional Loan Products

• Credit standards loosened

• Less reliance on creditworthiness,

more on collateral

• Defer principal and interest

- Interest only loans

- Payment option ARMs

• Higher risk due to risk of payment shock

-negative amortization a problem

• Such risk layering exposed providers to increased risk

levels.

Standards

1970 - 1990

• Conventional loans funded by institutions

• Hard Money Lenders – Equity loans

• 45% of Americans owned homes

• Investor market did not exist – Freddie

Mac and Fannie Mae

Standards

1991 - 2001

– Mortgage brokers began originating loans for banks

– Investor market began buying securitized mortgages

– Secondary market came into being

– Wholesale lending market picked up the pace

– Equity lending virtually disappeared

– Clinton Administration pushed the “American Dream”

Standards 2002 - 2007

• Post 9/11 USA in recession

• Real Estate market was the only thing keeping the USA going

• Regulators backed off institutions

• Market got greedy and exploded

Results 2002 - 2007

Loan Products

…the effects

Competition in a bull market for loans

caused investors, lenders, and brokers to

generate more attractive products to wide

spectrum of borrowers in competitive frenzy

to make money and capture market share.

Points

• Competition motivated lenders, investors

began offering more limited documentation

loans.

• The “Big Players” in Sub-Prime lending

popped up

– Guaranteed their broker’s an approval in 24

hours; closing within 10 days.

Tipping Points …toward change

• Streamlined amount of time to qualify a person

to “state” their income and assets

(or not use them in qualifying)

• Industry reports estimate over 60% of all stated

loans had income exaggerated over 50%!!!!

Tipping Points ….toward change

• “Liar” Loans – low/no documentation loans; targets for

unethical behavior by unscrupulous borrowers and

lenders

• “NINA” Loans – (No income no asset) Situations where

aggressive mortgage lenders and brokers do not want

any trouble qualifying otherwise non-qualifying loans,

thus becoming a significant factor in the subprime

lending crisis.

• Negative Amortization Loans – Never get out of debt.

Volume

• High volumes strained lender’s ability to

conduct thorough review of documentation

prior to funding.

• Quality control efforts took a back seat to

production efforts to get the business.

• Perpetrators were able to push fraudulent

transactions through lenders that were lax

in their review procedures.

Florida Consistently Ranked #1

Suspicious Activity Report (SAR’s) Filing April 1, 1996-December 31, 2008

4,7326,560 6,988 7,913

9,918

12,434

17,38915,650

17,319

25,135

33,067

36,923

49,868

0

10,000

20,000

30,000

40,000

50,000

60,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Florida Mortgage Loan Fraud SAR Filing Trend April 1,1966-December 31,2008

54 78 207368 473

656 7301,073

1,662

2,321

3,560

6,670

10,047

0

2,000

4,000

6,000

8,000

10,000

12,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total SARs: 27,899

Characterizations of SAR in Florida April 1, 1966 -December 31,2008

BSA/Structuring/Money Laundering

137,062

51%

Check Fraud33,38512%

Other23,515

9%

Additional Characterizations21,480

8%

Mortgage Loan Fraud

17,7027%

Counterfeit Check13,839

5%

Check Kiting6,906

2%False Statement

5,726

2%

Consumer Loan Fraud

5,339

2%

Identity Theft4,414

2%

3,494

3,450

3,112

2,357

2,028

1,881

1,708

1,061

954

505

450

268

212

0 1,000 2,000 3,000 4,000

Blank/Unknown

Defalcation/Embezzlement

Credit Card Fraud

Wire Transfer Fraud

Misuse Of Position Or Self -Dealing

Debit Card Fraud

Mysterious Disappearance

Counterfeit Instrument (Other)

Commercial Loan Fraud

Counterfeit Credit/Debit Card

Computer Intrusion

Terrorist Financing

Bribery/Gratuity

How Did We Get Here?

Mortgage Fraud, a Thriving

Empire? YES

Today’s Standards

• Mortgage Brokers and Loan Originators now handling loans;

more restricted.

• SAFE Act Prompts Federal Registry

• Requires registration “licensing” of mortgage processors

-Previously only Brokers, Title Agents, or Realtors had to be

“licensed” but virtually anyone in a “financial institution” could

process your loan.

Today’s Standards

• Loans are approved by Automated Underwriting

System (AUS)

– retrieves relevant data, such as a borrower’s

credit history, and arrives at a logic-based

loan decision

– Based on algorithms, eliminating human bias

• Desk Top Underwriting (DU)

• Desk Top Originator (DO)

Consumer Financial Protection Bureau

• Central mission of Consumer Financial

Protection Bureau (CFPB) is to make

markets for consumer financial products

and services work for Americans.

• Three tenets (principles)

– Educate, Enforce, Study

Consumer Financial Protection Bureau

• Know Before You Owe Mortgage Project

– Combine the two forms consumers get before

finalizing a home loan into a single, easy-to-

understand mortgage closing document.

Back to the Future

• Credit crunch

-No appetite for sub-prime or exotic products -Secondary market of private investors is shrinking. -Government and private mortgage insurers have tightened underwriting requirements.

• Loan volume is down

-“Back to the Future” with full documentation loans

Regulation

• Mortgage broker regulation

– No national standards for regulation of mortgage

brokers

– Licensed at the state level

– Vary from state to state

– Florida regulates about 9,100 mortgage broker

firms and about 302,000 loan officers that work for

a mortgage broker firm

• Appraisers are also regulated by state agencies

Today’s Direction

Problem is Huge

• Based on Suspicious

Activity Reports (SARs)

filings through March 07

(46,717 filed in 2007)

• Increase 684.5%

from 2001-2006

• Increased 44%

since 2005

The rise in foreclosures and mortgage payment defaults

has exposed lenders to industry insiders who know how to

manipulate illegal flipping in a depreciating housing market.

Agencies “Turn up Heat” on Mortgage

Fraud Actions

Today’s Direction

Prosecution

Currently, there is no federal

criminal statute to prosecute

mortgage fraud.

For additional information contact

Florida Regional Community Policing Institute

RCPI

3200 34th Street South

St. Petersburg, Florida 33711

727-341-4581

E-mail: RCPlinfo@spcollege.edu

This project was supported by Grant No. 2009-D1-BX-K030 awarded by the Bureau of Justice Assistance to St. Petersburg College. The Bureau of Justice Assistance is a

component of the Office of Justice Programs, which also includes the Bureau of Justice Statistics, the National Institute of Justice, the Office of Juvenile Justice and Delinquency

Prevention, the SMART Office, and the Office for Victims of Crime. Points of view or opinions in this document are those of the author and do not represent the official position or

policies of the United States Department of Justice.