Editor’s note: With billions of dollars flowing in and out of the real estate industry each year, the industry sees its share of fraud and other criminal misdeeds. In this special three-part series, Inman News uncovered the most common schemes, infamous scandals and a host of fraudsters who are still on the lam. (See Part 1: Real estate fugitives take the money and run and Part 3: From savings and loans to Whitewater.)
Over a two-year period starting in September 2000, a mother-and-son team stole $2.2 million through 20 separate fraudulent mortgage loans in Indiana. Earlier this year, a judge sentenced the two to a combined 59 months in prison and ordered them to pay more than $1.3 million in restitution.
The scams that Jamichael Watts and his mother Brenda Beckwith masterminded involved the classic fraudulent “flip” transaction, according to the U.S. Attorney’s office for the Southern District of Indiana. Another son, Jabbar Watts, was also part of the scheme, but was sentenced separately.
Between 2000 and 2003, Jamichael Watts worked as a mortgage broker for Prodigy Financial Group and J.D. Mortgage. Beckwith also worked at both companies at various times and acted as a “straw purchaser” for various properties in the mortgage fraud scheme. Straw buyers are the loan applicants or “fake buyers” used to obtain home loans, but who usually don’t intend to occupy the properties they’re buying.
In this scheme, the defendants purchased houses primarily in low-income areas of Indianapolis, either through loans in their own names or by using other straw purchasers. A short time later, they would enter a second transaction to sell the properties at a much higher price with no improvements made to the property. They also used straw buyers for the second purchases. The fraudsters prepared and submitted false loan applications supported by fraudulent tax forms, pay stubs, employment records and bank account information. In addition, they arranged for falsely inflated property appraisals so they could justify the high loan amounts for homes of little value.
Many real estate fraud schemes play out in much the same way. Sophisticated rings of loan brokers, appraisers, closing agents, attorneys and real estate agents conspire to obtain fraudulent loans and bilk lenders out of millions of dollars. Technology has enabled the crimes to spread, as fraudsters find easier ways to fabricate tax records, employment information, false appraisal reports, and to steal people’s identities.
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“The different types of fraud that occur (in real estate) are all tied together,” said Tim Mohr, senior manager with FIRSTGlobal Investigations, a New York-based firm that investigates all types of financial fraud.
Mohr’s been investigating financial fraud for 14 years. Some of the common mortgage fraud schemes he’s seen are loans made to borrowers who don’t exist and double pledging collateral, which occurs when the same property is put up as collateral on a number of loans. In an example of the second scam, a property that may be worth $100,000 might have $500,000 worth of loans against it.
Mohr also said that identity theft is common in home loan scams. He pointed out a recent scheme uncovered in New York in which a number of real estate professionals collaborated to defraud two mortgage companies by staging loan closings. They orchestrated a fake buyer and fake seller, as well as an appraiser and title company, and set it up so that the buyer appeared to buy a home from the seller, which the seller didn’t actually own. They forged documents to fake bank accounts with stolen identities and the real owner of the home ended up with another mortgage.
Perpetrators who are caught engaging in fraudulent loan schemes usually end up with mail fraud, wire fraud or money laundering charges. Investigations can be as complex as the schemes themselves and can take as long as two years to conduct.
The IRS compiled statistics on real estate fraud investigations for fiscal years 2001, 2002 and 2003 to compare activity in those years. The federal agency found the most common mortgage fraud schemes were fraudulent property flipping, fraudulent qualifications and two sets of settlement statements.
In a double settlement statement scheme, one settlement statement–which accurately reflects the true selling price of a property–is prepared and provided to the seller. A second fraudulent statement is given to the lender, showing a highly inflated selling price. The lender then provides a loan in excess of the property value, and the conspirators split the proceeds after the loans close.
In a fraudulent qualifications scheme, real estate agents assist buyers who would not otherwise qualify by fabricating the buyer’s employment history or credit card information.
Another form or mortgage fraud is known as predatory lending, which occurs when lenders use dicey sales tactics to target the poor, minorities and people with substandard credit by charging inflated interest rates on mortgage and home equity loans. Victims often end up with destroyed credit and some have even lost their homes.
More mortgage fraud cases have come to the surface in recent years. The IRS said the number of case initiations has increased from 107 in 2001 to 215 in 2003 and the number of indictments has increased from 67 in 2001 to 94 in 2003. The number of convictions decreased from 85 in 2001 to 81 in 2003 and the number of sentencings fell from 103 in 2001 to 65 in 2003. For the partial fiscal year 2004, there have been 159 case initiations, 69 indictments, 67 convictions and 64 sentencings.
The average number of months to serve has nearly doubled since 2001, according to the IRS. In 2001, perpetrators served an average 24 months and in 2003, they served an average 46 months. So far this year, the average months to serve is 40.
While it appears that mortgage fraud is on the rise, Mohr said that might just be because more cases are coming to the surface. With new technology in place, financial institutions are becoming smarter at detecting fraud before it occurs. Also, with new money-laundering compliance laws, lenders have to alert authorities if something appears suspicious.
With real estate values at all-time highs in many areas of the country, it’s easy to see why mortgage fraud is popular among white-collar criminals. Mohr said it comes back to the old question, “Why do you rob banks?”
“Because that’s where the money is,” he said.
Source: IRS
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