Fraud and Prevention

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Appraisers are raising alarms that the Treasury Department's decision to use broker price opinions (BPOs) for its new short sales program will exacerbate mortgage fraud and property "flopping." Three appraiser groups are urging Treasury to review the Home Affordable Foreclosure Alternatives program guidelines and prohibit the use of BPOs for property valuations on short sales. Their letter to Treasury secretary Timothy Geithner points to a new trend in sales of distressed properties: "flopping," whereby the value of a home is artificially deflated using a BPO and sold to a related party of the real estate agent who quickly sells that property for a profit. "Generally speaking, real estate agents and brokers are not independent or properly trained valuation specialists. They have an inherent bias toward quick results which produce a fee for themselves, irrespective of whether the lender/servicer/property owner/borrower gets a fair return on a short sale," the March 8 letter says. The Appraisal Institute, American Society of Appraisers and National Association of Independent Fee Appraisers signed the letter. Property "flipping" (as opposed to "flopping") usually involves the quick sale of real estate using straw borrowers (and payoffs to these borrowers) to artificially inflate a home for quick profit or some type of equity stripping scheme. Inflated appraisals play a key role in flipping schemes.

Defunct FHA lender Lend America and its "chief business strategist," Michael Ashley -- who controlled the company -- have effectively been barred from the mortgage industry, according to newly released court documents. The ban springs from a civil suit brought by the Justice Department on behalf of the FHA against the Melville, N.Y.-based nonbank and Mr. Ashley. Amid investigations against the company, LendAmerica closed its doors in early December. FHA found that the company had violated numerous underwriting guidelines and according to interviews conducted by NMN the company was refinancing some loans without paying off the prior liens. In agreeing to a ban from mortgage banking, Mr. Ashley, 44, did not admit liability, according to the agreement filed recently in federal court in Central Islip. In return, anything tied to federal-related loans is off limits -- from appraising properties and marketing mortgages to working as a consultant or housing counselor, Newsday reported. "I'm beyond thrilled to be done with the mortgage business," Mr. Ashley said. "I've had it with the mortgage business. I'm done with everybody chasing me around."

Two subsidiaries of the government-owned AIG have agreed to pay at least $6.1 million to resolve charges that they discriminated against African American borrowers by failing to monitor loan brokers that charged excessive fees. The loans in question were funded through the wholesale channel by AIG Federal Savings Bank, and an affiliate, Wilmington Finance Inc. Neither is still active in wholesale lending. According to the Department of Justice, AIG FSB and WFI "failed to supervise or monitor brokers in setting broker fees. This practice had a disparate impact on African American borrowers, who were charged higher broker fees than white, non-Hispanic borrowers on thousands of such loans from July 2003 until May 2006." American International Group - whose empire includes mortgage firms and a mortgage insurance company - was placed under government control in the fall of 2008. It has received upwards of $150 billion in financial aid and guarantees. The settlement, brought under the Fair Housing and Equal Credit Opportunity Acts, was filed Thursday in conjunction with a complaint made by DOJ in U.S. District Court in Delaware. The settlement, which is subject to court approval, stipulates that the AIG affiliates will pay up to $6.1 million to African American customers who were charged higher broker fees than similarly-situated, non-Hispanic white customers. The two also will invest at least $1 million in consumer financial education efforts. AIG is in the process of liquidating its $20 billion nonprime whole loan portfolio.

The Mortgage Bankers Association says the new good faith estimate disclosures should be given enough time to affect market behavior before the Federal Reserve Board moves ahead with a rule restricting certain forms of lender compensation. The Department of Housing and Urban Development's redesigned GFE went into effect Jan. 1, providing mortgage applicants with new disclosures on lender and originations fees. "We need to give it a chance to work," said MBA regulatory counsel Ken Markison. "The right move is for the Federal Reserve, at this time, to let nature takes its course," he said, speaking at a broker conference. Fed officials are currently reviewing 4,000 comment letters on its Truth in Lending Act proposal to curb abusive yield spread premiums and prevent loan officers and brokers from steering borrowers into more expensive loans. If the Fed decides to move ahead with its TILA rule, prime mortgages should be exempt from the new restrictions on commission-based compensation, Mr. Markison said. In addition, "We don't think the FHA and VA markets need or require" these new TILA regulations, he said.

A second insurer - a Lloyd's of London syndicate - is trying to escape liability in the massive U.S. Mortgage/CU National Mortgage fraud for which almost 30 credit unions are seeking recompense of as much as $125 million. The Lloyd's syndicate has filed suit in federal court in Newark seeking to block any potential insurance claims against it by three CUs: Picatinny Federal Credit Union, Suffolk Federal Credit Union and Sperry Associates Federal Credit Union. The CUs were swindled out of more than $50 million by U.S. Mortgage President Michael McGrath. The syndicate claims the fidelity bond it held for U.S. Mortgage and McGrath should be rescinded because of the fraud McGrath has confessed to. The group is the second insurer seeking to block claims in the case. The first was CUNA Mutual Group, which is seeking a court order declaring that the bond it holds for 23 of the U.S. Mortgage credit union victims does not cover the McGrath fraud. Four of the credit unions are counter-suing CUNA Mutual to secure coverage for their losses. The Lloyd's syndicate holds a Mortgage Bankers and Mortgage Brokers Professional Liability Insurance Policy and a Mortgage Bankers Fidelity Bond on U.S. Mortgage, which filed for bankruptcy a year ago in the face of the fraud probe into McGrath's actions. Since then, McGrath has pleaded guilty to fraudulently selling as much as $140 million of mortgages he held on behalf of credit unions to Fannie Mae and keeping the funds. After almost $15 million in assets to be forfeited by McGrath, credit unions are still out almost $125 million.

At least 1,000 victims have lost more than $100 million in cases of real estate fraud — including loan modification scams — referred to a special unit of the Orange County District Attorney's office, according to a new report. "The number of referrals has been overwhelming, with more than 346 referrals to date," says a report issued by the DA's office. (The unit that investigates RE fraud was launched last year.) The report's findings were first published by The Orange County Register. The DA says a "vast majority" of referrals have come directly from victims of real estate fraud directly to its office. A "significant number" of cases involve loan modification schemes, it said. Several cases were cited, including one in which three men were charged with 101 counts of fraud in a loan modification scheme.

Freddie Mac could lose up to $700 million because of the failure of Taylor Bean & Whitaker — $200 million more than previously disclosed. The Florida-based nonbank sold mortgages to Freddie and as recently as 2008 accounted for 5% of its total purchase business. In a new filing with the Securities and Exchange Commission, the GSE says the bankrupt TBW owes it money for loan buybacks and on servicing-related charges. In November, Freddie said it might lose $500 million on TBW but has since updated that estimate. The government-controlled mortgage giant said its seller/servicers are not honoring buyback requests in a timely manner with $4 billion of loan repurchase requests unfulfilled at yearend. TBW failed in August of last year.

A la mode, Oklahoma City, has released "The Appraisal Fee Reference," a monthly guide to what independent appraisers charge nationwide. The software vendor/publisher says the AFR will help lenders/servicers with compliance issues especially in regard to new Federal Housing Administration appraisal guidelines. FHA now requires lenders to ensure that appraisers are paid reasonable and customary fees, independent of what might be added on by an appraisal management company. The AFR provides the median appraisal fees for each of the 3,221 counties in the 50 states, the District of Columbia, Puerto Rico and Guam.

California now has the highest risk of mortgage fraud with an index value of 222, according to a report from Interthinx. Nevada, which had the highest index for the previous five quarters, drops to second place with an index of 220, and is closely followed by Arizona with an index of 211, according to the Mortgage Fraud Risk Report for the fourth quarter of 2009. Florida remains in fourth place at 179, while Colorado is fifth at 153. The occupancy fraud risk index rose 16% since last quarter, the first significant increase in the index since the fourth quarter of 2006. The magnitude of the quarter-on-quarter increase suggests that occupancy fraud risk will be a serious issue going forward, as continuing price declines and get-rich-quick schemes lure investors back into the market and as builders face continuing difficulty in moving unsold inventory. Despite a 4% quarter-on-quarter decrease, the property valuation fraud risk index is up 40% over last year and up more than 100% from two years ago. Schemes involving short sales, real estate owned inventories, wholesale flipping, and refinancing by borrowers whose equity has been impaired by falling real estate values continue to drive this index. Interthinx analysts expect lenders to focus more closely on fraud risk mitigation as they work to emerge from the downturn. This will help guard against the potential for fraud as a large number of adjustable rate mortgage loans, especially option adjustable rate mortgages with negative amortization features which reset between now and the first quarter of 2012.

Educational Systems Federal Credit Union became the first victim of the massive fraud at CU National Corp. to settle claims with Fannie Mae, setting the stage for other CUs hurt by the $140 million scandal to come to terms with the government-sponsored enterprise. "We've been negotiating with them [Fannie Mae] since July and August of last year," said Chris Conway, president of the Greenbelt, Md.-based ESFCU. Mr. Conway has now turned his eye toward a settlement with CUMIS Insurance Society, which holds a bond with the $340 million Greenbelt, Md., credit union. Mr. Conway said he is prevented from discussing the terms of the settlement under the agreement, but said ESFCU has received all payments and the return of the 32 mortgages Fannie Mae had bought from CU National under false pretenses. He also expressed optimism that the combination of the Fannie Mae payment and an insurance payout will help his credit union recover most, if not all of the $5 million exposure they have in the case. Representatives of nearly two dozens CUs are expected to meet with Fannie in mediation over the next few months to hammer out a settlement of claims. Michael McGrath, who founded U.S. Mortgage — the parent of CU National — pleaded guilty last year to selling $140 million worth of mortgages issued by 28 credit unions to Fannie Me without the CU's authorization and pocketing the money. He will be sentenced next month.