Cracking Down Against Emerging Schemes

Efforts are being made to proactively protect homes in default and foreclosure by sharing valuable information regarding appraisal fraud in short sale transactions.

Websites and telephone hotlines are being created to share case stories and file complaints. Industry partnerships and conversations are taking place between law enforcement, regulators, consumer protection agencies, title attorneys and appraisal valuation firms to combat fraud, according to speakers at the SourceMedia Second Annual Best Practices in Loss Mitigation Conference here.

Such efforts should help prevent concerns like "flopping," illegal short sales which start with an artificially low value based on a fraudulent BPO or an attempt to keep the property not in its best condition so it can be shown for a lower price.

"The homeowner gets the lower value and they think that is what the value is. The new buyer pays more for it and gets a higher value. In the flopping transaction at the lower price the homeowner transfers the title to an LLC. The LLC will sell it to the new buyer at a higher price," said Jeffrey Hayward, senior vice president, national servicing organization, Fannie Mae.

"The servicer is approving the transaction at the lower price, and the second transaction the servicer never sees. The first transaction is basically what the current homebuyer thinks is a good transaction. Generally they are not in cahoots with the fraudster. The real fraud is the second transaction which no one sees except the fraudster."

Hayward helped launch the Loan Modification Scam Prevention Network, an effort working together with Freddie Mac, Bank of America, Citicorp, the Lawyers' Committee for Civil Rights and many federal agencies to deal with fraud.

The first thing the group did was get NeighborWorks to come up with scam alerts to make borrowers aware of what fraud looks like and the fact that there is help out there for them.

"We also set up with the Hope for Homeowners hotline, a place for borrowers to call in about fraud and provide information about it. That information gets passed on to a fraud database run by the Lawyers' Committee for Civil Rights at PreventLoanScams.org," he told the conference, which had over 200 attendees.

Enforcement agencies can go there and "get the fraudsters," he said. So far, 4,000 complaints have been registered in the database within only a few months and 50 agencies have used the database.

"We partnered with the FTC, the FDIC, with the FBI and we did some efforts with local attorney generals. We think this is an effort to try to fight some of this loan modification. It seems to be yielding some results," Hayward said.

The beginning of foreclosure rescue fraud starts typically when a servicer publishes a public notice concerning the homeowner. In a modification scheme, they offer a "modification for money and they never deliver." The fraudster devises a "call-in campaign" or visits the borrower's home to offer the opportunity "to get some relief."

According to Hayward, in the most egregious instance of foreclosure rescue fraud, the homeowner signs over the deed to the perpetrator who will rent the house back to the borrower for "a certain amount of rent." After some months, the scammer will raise the rent and evict the homeowner.

"Another scam we have seen is they get the homeowner's deed and in fact sell the property out from under them," said Hayward. "The homeowner gets nothing for the deficiency."

During Fannie Mae home saving fairs around the country for borrowers in distress, Hayward said he witnessed how fraudsters would "hang out at these sessions and pick borrowers off saying, 'You don't need to talk to the servicer. I'll take care of this problem for you.' They were actually signing up people in the parking lot."

According to Cindy Dixon, in the last 30 days there has been over $24 billion worth of losses reported in headline news.

"When we ask, 'who is the victim,' we're all the victims. It's in everyone's best interest to be as aware as possible so you can protect your organization," she said.

Seminars on short sales are more active than ever before in recruiting straw buyers. These schemers put together the whole package together while providing bridge funding. In a lot of cases it's 30 days or less.

"They use your personal information, sell you 10 houses and give you the bridge loan. Within 15 days they recall the bridge loan and these properties are right back into foreclosure."

Dixon said county recorders from across the country are calling to the industry's attention fraudulent documents such as powers of attorney, satisfaction of liens and smudges on title.

Loan "put backs" are on everybody's mind. These loans usually end up going somewhere. "They don't just get away. They tend to recycle and will come through in some capacity. Keep an eye on these loans being audited and put back. It's important to be able to take that information and create proper training and policy upfront."

Layering up with the proper training and technology, Dixon said most lenders and servicers should be able to "catch" a lot of the fraud before it affects their shops.

"It's like going to the doctor. You don't want to wait until you have a crisis going on before you go in and a get a checkup. Based on your family history and your personal profile, you may need to go more than someone else. Prevention can stop a lot of this upfront," she said. "There's a lot of training and resources available. Have someone come in and do an audit. Look at this as an opportunity."