Interesting read. It is surprising how easy it is for crooks to get on the FHA bandwagon even after having been caught before ! The testimony also says up to 90 percent of appraisals are “pressured” and thus the need for a clean separation between appraisers, loan officers and real estate agents.

—————————-

The integrity and reliability of this crop of program loan originators is, in our view, unproven and, in light of the aggressive recent history of this industry, may pose a risk to the program. The Mortgage Bankers Association (MBA) in recent testimony stated the “MBA is concerned that since the once lucrative subprime market has evaporated, some of the less scrupulous lenders who specialized in that business are now turning their attention to FHA lending.”

In addition, we have seen lenders reacquiring FHA approval despite past abuses. A previous investigation on an FHA lender in New York led to the debarment of its owner for a period of five years from originating FHA insured loans. After the debarment was served, the lender, under the same owner, resumed operations using the same fraudulent practices. We again reviewed some of the loans and determined that the originations were fraudulent similar to the loans investigated in the first case. The OIG, in conjunction with the U.S. Attorney’s Office and departmental officials, sought and received an injunction against them in order to stop the business from operating. At the same time as the injunction, FHA withdrew their lender approval.

Our audit work also highlights how problem lenders may regain admission into the FHA program even when previous transgressions were apparent. For example, we reviewed an Arizona corporation that was approved as an FHA mortgage lender by HUD in 1996. This particular lender had 13 active branch offices and sponsored close to 2,000 FHA-approved loan correspondents nationwide. As highlighted in our audit, this lender had a number of serious issues related to Real Estate Settlement Procedure Act (RESPA) violations such as paying marketing fees, non-competition fees and quality incentives to real estate companies in exchange for more than $57 million in FHA mortgage business. The corporation’s license was suspended by the State and it filed for bankruptcy. One of the principal owners and principal managers reconstituted under a different name but operates from the same location. In 2008, HUD approved the new entity to originate and process FHA loans despite its principals’ prior citations for RESPA violations.

In our previous testimony and in our discussions with staff of Senate Committee on Banking we spoke to this dilemma regarding an FHA focus on entities rather than individuals. We are extremely gratified that S. 896 contains numerous provisions directed at this problem by, for example, extending civil monetary penalties to owners, officers, or directors and not just the “mortgagee or lender,” and by denying eligibility for approval to officers, partners, directors, principals, managers, supervisors, loan processors, loan underwriters, or loan originators who may have been, among other things, suspended, indicted, convicted or had unresolved findings contained in an OIG audit or an investigation. We are also pleased that the Senate Committee on Judiciary included provisions in S. 386 to amend the definition of financial institution to include mortgage brokers. Our testimony on former subprime players entering into the FHA arena was of concern to the Committee during drafting of this important legislation.

Adding to the risk, FHA is now, due to loan limit increases, serving new metropolitan areas with which it previously has had little interaction. Recent legislation increased maximum FHA loan limits to $729,750. With such entry, into these new markets, come new players and unknown hazards. The effects of this significantly increased loan limit are potentially much greater losses sustained by FHA on defaulted loans and that the loans may be much more attractive to perpetrators of fraud who will be able to extract greater payouts in fraudulent loans schemes.

Simultaneous to this confluence of events, is an increase in the reported incidents of mortgage fraud. As the Federal Bureau of Investigation (FBI) points out, a significant portion of the mortgage industry is void of any mandatory fraud reporting and presently there is no central repository to collect all mortgage fraud complaints. Mortgage fraud incidents reports, as compiled, however, by the Mortgage Asset Research Institute in the overall marketplace, have increased by 45 percent in the second quarter compared to a year-ago period. Its most recent third quarter assessment states that fraud incidence is at an “all-time high” and that “reported mortgage fraud is more prevalent now than in the heyday of the origination boom.”

Our long-term investigative exposure in the area of mortgage fraud schemes impacting both FHA and conventional loans (since most fraud schemes cross loan programs) has given us vast experience and extensive knowledge. Many “traditional” fraud schemes continue to affect FHA and are described below:

* Appraisal Fraud - typically central to every loan origination fraud and includes deliberately fraudulent appraisals (substantially misrepresented properties, fictitious properties, bogus comparables) and/or inflated appraisals (designed to “hit the numbers”); appraiser kickbacks; and appraiser coercion.
* Identity Theft - often includes use of bogus, invalid or misused Social Security numbers and may include involvement of illegal aliens, false ownership documents or certifications.
* Loan Origination Fraud - including false, fraudulent and substantially inaccurate income, assets and employment information; false loan applications, false credit letters and reports; false gift letters; seller-funded down payments; concealed cash transactions; straw buyers; flipping; kickbacks; cash-out schemes; fraud rings; and inadequate or fraudulent underwriting activities.

While these types of mortgage fraud schemes continue to operate, changing market conditions have generated new, or variant, schemes:

* Rescue or Foreclosure Fraud - recent trends show that certain individuals in the industry are preying on desperate and vulnerable homeowners who are facing foreclosure. Some improper activities include equity skimming [whereby the homeowner is approached and offered an opportunity to get out of financial trouble by the promise to pay off the mortgage or to receive a sum of money when the property is sold -- the property is then deeded to the unscrupulous individual who may charge the homeowner rent and then fails to make the mortgage payment thereby causing the property to go into foreclosure] and lease/buy-back plans [wherein the homeowner is deceived into signing over title with the belief that they can remain in the house as a renter and eventually buy back -- the terms are so unrealistic that buy-back is impossible and the homeowner loses possession with the new title holder walking away with most or all of the equity].
* Bankruptcy Fraud - typically Chapter 7 bankruptcy petitions are filed in lieu of Chapter 13 petitions on behalf of debtors; however, property sales information is fraudulently withheld from the bankruptcy court and the properties are leased back to the debtors at inflated rents. The debtors’ property ownership and equity are stripped from them.
* Home Equity Conversion Mortgage (reverse mortgage) Fraud - FHA reverse mortgages are a new and potentially vulnerable area for fraud perpetrators. We are aware that the larger loan limits can be attractive to exploiters of the elderly, whether it is by third parties or by family members, who seek to strip equity from senior homeowners. Due to the vulnerability of the population this program serves, we are also concerned about evasions of statutory counseling requirements, fraud by counseling entities, misleading sales claims, or incomplete compliance with the dispensing of required counseling information. We are working with the Chairman and members (Senator McCaskill, in particular) of the Senate Committee on Aging and the Chairman of the House Committee on Financial Services to address some of their concerns regarding these issues. We have also been partnering with the AARP and other groups to foster consumer protection education awareness. The following represent some of the types of schemes that we are encountering:
o Flipping - the perpetrator creates a fake mortgage company and ‘lends’ funds to the borrower (no money changes hands, no loan is given, but a mortgage is filed). The subject refinances the borrower into a HECM. At closing the title company pays all outstanding debt including the fraud perpetrators’ fake mortgage and the perpetrator walks away with the payoff.
o Recruitment - Some HECM-related fraud activities involve an investor who sells the property to an elderly straw buyer and enters into a quit claim deed with the straw buyer. The buyer applies for the HECM loan within a short time frame and the appraisal used to originate the HECM loan is then fraudulently inflated. This allows the investor to illegally divert the proceeds of the loan. Straw buyers are “recruited” in residential areas with a high rate of renters. The buyers are often unaware that they must pay property taxes and some are unaware that the cash due to them at closing has been diverted. A current investigation involves recruiting elderly homeless to live in properties victimizing these seniors who often have desperate needs.
o Annuity - Another activity that we currently have under investigation involves financial professionals fraudulently convincing HECM borrowers to invest HECM proceeds in a financial product, such as an annuity, in an improper way. The financial professionals receive increased fees and, in the case of annuities, the victims are unable to get access to their savings for many years or even past their projected life expectancy.
o Unauthorized Recipient - Individuals, often family members, may keep HECM payments after the authorized recipient dies or permanently leaves the residence.
o Onerous Fee Payments/Consumer Fraud - Just this last week, an OIG investigation led to an indictment in Maryland as a result of our participation in a local Elders Task Force. An elderly woman complained that her former health insurance representative stole approximately $200,000 from her HECM by convincing her she needed to pay him a fee to process her loan application and to repay him the reverse mortgage loan amount. He told the victim she had to repay the loan by writing personal checks to him and she paid from funds received as well as from her retirement annuity and from cash advances on her credit card. We are currently in the process of identifying more reverse mortgage victims.

HECM loans represent a significant investment by FHA, with considerable recent increases. The chart below shows a 253% increase in the dollar amount of HECM loans from 2004 through 2008:

…

In addition to the schemes described previously, the following case histories also illustrate some of the other types of prevalent mortgage fraud that the OIG typically encounters:

* In February, 2009, a former mortgage broker from Leawood, Kansas was sentenced to 154 months in prison and 60 months probation, and the former owner of a mortgage company from Olathe, Kansas was sentenced to 4 months in prison and 4 months house arrest and 36 months of probation for obtaining over $12 million in mortgage loans by submitting fraudulent information to lenders, including false representations on borrower income and employment, false lien information, false sales contracts and by laundering over $2 million in proceeds through straw business entities. Awaiting sentencing is a previously convicted felon (and former apprentice real estate appraiser) who pleaded guilty to stealing the identities of licensed appraisers approved by the FHA in order to create fraudulently inflated appraisals which then resulted in excess of $20 million in fraudulent loans. He obtained license numbers from the internet.
* In January, 2009, in Philadelphia, Pennsylvania, an appraiser and two settlement agents, were collectively sentenced to 45 months incarceration and 9 years probation and ordered to pay HUD $235,802 in restitution for their earlier guilty pleas to making false statements to HUD and committing a conspiracy and wire and identity fraud. The defendants and others provided fraudulent appraisals and other documents used by unqualified borrowers to obtain FHA-insured mortgages. HUD realized losses of $4,460,588 after 183 mortgages defaulted.
* In September, 2008, two defendants in South Florida were charged in a 21-count indictment for their participation in a mortgage fraud scheme that resulted in the approval and disbursement of six mortgage loans totaling $980,000. According to the indictment, one of the defendants, through his company, sold six properties in Miami-Dade County to unqualified buyers using FHA loans. In all six sales, the same defendant, through straw donors, fraudulently financed the down payments and closing costs of the buyers. The second defendant, one of the false donors, was also a silent investor in the scheme. Both defendants allegedly received sizable payments once the properties were sold. When the loans were closed, four of the six properties went into foreclosure.
* A sampling of FHA loans from a mortgage company in Olathe, Kansas indicated that the loans were issued to Social Security Numbers belonging to deceased individuals. An investigation revealed that this company originated 78 FHA insured loans totaling over $5 million and 31 conventional loans totaling close to $2.8 million to illegal aliens using stolen Social Security Numbers. The owners of the company were sentenced to 8 months in jail and 18 months probation and were ordered to repay $1.8 million in FHA insured loans.
* In Rockford, Illinois, a loan officer, realtor, loan processor, and company employers were charged with conspiracy, making false statements to HUD, and mail fraud, in a 35-count indictment. Specifically, the defendants were alleged to have engaged in a complex scheme to defraud HUD through a litany of false and fraudulent statements on FHA loan applications. These included, but were not limited to, the following: verifications of employment, pay stubs, W-2’s, credit letters, cashier’s checks, Social Security Numbers, Social Security cards, and letters containing Social Security Administration letterhead. Overall, 50 FHA loans were in question, with losses totaling in excess of $2 million.
* Nursing Homes/Section 232 - The FHA insures mortgage loans (Section 232) to facilitate the construction and rehabilitation of nursing homes, intermediate care facilities, board and care homes, and assisted living facilities. It also allows for the purchase or refinancing of existing projects not requiring substantial rehabilitation. It insures lenders against the loss on mortgage defaults. The current Section 232 regulatory agreement does not prevent transfer of the Transfer of Need associated with the property; does not include receivables in any security documents (which is a significant asset to the properties and can limit HUD’s loss when retained); and does not require a lessee operating the project to abide by the same requirements as the owner. This allows lessees to use project funds for non-project expenses to the point of default with no recourse. With such a vulnerable population, the OIG has been recommending for years in numerous audits and investigations that the regulatory agreement needs to be changed.

…

Appraiser Oversight: Our work of the FHA appraiser roster identified more critical front-end weaknesses as evidenced in the quality control review and monitoring of the roster. The roster contained unreliable data including the listing of 3,480 appraisers with expired licenses and 199 appraisers that had been state sanctioned. In a further review, we found that HUD’s appraiser review process was not adequate to reliably and consistently identify and remedy deficiencies associated with appraisers.

The FHA’s current Single-Family insured exposure totals over $560 billion representing 4.8 million FHA-insured mortgages. Inflated appraisals cause higher loan amounts. If the properties foreclose, the loss to the insurance fund is greater. With significant increases in volume and new responsibilities in the mortgage marketplace, we do believe it may be time for the Department to return to an FHA Appraiser Fee Panel similar to the one dismantled by statute in 1994. It is essential if the mortgage industry wants to overcome perceptions regarding its integrity and its role in the current economic crisis that it ensures true market values are correctly estimated. Such a move would relieve pressures on appraisers to return predetermined values and would change a system based on misplaced incentives. A recent study indicated that 90% of appraisers had felt pressure “to hit the number” provided (i.e., on the sales contract). The old FHA fee panel was rotational and guaranteed work as long as the appraiser met certain HUD requirements.

Our concern that appraisers tied to lenders may impact the quality of the FHA appraisal was also a matter of interest elsewhere as evidenced in last year’s settlement involving Fannie Mae and Freddie Mac and the New York Attorney General whereby lenders selling loans to those entities were required to follow stricter guidelines to ensure that people involved in the processing of loans did not also choose the appraiser. The new Home Valuation Code of Conduct, while an improvement, contains vulnerabilities whereby the lending community still may have the potential to manipulate appraisal management companies who do not necessarily appraise in a way that some unscrupulous lenders may desire. Although still early in the new process, we are not sure that if such paid appraisers are not “hitting the mark,” what is to stop those lenders from threatening to go elsewhere to do business? While the FHA fee panel was disbanded a number of years ago, the Department of Veterans Affairs has not abandoned this concept and we believe that this Department might want to follow suit thus eliminating the relationship between the loan officers, real estate agents and appraisers. We should remain cognizant that the downstream negative effect of overinflated appraisals is long-term and can be fundamentally corrosive to the housing market and to even, as we know today, the world economy.

——————

Here is an apparent spat between the realtors and appraisals. Is this for real or a public relations show ? The rules referred to are the Home Valuation Code of Conduct.

In a June 23 release, the National Association of Realtors’ chief economist Lawrence Yun blamed “poor appraisals [for] stalling transactions.” He attributed May’s less-than-expected sales increase (see related story below) on the fact that “some contracts are falling through from faulty valuations that keep buyers from getting a loan.” In a same-day statement, Bill Garber, Appraisal Institute Director of Government and External Relations, said: “We take offense with the notion that the appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with. The fact that the appraisal does not match the sales price is not the fault of the appraisal but a fault of the market today.” …

Since the rules took effect May 1, real estate agents and mortgage brokers say a number of appraisals are coming in surprisingly low. NAR is pressing regulators to put an 18-month hold on the code, arguing in a June 22 letter to regulators that it is “hampering the housing market’s recovery.”