OPERATION QUICK FLIP
- Operation Quick Flip is designed to show that federal law enforcement recognizes the mortgage fraud threat. The Federal Bureau of Investigation Criminal Investigative Division (CID), the Department of Housing and Urban Development (HUD) Office of the Inspector General (OIG), the United States Postal Inspection Service (USPS), the Internal Revenue Service (IRS), and the Department of Justice (DOJ) have participated in this case round-up to provide information to the public regarding the federal government's efforts to combat mortgage fraud. The federal agencies involved are targeting mortgage fraud groups in order to disrupt and dismantle them permanently.
- Mortgage Fraud is one of the fastest growing white collar crimes in the United States. Mortgage Fraud is defined as a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.
- There are two types of Mortgage Fraud: fraud for property and fraud for profit. Fraud for Property, also known as Fraud for Housing, usually involves the borrower as the perpetrator on a single loan. The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value or there are down payment problems. The borrower wants the property and intends to repay the loan. Sometimes industry professionals are involved in coaching the borrower so that they qualify. Fraud for Property/Housing accounts for 20 percent of all fraud.
- Fraud for Profit involves industry professionals. There are generally multiple loan transactions with several financial institutions involved. These frauds include numerous gross misrepresentations including: income is overstated, assets are overstated, collateral is overstated, the length of employment is overstated or fictitious employment is reported, and employment is backstopped by co-conspirators. The borrower's debts are not fully disclosed, nor is the borrower's credit history, which is often altered. Often, the borrower assumes the identity of another person (straw buyer). The borrower states he intends to use the property for occupancy when he/she intends to use the property for rental income, or is purchasing the property for another party (nominee). Appraisals almost always list the property as owner-occupied. Down payments do not exist or are borrowed and disguised with a fraudulent gift letter. The property value is inflated (faulty appraisal) to increase the sales value to make up for no down payment and to generate cash proceeds in fraud for profit.
- Backward Applications: After identifying a property to purchase, a borrower customizes his/her income to meet the loan criteria.
- Air Loans: These are non-existent property loans where there is usually no collateral. An example would be where a broker invents borrowers and properties, establishes accounts for payments and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc. for verification purposes.
- Silent Seconds: The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.
- Nominee Loans: The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee's name and credit history to apply for a loan.
- Property Flips: Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is that the appraisal information is fraudulent. The schemes typically involve fraudulent appraisals, doctored loan documents, and inflation of the buyer’s income.
- Foreclosure schemes: The subject identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Subjects mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The subject profits from these schemes by re-mortgaging the property or pocketing the fees paid by the homeowner.
- Equity Skimming: An investor may use a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer's name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.
- Federal law enforcement is working with state and local law enforcement, regulators, and the financial institution industry to combat the problem.
- OFHEO (Office of Federal Housing Enterprise Oversight) has passed a regulation requiring Freddie Mac and Fannie Mae to report suspicious mortgage fraud activity on a Mortgage Incident Notice (MFIN).
- FBI, OFHEO, and FinCEN (Financial Crimes Enforcement Network) are working to establish a reporting device similar to the banking industry's Suspicious Activity Report. This is in progress, but will likely take some time as regulations and possibly legislation will have to be passed.
- The FBI, HUD-OIG, USPS, and IRS conduct criminal investigations into Mortgage Fraud Activity with a goal of disrupting and dismantling mortgage fraud rings. We strongly support joint investigations to effectively utilize all of our limited resources while strengthening investigations by tapping into everyone's expertise.
- From July 5, 2005, until October 27, 2005, the FBI, HUD-OIG, USPS, IRS, in coordination with the DOJ, indicted 156 mortgage fraud subjects. A total of 81 arrests were made. A total of 89 convictions were obtained, and 60 subjects were sentenced during this time frame.
- The combined loss to the industry by the above-subjects is $606,830,604.
- In fiscal year 2005, the following stats are available:
- 21,994 SARs were filed (up from 17,127 in Fiscal Year 2004).
- 721 pending FBI Mortgage Fraud cases (up from 534 in Fiscal Year 2004).
- 1,020 pending HUD-OIG Mortgage Fraud cases (up from 920 in Fiscal Year 2004).
- 206 FBI indictments/informations (down from 241 in Fiscal Year 2004).
- 170 FBI convictions (consistent with 172 convictions in Fiscal Year 2004)
- $1,014,000,000 (FBI) reported loss (up from $429,000,000 in Fiscal Year 2004).
- Top ten hot spots for Mortgage Fraud activity in 2003 (per capita): California, Nevada, Utah, Colorado, Missouri, Illinois, Michigan, South Carolina, Georgia, and Florida.
- Top ten hot spots for Mortgage Fraud activity in 2004 (per capita): California, Nevada, Utah, Arizona, Colorado, Missouri, Illinois, Maryland, Georgia, and Florida.
- OPERATION BROKEN LOAN (Detroit): On 10/18/2005, an undercover operation targeting five criminal mortgage fraud organizations culminated in the execution of 18 arrest warrants, seven search warrants, eight seizure warrants for subjects' bank accounts, and two vehicle seizures. Among those charged were several mortgage brokers in the Detroit metropolitan area who allegedly defrauded mortgage lenders through inflated appraisals and straw purchases. Subjects were charged with violation of Title 18, United States Code, Sections 1344 (bank fraud) and 1343 (wire fraud). On 10/06/2005, six individuals were indicted and six complaints were filed. On 10/07/2005, seven complaints were filed against subjects in this case, and on 10/13/2005, an additional complaint was filed.
Operation Broken Loan was initiated to target widespread fraud in the home mortgage industry in the Detroit metropolitan area. Detroit successfully utilized a Title III in this investigation and made controlled purchases of real estate. The investigation confirmed that dishonest mortgage brokers were creating fraudulent W-2s, paycheck stubs, and employment verifications in order to qualify straw buyers for real estate purchases. The victim lenders relied on inflated appraisals and borrower certifications arranged by subjects.
- CHALANA MCFARLAND (Atlanta): This case involves a mortgage fraud property flip scheme which operated from the summer of 1999 through March 2004. This case was worked by the FBI, HUD-OIG, and USPIS.
Chalana McFarland was an attorney who operated her own law firm. She acted as a title agent for title insurance companies as well as the closing attorney for various lenders.
McFarland used the stolen identity of numerous victims to submit false fraudulent loan applications. Appraisals were inflated and straw buyers were used to complete the fraudulent sales of over 100 properties. McFarland paid her identity thief $10,000 per stolen identity, as well as paying the appraiser who inflated property values over $400,000. Fraudulently obtained mortgages valued in excess of $20 million with losses in excess of $12 million.
McFarland and 16 other subjects were indicted. Fifteen have been sentenced, with McFarland receiving 30 years in prison—the largest sentence ever for Mortgage Fraud.
- THOMAS FAUNTLEROY/DAVID BOWIE (Newark): This case involves the subjects' alleged inducement of the FHA to insure mortgage loans valued over $1 million, made by Neighborhood Mortgage (owned by Bowie) to unqualified buyers. In support of the FHA loan applications, the defendants allegedly created and submitted false and fictitious bank statements, leases, IRS Forms W-2, verifications of past mortgage payments, pay stubs, attorney escrow letters, gift letters, verifications of employment, deposit checks, and fraudulent property appraisals.
To date, the following have occurred: one complaint, three informations, two indictments, three arrests, four federal convictions, and one state conviction.
- MARK YOUNG (Nevada): This case involves a former Nevada First Residential Mortgage Company branch manager (Young) who directed loan officers and processors in the origination of 233 fraudulent FHA loans valued at over $25 million. Young conspired with other mortgage company employees and with employees of General Realty to manufacture and submit false employment and income documentation for borrowers. Most of the borrowers were illegal immigrants from Mexico. To date, 58 loans with a total value of $6.2 million have gone into default, with a loss to HUD of over $1.9 million. The Nevada First Residential Mortgage Company is no longer in business.
On 09/01/2005, Mark Young was found guilty on 32 counts of submitting false information to HUD, and one count of conspiracy. This case was jointly investigated by FBI, HUD-OIG, and the Nevada Mortgage Fraud Task Force.
- RANDALL DAVIDSON ET AL (Cincinnati): Randall Davidson used his companies Knab Mortgage and Capital Properties to commit Mortgage Fraud. He used unsuspecting buyers from Pittsburgh, Pennsylvania, for the purchase of depressed properties in the Dayton, Ohio, area. These properties were purchased at an inflated rate using falsified documents to secure the loans. Davidson maintained a business office in both Pittsburgh as well as Dayton. The closing agent would disburse funds prior to receiving the down payment checks in order to provide Davidson and other co-schemers with money. The closing agent was aware that many of the documents used in order to secure the loans were falsified, but continued to close the loans. Davidson would inevitably receive a large cash profit during the disbursement of funds. Currently the known loss is over $8 million. This case was jointly investigated by FBI and IRS-CID.
- ROBERT A. AMICO ET AL (Buffalo): Robert A. Amico and his sons Robert J. Amico and Richard Amico engaged in a large conspiracy with loan brokers, appraisers, and buyers to submit over 100 fraudulent mortgage applications that overstated the value of all houses so that no down payment was made and so that the buyers could qualify for loans that they could not otherwise afford. All of the conspirators plead guilty, with the exception of the Amicos. Some of these conspirators were sentenced to probation and testified at the Amicos trial. Others were sentenced to jail terms of up to five years. After a six month jury trial the Amico sons were convicted and the father died of cancer. Fraudulently obtained mortgage applications were valued at $58 million with losses totaling $14.7 million. Robert J. Amico was sentenced to 17 years in prison and Richard N. Amico was sentenced to 9 years in prison. This case was joint investigation with IRS/CID.
- OPERATION CLEAN DEED (Charlotte): Promoters and other industry professionals obtained/brokered loans based on inflated property values and false application information for recruited buyer/investors. Participating attorneys falsified closing documents showing non-existent down-payments and closed the sales as "primary residence" purchases rather than as investments. The excess amount of the inflated loan was diverted to the promoters and other co-conspirators with a payment typically made to the buyer/investor following the closing. Loan payments were not made and houses eventually went into foreclosure. Fraudulently obtained loans valued in excess of $71 million with losses in excess of $9.5 million. To date, 14 subjects have been convicted, including promoters, attorneys, mortgage brokers, and builders.
AMERIFUNDING (Denver): This joint investigation with IRS/CID involved kiting of mortgage loans by utilizing stolen identities to facilitate the scheme. Further investigation determined that the scheme involved over $200 million in fraudulent loans over a 24 month period. One of the subjects obtained fraudulent identities by placing "help wanted" advertisements in a local newspaper. Information from the victims applications were used to apply for mortgage loans between $300,000 and $500,000. The proceeds of the scheme were used to pay personal expenses of the defendants. In a related fraud scheme, the lead defendant paid prior loans and purchased defective properties that were then resold for a substantial profit with inflated appraisals. To date, six subjects have been indicted. Losses totaled $37.5 million and approximately $16 million in assets were seized.
- DOTTY PIERRE ET AL (Boston) : Four individuals were indicted with Bank Fraud and Aggravated Identity Theft in connection with a scheme involving the use of stolen identities to obtain mortgage loans. The subjects used stolen identity information to obtain, or attempt to obtain, mortgages worth over $800,000. This case was a joint investigation with the Postal Inspection Service, and Massachusetts State Police.