Illegal Property Flipping: Financial Terrorism
Figure 3: Top Mortgage Fraud Affected Areas Based on Data from FBI,
HUD/OIG, FinCEN, MARI, RealtyTrac Inc., Fannie Mae, and Radian Guaranty Inc.


FBI: Mortgage Fraud Begets Foreclosure

2006 Mortgage Fraud Report published by the FBI. Republished by the FBI in May 2007.
Abridged version, posted here, was originally posted Thursday, July 12, 2007 5:26 AM, by darenb, for RealtyTrac

The FBI recently came out with its 2006 Mortgage Fraud Report, which somewhat anticlimactically concludes that there is "a strong correlation between mortgage fraud and loans which result in default or foreclosure."

The correlation is apparent in the report's list of the top states for mortgage fraud: California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas, and Utah. Six of those states also appeared in RealtyTrac's list of states with the highest foreclosure rates in 2006. The FBI also lists Arizona, Colorado, Maryland, Minnesota, Missouri, Nevada, North Carolina, Tennessee, and Virginia as other areas significantly affected by mortgage fraud.

The report identifies the most common scam as "illegal property flipping." This is not what many legitimate investors refer to as flipping — buying a property at a discounted price, making repairs and then quickly reselling the property for a profit. An illegal property flipping scheme involves fraudulent appraisals and loan documents for a straw buyer who never intends to pay off the loan. The property ends up in foreclosure with the bank eating the loss. If not caught, the flipper pockets the profit produced by the artificially inflated sales price (see diagram below from FBI report).

Illegal Property Flipping: Financial Terrorism
Figure 1: Illegal Property Flipping Scheme

The report goes on to pinpoint "foreclosure-rescue" scams as an emerging form of fraud that takes advantage of the growing number of homeowners in default.

"The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. This 'foreclosure rescue' often involves a manipulated deed process that results in the preparation of forged deeds. In extreme instances, perpetrators may sell the home or secure a second loan without the homeowners' knowledge, stripping the property's equity for personal enrichment."

More states are enacting legislation to protect homeowners against such fraud, and justifiably so. Unfortunately some of that legislation swings the pendulum too far the other way and all but prohibits legitimate investors from purchasing pre-foreclosure. These investors will forgo jumping through the legal loopholes to help distressed homeowners and just wait for the public auction, or until the property has been repossessed by the lender.

The report acknowledges that "no single regulatory agency is charged with monitoring this crime" and that "combating mortgage fraud effectively requires the cooperation of law enforcement and industry entities." So maybe what is needed more than new laws is a more concerted effort to catch and punish perpetrators of mortgage fraud.