Thursday, June 28, 2012

Mortgage Fraud in California, Nevada, and Florida

The Financial Crimes Enforcement Network (FinCEN) released its First Quarter 2012 on June 26, 2012, entitled Mortgage Loan Fraud Update - Suspicious Activity Report Filings in 1st Quarter 2012.*

This update of mortgage loan fraud suspicious activity reports, known as MLF SARs, shows that California, Nevada, and Florida lead the nation in the number of MLF SAR subjects per capita.

Of the 50 most populous Metropolitan Statistical Areas (MSAs) ranked by the number of MLF SAR subjects reported, the top nine are MSAs located in California, Nevada, and Florida. The Californian cities of Los Angeles, Long Beach, and Santa Ana ranked first in the nation for mortgage loan fraud SARs.

A closer look indicates that 19% of Q1 MLF SARs report activity that occurred within the past two years. Of this more recent activity, there were sharp increases in debt elimination schemes: comparatively, 14% reported in Q1-2012 versus 9% in Q1-2011. Foreclosure rescue scams show a dramatic increase: comparatively, 8% of these Q1-2012 filings versus less than 2% in Q1-2011.

In total, financial institutions filed 17,651 MLF SARs in the first quarter of 2012, which is down from 25,485 filed in the same quarter of 2011. According to the report, previous record levels were attributable to mortgage loan repurchase demands prompting reviews of dated mortgages. I would expect this trend to continue, inasmuch as 72% of Q1 filings are still reporting suspicious activity that occurred more than four years ago.

An interesting statistic is the extent to which mortgage fraud was prevented: 41% of the mortgage loan transactions were spotted and stopped before completion, up slightly from 40% in the CY 2011. However, that also means 59% of the subject transactions were not prevented before completion.

Let's look at some charts, sourced from the FinCEN report.


Quarterly MLF Filings, Q1 2006 through Q1 2012
Mortgage Loan Fraud - MLF SAR
Mortgage Loan Fraud SAR Subjects-Top 20 States & Territories 
Categories of Fraud Addressed in MLF SAR Narratives

New Fraud Patterns


MLF-Chart 1
FinCEN reported an unusual spike in MLF SAR filings during 2011 Q1 through Q3, primarily due to mortgage repurchase demands on banks. Those repurchase demands prompted review of mortgage loan origination and refinancing documents, where filers discovered fraud, which was then reported on SARs.

Chart 2: Mortgage Loan Fraud - MLF SARs
MLF-Chart 2
During both 2012 and 2011 Q1, a majority of reported activities actually began during or before 2008.

Chart 3: Mortgage Loan Fraud SAR Subjects - Top 20 States and Territories
MLF-Chart 3
Based on per capita rankings, California remained the top ranked state, as it was in Q4 and CY 2011. Nevada ranked 2nd, rising from its 5th place ranking in 2011 Q4. Florida's 3rd ranking was consistent with its showings between 2nd and 4th in the 2011 quarterly reports. Arizona and New York rounded out the top five per capita rankings. Arizona jumped into 4th from rankings in the 6th through 11th range during 2011, while New York jumped into 5th from rankings in the low to mid-teens during 2011.

Chart 4: Categories of Fraud Addressed in MLF SAR Narratives
MLF-Chart 4
Some noteworthy changes from CY 2011 include an increase in debt elimination schemes, which were addressed in 14% of 2012 Q1 sample SARs, up from 9% in CY 2011. In addition, foreclosure rescue scams (other than debt elimination) were noted in 8% of 2012 Q1 sample SARs, but had been described in less than 2% of CY 2011 reports. Appraisal fraud was described in 3% of 2011 Q1 reports, down from 12% of CY 2011 reports.
New Fraud Patterns
Homeowners' Insurance Fraud
FinCEN noted two SARs describing homeowners' insurance fraud related to mortgage fraud in the aftermath of home fires. In one instance, a home with two mortgages burned down. The borrower asked that the insurance check be payable to him instead of the mortgage lender, and did repay the first mortgage. But the subject ignored payment requests and subsequent demand letters from the filer on the second mortgage. In the other case, the filer suspected arson on a rental property insured for several times the mortgaged value. This subject repaid his mortgage loan with insurance proceeds and pocketed the additional insurance money.
Keys for Cash
One filer was notified by local law enforcement, based on a confirmed lead from a local realtor, about persons illegally occupying bank owned properties ("REOs"). The subjects moved into various bank owned properties claiming to have long term leases. However, the subjects' true objective appeared to be inducing lenders into paying them to vacate the premises.
Law Library Image
Financial Crimes Enforcement Network
Mortgage Loan Fraud Update -
Suspicious Activity Report Filings in 1st Quarter 2012

June 26, 2012
* Jonathan Foxx is the President & Managing Director of Lenders Compliance Group