Oklahoma Bar Association

According to recent government statistics, reports of mortgage fraud are on the rise.1 Consequently, the number of indictments filed by the federal government is also increasing.2 Unfortunately, Oklahoma has not been spared from this recent crime wave. In fact, one recent Oklahoma mortgage fraud scheme garnered national attention. A team of fraudsters targeted a subdivision in Edmond and colluded with industry insiders to inflate the purchase price of homes in order to obtain cash back at closing for alleged remodeling and repair costs.

Four individuals involved in the scheme pled guilty in December 2006 to the federal criminal charges brought against them.3 One of those individuals was a leading real estate broker who was licensed to sell real estate in Oklahoma for more than 25 years. As a result of her involvement, the broker’s real estate license was suspended. Six other individuals involved in the scheme were convicted by a federal jury in April 2007.4

Most consumers are not familiar with the crime of mortgage fraud (which has been referred to as “the worst crime no one’s heard of”),5 and this lack of knowledge makes them easy targets. Accordingly, Oklahoma attorneys must be knowledgeable about the crime in order to protect clients from becoming mortgage fraud victims. This article discusses mortgage fraud categories, schemes used to perpetrate the crime, warning signs of mortgage fraud, and its impact on neighborhoods and communities.

Mortgage fraud occurs “when a consumer or professional intentionally causes a financial entity to fund, purchase or insure a mortgage loan when the entity otherwise would not have done so if it had possessed the correct information.”6 Although there are numerous schemes utilized to perpetrate mortgage fraud, all of the schemes contain one common factor — a “material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase or insure a loan.”7 Mortgage fraud schemes can generally be grouped into one of three categories: 1) fraud for profit, 2) commission fraud and 3) fraud for property.

“Fraud for profit consists of systematic transactions by industry professionals who are attempting to steal a significant amount of the funds associated with one or more mortgage transactions.”8 Multiple participants — usually industry insiders such as mortgage brokers, real estate brokers, real estate appraisers and settlement agents (attorneys and title examiners) — are involved and paid in a fraud for profit scheme. Perpetrators of fraud for profit schemes do not intend to repay their mortgage loans, thus resulting in significant losses to financial institutions. Fraud for profit schemes account for the majority of losses to consumers and financial institutions.

Commission fraud occurs when one or more industry professionals misrepresent information in a loan transaction in order to receive a commission on a loan that would not normally be acceptable to the lender. Commission fraud is very common in the industry and results in losses to consumers, financial institutions and insurers.

Fraud for property is perpetrated by borrowers who seek to acquire and maintain ownership of a house under false pretenses. Borrowers misrepresent information on the loan application — such as their income, assets and intent to occupy the premises — in order to qualify for the loan. The borrowers would not normally be approved for the loan because they simply cannot afford the house they are attempting to purchase. As a result, these borrowers often default on their mortgage loans. Although fraud for housing is a problem, its impact is relatively minor and does not cause significant losses for financial institutions.

Mortgage fraud schemes can be difficult to identify because often, several industry insiders are involved in a single fraudulent transaction. Some of the most common schemes are discussed below.


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Many people use the term “property flipping” to refer to the purchase of a property that is then remodeled and upgraded and resold for a profit. Illegal property flipping occurs when a property is purchased and then immediately refinanced or resold for an artificially inflated value. The buyer does not remodel or upgrade the property. Instead, the buyer acts in collusion with a real estate appraiser to artificially inflate the value of the property. Property flipping is illegal because the home’s value at the time of sale is based upon a false appraisal.

A “silent second” scheme occurs when the buyer of property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender is led to believe that the borrower has invested his own money for the down payment. The second mortgage is further concealed from the primary lender by the failure of the borrower to record the second mortgage in the county land records.

“Nominee loans” or “straw buyers” are utilized to conceal the identity of the borrower through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan. Straw buyers do not intend to occupy the property or make payments on the loan. In fact, they often deed the property to the true buyer immediately after closing. Straw buyers are usually compensated for the use of their identity.

Often, a “fictitious or stolen identity” is utilized to gain approval for a loan. This scheme constitutes a form of identity theft, causing its victims to suffer long-lasting consequences. Victims usually have no knowledge that the perpetrator has obtained a mortgage utilizing their name, personal identifying information and credit history until the loan goes into default.

“Inflated appraisals” occur when an appraiser acts in collusion with a borrower by providing an appraisal report to the lender that falsely inflates the property value. The appraiser usually receives an increased fee or some other form of kickback from the borrower. An Oklahoma real estate appraiser, whose license was suspended at the time of his fraudulent appraisal, pled guilty to federal charges of wire fraud associated with an inflated appraisal that he provided to a financial institution and was sentenced to one year in prison and ordered to pay $235,000 in restitution.9 The appraiser, at the request of a branch manager of a national mortgage broker, provided an inflated appraisal that he knew would be transmitted through interstate communications for the purpose of securing approval of the loan. The branch manager paid the appraiser additional compensation in exchange for the inflated appraisal.

Inflated appraisals may explain recent findings by the Mortgage Asset Research Institute, a research group associated with the Mortgage Bankers Association, listing Enid second in the nation for potential mortgage fraud involving subprime loans.10 This ranking is derived from the highest early payment default index values based upon 2006 subprime loan originations. Enid’s poor ranking may be explained by the pressure that is placed upon real estate appraisers by industry insiders to “make value,” i.e., to appraise the property for the sales price even if the actual value of the home is less than the sales price. The subprime connection comes into play where a borrower receives a “no-money down” loan for an over- valued property and then cannot make the payments. The lender suffers a significant loss. Most early payment defaults11 are the result of some form of mortgage fraud, whether it is an inflated appraisal, falsified loan application or the result of property flipping. For example, suppose a home is actually valued at $100,000, but an inflated appraisal is submitted to the lender valuing the home at $150,000. The lender loans $150,000 to the borrower, but the borrower soon defaults and the lender forecloses on the property. The lender now owns a property worth only $100,000, and it has suffered a $50,000 loss.

A “foreclosure rescue scam” involves a perpetrator who identifies and seeks out homeowners at risk of defaulting on their mortgage or homeowners whose homes are already in foreclosure. The perpetrator claims to offer or arrange for a new loan, but ultimately convinces the homeowners to sign over the deed by agreeing to lease the home back to the homeowners, allowing them to buy it back over time, or purchase the home with a land contract. The perpetrator usually requires the homeowner to pay some form of up-front payment. The perpetrator will then either pay off the existing mortgage or take out a new loan. The perpetrator now owns the home and has stripped the victim of all his equity. The former homeowner’s lease or land contract payments are usually low at first, but the agreement (unbeknownst to the former homeowner) usually requires an enormous balloon payment at the end of a short time period. Most of the former homeowners cannot afford the balloon payment. Victims of foreclosure rescue scams usually do not know they have been deceived until they are evicted from their home. The perpetrator then sells the home and profits enormously.

Another common mortgage fraud scheme is conducted by the use of two settlement statements. One settlement statement — accurately reflecting the true selling price of the property — is prepared and provided to the seller. A second settlement statement — falsely reflecting an inflated selling price — is provided to the lender. The lender provides a higher loan amount based upon the fraudulent settlement statement. These funds are usually placed in escrow with the closing company. After the loans are settled, the proceeds are disbursed among the fraudsters. This type of mortgage fraud scheme can only be committed by industry insiders working in collusion with each other.

New mortgage fraud schemes are constantly being developed. The changing nature of the schemes makes it difficult for the government to identify and prosecute the perpetrators. There are, however, several warning signs of mortgage fraud of which attorneys should be aware. The following activities are warning signs of potential mortgage fraud:

Mortgage fraud can be greatly reduced by taking a few extra precautions. Attorneys advising a client in a real estate transaction should recommend the following preventative measures:

Mortgage fraud not only impacts its direct victims, the homeowners and lenders who have been defrauded, it also has negative implications on indirect victims, including entire neighborhoods and communities. Perpetrators often target specific neighborhoods and seek to purchase multiple homes within the neighborhood over a short period of time in order to maximize the potential earnings before the scams are detected. Once the homes are purchased and the scams are completed, the perpetrators take the money and run, leaving victims and other residents of the neighborhood to suffer the consequences. Some of these consequences include increased property taxes, market confusion, vandalism, low home occupancy rates, and higher mortgage rates and fees.13

One negative impact to a neighborhood occurs when inflated appraisal values falsely inflate a home’s sales price which, in turn, leads to higher property taxes. When perpetrators target several homes within a neighborhood — falsely inflating the value of these homes — property taxes throughout the entire neighborhood may increase. Higher property taxes make homes in the neighborhood less attractive to potential buyers, thus making it more difficult for the residents to sell their homes. Another negative impact of mortgage fraud on neighborhoods is market confusion, which occurs when legitimate sales prices become difficult, if not impossible, to determine due to fraudulent activities. Buyers, sellers, real estate brokers and appraisers may become confused about the legitimate value of a home after a property has been fraudulently flipped and/or appraised.

Mortgage fraud also leads to home foreclosures. Foreclosure proceedings often result in homes being left vacant for a period of time, which create opportunities for vandals to enter the homes undetected and steal property or destroy the homes. The foreclosing lender must either clean up the mess or risk losing even more money when the house is sold. Consequently, neighborhoods with high rates of foreclosures may see an increase in crime in their neighborhoods.

Entire communities may also be impacted by mortgage fraud. First, mortgage fraud is often affiliated with money laundering and other criminal behavior. If the community presents opportunities for perpetrators to commit mortgage fraud without being detected, the community becomes an attractive target for other types of criminal behavior, thus resulting in an increased rate of crime. Second, lenders will raise mortgage rates and fees in order to recover their losses from mortgage fraud in the community. Finally, normally honest consumers and professionals are often implicated in mortgage fraud schemes. The perpetrators approach these normally honest individuals and convince them that they will be able to earn a quick profit without being detected.

Mortgage fraud is investigated by the Federal Bureau of Investigation. The Internal Revenue Service also investigates cases of mortgage fraud that involve money laundering. Mortgage fraud is a federal crime that is punishable by up to 30 years in prison or a $1 million fine, or both.

There is no federal statute that specifically addresses the problem of mortgage fraud; rather, mortgage fraud is prosecuted under a variety of federal criminal statutes, depending on the scheme perpetrated.14 If you suspect your client has been defrauded or if you identify several warning signs of mortgage fraud in a real estate transaction, report your suspicions to one or more of the following local agencies:15

FBI Field Office, Mortgage Fraud
White Collar Crime Supervisor
http://oklahomacity.fbi.gov/
3301 W. Memorial Drive
Oklahoma City, OK 73134-8801
Phone: (405) 290-7770

HUD Field Office: Oklahoma City
301 N.W. 6th St., Suite 200
Oklahoma City, OK 73102
Phone: (405) 609-8509

Office of the Attorney General
Consumer Protection Unit
2300 N. Lincoln Blvd., Suite 112
Oklahoma City, OK 73105
Phone: (405) 521-3921

HUD Field Office: Tulsa
1516 S. Boston Ave., Suite 100
Tulsa, OK 74119-4030
Phone: (918) 581-7434

Mortgage fraud is occurring in Oklahoma with greater frequency. Oklahoma attorneys must be knowledgeable about this crime in order to protect clients that engage in real estate transactions, attorney’s failure to notice blatant warning signs of mortgage fraud could be deemed as malpractice. Most importantly, though, the effects of mortgage fraud can ruin entire neighborhoods and communities, thus destroying the value of most individuals’ largest investment – their home.

1. Fed. Bureau of Investigation, Financial Crimes Report to the Public - Fiscal Year 2006, at www.fbi.gov/publications/ financial/fcs_report2006/financial_crime_2006.htm. (last visited Oct. 2, 2007); Fin. Crimes Enforcement Network, The SAR Activity Review – By The Numbers, Issue 8, June 2007, available at www.fincen. gov/pub_reports.html (last visited Oct. 2, 2007); Internal Revenue Serv., U.S. Dep’t of the Treasury, Real Estate Fraud: Facts, Figures and Closed Cases, Sept. 2007, at www.irs.gov/compliance/enforcement/article/0,,id=162992,00.html (last visited Oct. 2, 2007).
2. Internal Revenue Serv., U.S. Dep’t of the Treasury, Real Estate Fraud: Facts, Figures and Closed Cases, Sept. 2007, at www.irs.gov/compliance/enforcement/article/0,,id=162992,00.html (last visited Oct. 2, 2007).
3. U.S. v. Alford, No. CR-06-274-T (W.D. Okla. 2006); U.S. v. Campbell, No. CR-06-275-C (W.D. Okla. 2006); U.S. v. Jew, No. CR-06-276-HE (W.D. Okla. 2006); U.S. v. Mykel, No. CR-06-277-HE (W.D. Okla. 2006).
4. U.S. v. Baum, No. CR-06-264-HE (W.D. Okla. 2006).
5. Carol Lloyd, Mortgage Fraud – The Worst Crime No One’s Heard Of, San Francisco Chronicle, October 29, 2006 at K-2, available at http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/10/29/REGKQM0RN81.DTL (last visited Oct. 2, 2007).
6. William Matthews, Mortgage Asset Research Inst., LLC, Testimony before the United States House of Representatives Subcommittee on Housing and Community Opportunity, available at www.mari-inc.com/resources-news/articles-rulings.asp (last visited Oct. 2, 2007).
7. Fed. Bureau of Investigation, Statement of Chris Swecker Assistant Director Criminal Investigative Division Federal Bureau of Investigation Before the House Financial Services Subcommittee on Housing and Community Opportunity, Oct. 7, 2004, at www.fbi.gov/congress/congress04/swecker100704.htm (last visited Oct. 2, 2007).
8. Matthews, supra note 6.
9. U.S. v. Goodwin, No. CR-06-128-T (W.D. Okla. 2006).
10. Mortgage Asset Research Inst., LLC, Ninth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association, April, 2007, at www.mari-inc.com/resources-news/reports.asp (last visited Oct. 2, 2007). MARI’s index ranks seven cities ahead of Enid; however, six of these cities are located in areas affected by Hurricane Katrina. The index figures for areas affected by Hurricane Katrina, as acknowledged by MARI, do not accurately reflect the number of early payment defaults resulting from potential mortgage fraud.
11. An Early Payment Default (EPD) is usually defined as a loan that goes 90+ days delinquent in its first year.
12. To check an Oklahoma real estate broker’s license, contact the Oklahoma Real Estate Commission (OREC) at www.orec.ok.gov. To check an Oklahoma mortgage broker’s license, contact the Oklahoma Department of Consumer Credit at www.okdocc.state.ok.us/mainMB.php. To check an Oklahoma real estate appraiser’s license, contact the Oklahoma Real Estate Appraisers Board (REAB) at www.oid.state.ok.us/REAB.asp.
13. Fannie Mae, Mortgage Fraud Overview, May, 2007, at https://www.efanniemae.com/utility/legal/ pdf/mtgfraudoverview.pdf (last visited Oct. 2, 2007).
14. Those federal criminal statutes include (i) 18 U.S.C. § 1001 – Statements or entries generally; (ii) 18 U.S.C. § 1006 – Credit Institution Fraud; (iii) 18 U.S.C. § 1010 – Department of Housing and Urban Development and Federal Housing Administration transactions; (iv) 18 U.S.C. § 1014 – Loan and credit applications generally; (v) 18 U.S.C. § 1028 – Fraud and related activity in connection with identification documents, authentication features, and information; (vi) 18 U.S.C. § 1341 – Frauds and swindles by mail; (vii) 18 U.S.C. § 1342 – Fictitious name or address; (viii) 18 U.S.C. § 1343 – Fraud by wire; (ix) 18 U.S.C. § 1344 – Bank fraud; 18 U.S.C. § 1503 – Obstruction of justice; 18 U.S.C. §§ 1956 and 1957 – Money laundering; 18 U.S.C. § 2314 – Interstate transfer of funds; 26 U.S.C. § 7206(2) – Filing false tax returns; and (x) 42 U.S.C. § 408(a) – False social security number.
15. For additional local and federal agencies, see www.mortgagenewsdaily.com/mortgage_fraud/report_ Oklahoma.asp (last visited Oct. 2, 2007).

Briana J. Ross is a vice president and title attorney at Guaranty Abstract Company in Tulsa. She serves as the OBA/YLD director for Judicial District 6 and was recently appointed to the OBA Real Property Section Board and the OBA Women in Law Committee. She also serves as a board member of the TU College of Law Alumni Association, where she co-chairs the Young Lawyer Alumni Committee.

Stealing Home: Protect Your Clients against Mortgage Fraud
Published 79 OBJ 7 (February 9, 2008)