By Arkady Buhk
Although mortgage fraud has been around almost since people started to buy and sell real estate, the peak wasn’t reached until the bursting financial bubble in 2008 put the white-collar crime on the front page of every newspaper in the nation.
Greed, moral failings and white-collar crime combined to play havoc with the nation’s finances over the past ten years. The investment, monetary and home industries have been in the lead of the complex ethical and criminal issues involving mortgage fraud.
At it’s most simple definition, fraud is intentional deception and betrayal. Active fraud occurs when one betrays another by deliberately providing misleading data including facts and figures.
What is Mortgage Fraud and Why?
Greedy lending, or “predatory,” methods that target certain borrowers is just one form of mortgage fraud. The Federal Bureau of Investigation defines mortgage fraud as “material distortion, misrepresentation or omission related to buying property.” With this as a working definition, it can be seen that mortgage fraud is perpetrated by both private borrowers and professionals.
Many reasons motivate individuals to perpetrate mortgage fraud but most of these reasons can be broken down into two factors:
- Fraud for housing, and
- Fraud for profit
Fraud for housing is performed by borrowers, often with the help of loan managers who misrepresent aspects about work history, income, debt/credit or the value and condition of the property. The goal is to either obtain or keep, ownership of real estate. Fraud for housing can be committed by people intending to occupy a property or by investors who plan to lease the property as a source of income.
Fraud for profit is committed by real estate management and financial specialists who misrepresent a variety of data with the aim of maximizing profit. Fraud for profit can be executed by any professional in the loan chain which consists of the builder, sales agent, loan officer, mortgage broker, debt counselor, appraiser, inspector, and insurance or escrow agents.
Common Schemes and Scams
The most popular investor mortgage fraud schemes are variations on diverse kinds of property flipping, occupancy fraud, and straw buyers. Property flipping is normally not prohibited when buying a home, fixing it up and then reselling the property. However, when a property is bought beneath market value and promptly sold at a profit, with the aid of a shady appraiser who “verifies” the assessment of the property, mortgage fraud is indicated.
Although not the largest cases of mortgage fraud, the six discussed below cases serve as illustrative examples of each of the main types of fraud that occur.
Housing Fraud in Cleveland
Five people have been charged in a $4.1 million mortgage fraud scam that combined five luxury houses in Medina County and one in Cuyahoga County. The seven-count indictment included conspiracy to commit bank fraud, wire fraud, and five counts of bank fraud.
The court documents show that the accused were busted bilking mortgage lenders by listing the Cuyahoga County property at a value surpassing its true worth and then sending the property into foreclosure. The scheme resulted in the lenders losing over $800,000.
Bank of America Manhattan
In one of the few major trials from the financial crisis, a Manhattan federal jury decided Bank of America was guilty of selling thousands of faulty mortgages through its Countrywide Financial section.
After a month-long trial, the jury found that Bank of America ‘s Countrywide executive Rebecca Mairone committed civil fraud. New York prosecutors had cited the bank for removing safeguards meant to catch mortgage fraud and then sold the loans to government-backed Fannie Mae and Freddie Mac. The mortgage finance companies were left owing over $1 billion in losses when the housing business tanked.
A large portion of Bank of America’s legal problems are connected to its $2.5 billion purchase of Countrywide Financial. Countrywide was, at one time, the largest US home lender. “In a rush to feed at the trough of easy mortgage money at the beginning of the economic disaster, Bank of America purchased Countrywide believing that it was a cash cow. That profit was built on fraud,” Manhattan US Attorney Preet Bharara said in a statement.
Andrea Lorraine Avery
In May, Andrea Lorraine Avery, of Los Angeles, California was handed a sentence of 84 months in prison and instructed to pay $10,323,369 in restitution to the FDIC. In December, 2013, Avery pled guilty to charges of money laundering for a series of contracts to purchase 24 homes in Florida, Georgia, Louisiana and Texas.
Avery, along with several accomplices, would submit fraudulent loan applications to fund the purchase of various residences. To support the loans, Avery would use false names and fake social security numbers, as well as inflating income and assets. The lenders issued over $15 million in loans, and Avery received over $3 million in kickbacks.
In April, Charles R. Sammon was sent to prison for almost three years for his part in a mortgage fraud in which he participated in wire scams, mail fraud, and unlawful monetary transactions.
A former attorney in Boston, Sammon engaged in over 13 fraudulent real estate deals involving triple-decker condo structures. In eight of the deals, Sammon worked as the closing attorney for the banker. For the additional five, Sammon served as the seller himself.
Sammon’s basic scheme included recruiting people in buying properties. Several of the clients were promised that the dealer would handle the mortgage for over a year. Many of the installments to buyers came directly from Sammon’s law firm bank accounts. He failed to let the mortgage bankers know he was behind the payments.
Sammon also got some of the profits on top of his legal fees and failed to let the lender know about these payments. Every loan of the 13 placed defaulted within 12-18 months, and the homes were then let go at foreclosure creating combined losses, to the lenders, of over $2.5 million.
Sammon will have to serve three years of directed release and pay almost $1 million in restitution when he is released.
Brian Nels Peterson
Brian Nels Peterson, the leader of a mortgage business called Terra Finance, was sentenced to nearly four years in the pen for his role in a fraud scheme. Peterson, who finally lost his broker’s license with the California Department of Real Estate, signed most of the fraudulent loan applications generated by a team of scammers Peterson recruited. The players that Peterson pulled together for the scam included loan officers, loan processors, office staff, real estate investors, appraisers and tax preparers.
Peterson’s “dream team” of scammers would make up job titles and income figures so borrowers would appear as though they qualified for a loan. Then, the team would add borrowers to another person’s bank account and instruct the fake borrowers to claim the funds in the account as assets.
Peterson garnered more than $1 million from his loan businesses in just one year.
Fannie Mae Executive Fined $10,000 and Doesn’t Have to Pay
Mortgage frauds have proven to be popular because they don’t appear to be taken seriously by government law enforcement. On Monday, September 21, Thomas Lund settled charges by the SEC that he helped fool shareholders of Fannie Mae in the lead-off to the financial crisis.
The trouble began in 2008 when Fannie Mae had to be rescued by the government in a move that many saw as a main contributor to the financial meltdown. Lund, according to the suit, helped hide over $100 billion of subprime exposure and allowed the organization to keep funding more risky loans.
Lund’s penalty? $10,000. The payment won’t even be counted as a fine. The SEC agreed to call the payment a “gift to the US government.” It gets worse, Lund won’t even have to pay it. The settlement allows Fannie Mae to make the payment for him — and the financier has agreed to do it.
Now, follow along: The non-fine “gift to the government” which was levied on Lund, the former head of Fannie Mae’s single-family division, which was the biggest source of the company’s trouble, will actually be paid by the government.
So, how is that for justice?
Arkady Buhk is the founding partner of the Buhk Law Firm in New York City. He earned a J.D. from New York University in 2003, and is licensed to practice in New York as well as the Federal bar for the Southern and Eastern districts of New York. He specializes in white collar criminal defense cases.
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