By Michelle B. Phipps-Evans

The Department of Insurance, Securities and Banking (DISB) is currently involved in a case with the Federal Bureau of Investigation (FBI), the US Attorney’s Office and other agencies where a 35-year-old DC man was found guilty last May of four counts of mail fraud, two counts of wire fraud, three counts of first degree theft, and two counts of monetary transactions. He is scheduled to be sentenced in October, where he faces a range of imprisonment of 87 to 108 months under the Federal Sentencing Guidelines.
 
At trial, the government’s evidence established that the man obtained titles to DC and Maryland properties through forged deeds, that is, deeds that were purported to be signed by the owners transferring the properties to the accused or his nonprofit business. In fact, the deeds were not signed by the owners as the vast majority of the owners were deceased at the time of the forgeries. The man had an accomplice who signed his name to these deeds as the “notary” falsely stating that he saw the owner sign the deeds as grantor and that the owner “personally appeared before him.” Once the forged deeds were notarized, the accused man filed them with the District of Columbia’s Recorder of Deeds and the Prince George’s Circuit Court Land Records. He would then sell the properties and use the money for personal gain. He wrongfully obtained about 14 properties, nine of which he sold for more than $770,000.
 
This kind of fraud scheme is not a very common one, according to Assistant Director Gregory Marsillo in DISB’s Enforcement and Investigation Bureau. “We have several other ongoing cases, which include numerous properties and numerous perpetrators with property values into the millions of dollars,” Marsillo said.
 
A more common type of mortgage fraud case is the joint investigation that DISB has ongoing with the US Postal Inspection Service. Interviews with numerous witnesses and 35 subpoenas, served by the US Attorney’s Office, have identified more than 30 “straw buyers,” as well as loan officers, appraisers, real estate agents and mortgage brokers involving more than 30 District properties, many of which went into foreclosure. At least $20 million in fraudulent mortgage loans were obtained through false loan applications and inflated appraisals. The prosecuting Assistant US attorney anticipates presenting the case to a federal grand jury late August or September.
  
“The problem is pervasive in DC, and very difficult to investigate and prosecute due to the complexity and the number of transactions,” Marsillo added. As with most mortgage fraud cases, several parties were involved, many of whom worked in the mortgage industry.
 
Examples of other significant ongoing criminal investigations at DISB involve a mortgage fraud scam being worked with the FBI involving more that 20 properties with bad loans totaling over $9 million. The main perpetrator in this case is currently negotiating a plea deal with the prosecuting Assistant US Attorney. DISB also worked jointly with the Internal Revenue Service where an unlicensed lender illegally acquired ownership of more than 35 District properties, using more than 110 transactions, under the pretext of assisting homeowners facing foreclosure. And another criminal investigation worked with the FBI involves another group of perpetrators who acquired five District properties using the stolen identities of out-of-state residents. They incurred bad loans of over $1.6 million. Once obtained, these properties were “flipped” with losses to the lenders and insurance companies of more than $450,000.
 
Mortgage fraud is defined as the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan, according to an FBI definition. It is usually looked at in two categories—fraud for property/housing, which entails misrepresentations by applicant for purpose of purchasing a property for a primary residence. This usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan. The other category, however, fraud for profit, often involves multiple loans and elaborate schemes to gain illicit proceeds from property sales. It is this second category that is of most concern to law enforcement and the mortgage industry.
 
Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation. Subprime mortgage issues remain a key factor in influencing mortgage fraud directly and indirectly. The subprime share of outstanding loans has more than a doubled since 2003 putting a greater share of loans at higher risk of failure. Additionally, during 2007 there were more than 2.2 million foreclosure filings reported on approximately 1.29 million properties nationally, up 75 percent from 2006, according to recent estimates.
 
FBI statistics reveal that estimated annual loses due to mortgage fraud are $4 billion to $6 billion. Based on industry reports, the FBI states that mortgage fraud is pervasive and growing, echoing Marsillo’s observations. In fiscal year 2005, the number of suspicious activity reports to the FBI was more than 35,000. By fiscal year 2006, they were more than 46,000 and by 2007, they were more than 60,000.
 
According to Associate Commissioner Stephen Perry from DISB’s Enforcement and Investigation Bureau, the bureau has seen a gradual increase in the number of complaints regarding suspected mortgage fraud or other mortgage loan-related issues. For FY 2006, 27 banking-related cases were initiated by the bureau, of which 10 were fraud or loan related. In FY 2007, the number of cases initiated increased to 39, of which 12 were fraud or loan related, and for FY 2008, ending in July, 57 investigations were initiated, 19 of which were mortgage fraud or loan related.
 
If these fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market, according to DISB Commissioner Thomas E. Hampton.
 
“Investors lose faith and require higher returns from mortgage-backed securities,” he said. “This leads to higher interest rates and fees paid by borrowers, which limit the amount of investment funds available for mortgage loans.” 

To assist in its ongoing fight against fraud, DISB has dedicated the week of Aug. 10 to 17 as its fourth annual Financial Fraud Awareness Week, in keeping with its 2008 goal of reducing insurance, securities and banking fraud in the District of Columbia.
 
“We have seen an increase in reports of financial fraud in Washington, DC,” said. Hampton. “This is the case especially in the area of mortgage-related fraud where we have seen a significant increase due to the problems being experienced by consumers who are having difficulty meeting their mortgage payments. Desperate homeowners, looking for some type of financial relief, are victimized by foreclosure-rescue schemes and mortgage-related bankruptcy schemes and we will be providing information to assuage this trend. The downturn in the economy may have been responsible for this increase.”
 
For this year’s Financial Fraud Awareness Week, DISB has provided daily information to District residents on fighting fraud, especially mortgage and foreclosure scams. The agency also took part in various seminars and fraud events hosted by other District agencies. The annual Financial Fraud Awareness Week is aimed at raising District residents’ awareness about how they could spot scams, protect themselves from scams, and report scams to help protect others.

Some Consumer Tips

Due to the fallout from mortgage fraud, DISB is presenting some tips to prevent consumers from becoming victims:

• Get referrals for mortgage professionals. Check licenses of the industry professionals with DISB, the state regulatory body, at (202) 727-8000 or disb.dc.gov.
• If it sounds too good to be true, it probably is. An outrageous promise of extraordinary profit in a short period of time signals a problem.
• Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques.
• Look at written information to include recent comparable sales in the area and other documents such as tax assessments to verify the value of the property.
• Understand what you are signing and agreeing to and do not sign any blank forms. If you do not understand, re-read the documents or seek assistance from an attorney.
• Make sure the name on your application matches the name on your identification.
• Review the title history of the home you are anticipating to purchase to determine if the property has been sold multiple times within a short period. It could mean that this property has been “flipped” and the value falsely inflated.
• Know and understand the terms of your mortgage. Check your personal information against the information as listed on the loan documents to ensure it is accurate and complete.
• Never sign any loan documents that contain “blanks.” This leaves you vulnerable to fraud.

Mortgage Debt Elimination Schemes
Be aware of emails or web-based advertisements that promote the elimination of mortgage loans, credit card, and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport.

• There is no easy method to relieve yourself of debts you have incurred.
• Borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.

Foreclosure Rescue Fraud Schemes
Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a Quit-Claim Deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner, without preventing the foreclosure. The victim suffers the loss of the property, as well as the up-front fees.

• Be aware of offers to “save” homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure.
• Seek a qualified credit counselor or attorney to assist.

Michelle B. Phipps-Evans is the senior public affairs specialist for the DC Department of Insurance, Securities and Banking.