Criminal Investigative Division
Federal Bureau of Investigation
House Financial Services
Subcommittee on Housing and Community Opportunity
Good morning Mr. Chairman and Members of the subcommittee.
I want to thank you for the opportunity to testify
before you today about the FBI's efforts in combating
mortgage fraud. Although there is no specific statute
that defines mortgage fraud, each mortgage fraud scheme
contains some type of "material misstatement,
misrepresentation or omission relied upon by an underwriter
or lender to fund, purchase or insure a loan."
The Mortgage Bankers Association (MBA) projects $2.5
trillion in mortgage loans will be made this year.
The FBI compiles data on mortgage fraud through Suspicious
Activity Reports (SARs) filed by financial institutions,
and Department of Housing and Urban Development Office
of Inspector General (HUD-OIG) reports. The FBI also
receives complaints from the industry at large.
A significant portion of the mortgage industry is
void of any mandatory fraud reporting. In addition,
mortgage fraud in the secondary market is often under
reported. Therefore, the true level of mortgage fraud
is largely unknown. The mortgage industry itself does
not provide estimates on total industry fraud. The
industry provides incomplete or inconsistent fraud
data. Based on various industry reports and FBI analysis,
mortgage fraud is pervasive and growing.
The FBI investigates mortgage fraud in two distinct
areas: Fraud for Housing and Fraud for Profit. Fraud
for Profit is sometimes referred to as "Industry
Insider Fraud" and the motive is to remove equity,
falsely inflate the value of the property or issue
loans based on fictitious property(ies). Based upon
existing investigations and mortgage fraud reporting,
80% of all reported fraud losses involve
collaboration or collusion by industry insiders. These
schemes involve industry insiders to override lender
controls. Fraud for Housing represents illegal actions
perpetrated solely by the borrower. The simple motive
behind this fraud is to acquire and maintain ownership
of a house under false pretenses. This type of fraud
is typified by a borrower who makes misrepresentations
regarding his income or employment history to qualify
for a loan.
For the past 18 months, the FBI has been evaluating
the effectiveness of its national mortgage fraud program.
In June 2004, I authorized the consolidation of the
mortgage fraud program into the Financial Crimes Section
of the FBI’s Criminal Investigative Division.
Previously, mortgage fraud that impacted government
programs (i.e.HUD) was managed by the Integrity in
Government Section. Mortgage fraud affecting financial
institutions was managed by the Financial Crimes Section.
This consolidation provides the FBI a more effective
and efficient management over mortgage fraud investigations.
Second, I encouraged an overall strategy to addresses
mortgage fraud on a proactive basis utilizing partnerships
with federal agencies, state and local law enforcement,
regulatory bodies, and private industry. Third, I
assured adequate personnel resources were dedicated
to emerging mortgage fraud problems in regions of
the country encountering the greatest levels of fraud.
And finally, the FBI adopted an overall strategy to
focus on insiders harming the industry in order to
disrupt and dismantle entire criminal enterprises.
The FBI defines industry insiders as appraisers, accountants,
attorneys, real estate brokers, mortgage underwriters
and processors, settlement/title company employees,
mortgage brokers, loan originators and other mortgage
professionals engaged in the mortgage industry. Through
a mandatory reporting mechanism, industry insiders
would be the front line in preventing mortgage fraud.
Zero tolerance within the industry combined with a
mandatory system of reporting fraudulent activities
to the FBI and HUD will be a major step in addressing
The defrauding of mortgage lenders should not be compared
to predatory lending practices which primarily affect
borrowers. Predatory lending typically affects senior
citizens, lower income and challenged credit borrowers.
Predatory lending forces borrowers to pay exorbitant
loan origination/settlement fees, sub prime or higher
interest rates, and in some cases, unreasonable servicing
fees. These practices often result in the borrower
defaulting on his mortgage payment and undergoing
foreclosure or forced refinancing. As one example,
in 2002 and 2003, FBI, HUD-OIG and state and local
agencies from Utah pursued allegations that Fairbanks
Capital Corporation was engaged in predatory servicing
practices. This particular case culminated in civil
and other administrative actions taken by the Department
The potential impact of mortgage fraud on financial
institutions and the stock market is clear. If 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.
Investors may lose faith and require higher returns
from mortgage backed securities. This may result in
higher interest rates and fees paid by borrowers and
limit the amount of investment funds available for
Often times, mortgage loans are sold in secondary
markets or are used by financial institutions as collateral
for other investments. Repurchase agreements have
been utilized by investors for protection against
mortgage fraud. When loans sold in the secondary market
default and have fraudulent or material misrepresentation,
loans are repurchased by the lending financial institution
based on a "repurchase agreement." As a
result, these loans become a non performing asset.
In extreme fraud cases, the mortgage backed security
is worthless. Mortgage fraud losses adversely affect
loan loss reserves, profits, liquidity levels and
capitalization ratios, ultimately affecting the soundness
of the financial institution.
Approach to Mortgage Fraud:
Over the past five years, the FBI has implemented
new and innovative methods to detect and combat mortgage
fraud. One of these proactive approaches was the development
of a property flipping analytical computer application,
first developed by the Washington Field Office, to
effectively identify property flipping in the Baltimore
and Washington areas. The original concept has evolved
into a national FBI initiative which employs statistical
correlations and other advanced computer technology
to search for companies and persons with patterns
of property flipping. As potential targets are analyzed
and flagged, the information is provided to the respective
FBI field office for further investigation. Property
flipping is best described as purchasing properties
and artificially inflating their value through false
appraisals.The artificially valued properties are
then repurchased several times for a higher price
by associates of the “flipper.” After
three or four sham sales, the properties are foreclosed
on by victim lenders. Often flipped properties are
ultimately repurchased for 50-100% of their original
Other methods employed by the FBI include sophisticated
investigative techniques, such as undercover operations
(UCO's) and Title III wire taps. These investigative
measures often result in collecting valuable evidence
and provide an opportunity to apprehend criminals
in the commission of their crimes and reduce losses
to financial institutions. These proactive methods
do not preclude historical investigations; however,
they provide the FBI with additional tools to conduct
large scale investigations through operational efficiencies.
August 2002, the Cleveland FBI Office culminated a
two-year UCO targeting industry insiders. The UCO
focused on mortgages settled by American Home Loans
employees and corrupt professionals including appraisers,
accountants, mortgage brokers and loan originators.
Representatives of American Home Loans were able to
orchestrate the scheme by fabricating loan applications
and the supporting documentation (W-2s, tax returns,
employment/income and bank verifications). As a result,
industry insiders were able to circumvent the safeguards
of numerous finance companies. The pervasive loan
fraud caused property values to be artificially inflated
in the greater Cleveland area. Through this UCO, more
than 150 targets were identified, 23 search warrants
were executed, and 94 targets were indicted, including
two accountants, four title company employees, five
appraisers, eight underwriters and forty loan brokers.
On September 16, 2004 an undercover mortgage fraud
investigation conducted by the FBI Charlotte Division
resulted in the identification of more than 35 industry
insiders, and more than 380 fraudulent loans exceeding
$70 million. In November 2002, the investigation was
initiated due to numerous complaints by the North
Carolina State Bureau of Investigation and lenders
regarding high loan default rates within a short period
of time. The FBI identified a pattern of pervasive
mortgage fraud in the greater Charlotte area. The
investigators determined the most efficient and effective
approach to this investigation was an UCO. This not
only resulted in the identification of a large number
of corrupt industry insiders, but also prevented further
fraudulent mortgages. Seven plea agreements have been
signed to date; the investigation is ongoing.
Although there are many mortgage fraud schemes, the
FBI is focusing its efforts on those perpetrated by
industry insiders. The FBI is engaged with the mortgage
industry in identifying fraud trends and educating
the public. Some of the current rising mortgage fraud
trends include: equity skimming, property flipping
and mortgage identity related theft. Equity skimming
is a tried and true method of committing mortgage
fraud and criminals continue to devise new schemes.
Today's common equity skimming schemes involve the
use of corporate shell companies, corporate identity
theft and the use or threat of bankruptcy/foreclosure
to dupe homeowners and investors. Property flipping
is nothing new; however, once again law enforcement
is faced with an educated criminal element that is
using identity theft, straw borrowers and shell companies,
along with industry insiders to conceal their methods
and override lender controls. It should also be noted
that identity theft in its many forms is a growing
problem and is manifested in many ways, including
mortgage documents. The mortgage industry has indicated
that personal, corporate and professional identity
theft in the mortgage industry is on the rise. Computer
technology advances and the use of online sources
have also assisted the criminal in committing mortgage
fraud. However, the FBI and its law enforcement and
industry partners are working together to identify
trends and develop techniques to thwart illegal activities
in this arena.
In 1999, the FBI joined forces with HUD-OIG to establish
the Housing Fraud Initiative (HFI)Task Force. As a
result, numerous successful joint investigations were
conducted in New York, Baltimore, Washington D.C.,
Chicago, Los Angeles, and Dallas. The FBI is actively
investigating mortgage fraud in those cities and continues
to promote joint investigations with HUD-OIG and other
federal, state and local law enforcement and regulatory
agencies wherever mortgage fraud is prevalent.
regard to the HFI initiative the following serve as
examples of successful joint investigations:
A two-year joint investigation by the FBI , the IRS,
and HUD-OIG revealed a fraud for profit scheme committed
by several insiders of First Beneficial Mortgage Corporation.
This two year fraud was perpetrated against Fannie
Mae and Ginnie Mae home loan programs resulting in
losses exceeding $30 million. Recently, the president
of First Beneficial Mortgage Corporation and six others
were convicted on conspiracy, bank fraud, wire fraud,
and money laundering charges. The president was sentenced
to 21 years in prison, ordered to pay $23 million
in restitution and forfeited about $8 million in property.
A joint investigation conducted by the Los Angeles
FBI Office and HUD-OIG illustrated an extensive scheme
in which fraudulent identification and employment
documents were used to perpetrate mortgage frauds.
The scheme was largely assisted by an individual who
regularly manufactured false identity and income documents
for a profit. This document forger created W-2s, pay
stubs, credit letters and social security printouts
over an eight-year period. These documents were used
by real estate professionals who knowingly submitted
the falsified information to lending institutions.
The loans were then insured by HUD and caused a loss
to that agency of more than $18 million. A search
warrant executed during the investigation revealed
more than 100 real estate professionals had ordered
false documents in the past. To date, the document
forger and six associates have been convicted in the
scheme, as well as fourteen real estate professionals.
A two-year joint investigation conducted by the Kansas
City FBI Office, IRS, and HUD-OIG culminated on August
13, 2004 with the arrest of a local real estate investor.
The real estate investor and three business associates
were charged in U.S. District court for their alleged
roles in purchasing run-down properties, securing
fraudulent appraisals and obtaining mortgages in the
names of straw purchasers. The straw purchasers were
allegedly paid $2,000 for their role in the scheme
whereby they placed properties in foreclosure, leaving
the real estate investor and his associates with the
mortgage proceeds. This scenario was repeated approximately
300 times, resulting in losses to lending and financial
institutions in excess of $15 million.
The FBI focuses on fostering relationships and partnerships
with the mortgage industry to promote mortgage fraud
awareness. Over the past two years, the FBI has spoken
at and participated in various mortgage industry conferences
and seminars, including those sponsored by the MBA.
This year the FBI will be speaking at and participating
in the MBA's 91st Annual Convention and Expo. The
MBA estimates that six thousand industry leaders will
attend this conference.
To raise awareness of this issue and provide easy
accessibility to investigative personnel, the FBI
has provided contact information for all FBI Mortgage
Fraud Supervisors to relevant groups including the
MBA, Mortgage Asset Research Institute, Fannie Mae,
Freddie Mac and others. Additionally, the FBI is collaborating
with industry to develop a more efficient mortgage
fraud reporting mechanism for those not mandated to
report such activity. This Suspicious Mortgage Activity
Report (SMARt Form) concept is under consideration
by the MBA. The FBI supports providing a "safe
harbor" for lending institutions, appraisers,
brokers and other mortgage professionals similar to
the provisions afforded to financial institutions
providing SAR information. The "Safe Harbor"
provision would provide necessary protections to the
mortgage industry under a mandatory reporting mechanism.
This will also better enable the FBI to provide reliable
mortgage fraud information based on a more representative
population in the mortgage industry.
A recent analysis of mortgage industry fraud surveys
identified 26 different states as having significant
mortgage fraud problems. Although every survey identified
Georgia and Florida as having significant mortgage
fraud related investigations, the survey also identified
nine other states in the South and Southwest, seven
states in the West and five states in the Midwest
as having mortgage fraud problems. Once again, these
studies illustrate the need for increased coordination
among industry and law enforcement on mortgage fraud.
Lenders are increasingly aware that fraud is affecting
their bottom line. Through routine interaction with
FBI personnel, industry representatives are aware
of our commitment to address this crime problem. The
FBI frequently participates in industry sponsored
fraud deterrence seminars, conferences and meetings
which include topics such as quality control and industry
best practices to detect, stop and prevent mortgage
fraud. These meetings play a significant role in training
and educating industry professionals. Companies share
current and common fraud trends, loan underwriting
weaknesses and best practices for fraud avoidance.
These meetings also increase the interaction between
industry and FBI personnel.
the FBI continues to train its personnel and conduct
joint training with HUD-OIG and industry on mortgage
fraud. As a training model, the FBI seeks industry
experts to assist in its internal training programs.
In this past year, industry has assisted training
FBI personnel on mortgage industry practices, documentation,
laws and regulations. Industry partners have offered
to assist the FBI in developing advanced mortgage
fraud investigative training material and fraud detection
conclusion, the FBI is committed to increasing liaison
and education efforts and partnering with federal,
state, and local law enforcement, and private industry
to combat mortgage fraud. The FBI supports new approaches
to address mortgage fraud and its effects on the U.S.
financial system, to include:
mechanism to require the mortgage industry to report
fraudulent activity, and
creation of“Safe Harbor” provisions
to protect the mortgage industry under a mandatory