FinCEN: Fraud and Mortgage Rescue Schemes

The Financial Crimes Enforcement Network (FinCEN) has just released its 20th issue of the SAR Activity Review - Trends, Tips, and Issues. The publication provides information about SARs and Remote Deposit Capture risks, Organized Retail Crime, Health Care Fraud, Elder Financial Exploitation, and more.

Of particular interest is a section devoted to the U.S. Trustee Program's (USTP) civil enforcement activity targeting bankruptcy-related mortgage fraud and mortgage rescue schemes. The USTP is a unit in the Department of Justice (DOJ) responsible for overseeing the administration of bankruptcy cases and private trustees. In that capacity, it also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

In this SAR Activity Review, USTP provides information regarding its role in combating these schemes, and, importantly, provides tips to financial institutions on detecting such unlawful activity.

The following outline provides:

• A Brief statement
• Financial Consultant Schemes (Red Flags)
• Sale-Lease Back and Property Transfer Schemes (Red Flags)
• Reverse Mortgage Schemes
• Library – Download Issuance

A Brief Statement

Bankruptcy-related mortgage fraud and mortgage rescue schemes use know how to exploit the federal bankruptcy court system.

Perpetrators of mortgage foreclosure rescue fraud schemes use these courts as a means to defraud vulnerable consumers in jeopardy of losing their homes to foreclosure or eviction.

Here's a strategy used by perpetrators:

1) The filing of a bankruptcy case triggers an automatic stay.
2) This filing then immediately stops all collections actions.

Point 1: Perpetrators often take advantage of the automatic stay, using it to give consumers the impression that the perpetrators' false promises of saving their homes are true since collection activities cease - at least temporarily.

Point 2: In some of these schemes, perpetrators use the courts by recommending to consumers that they file bankruptcy to eliminate their unsecured debt and thereby position themselves to buy back their houses as part of a sale-lease back scheme.

Point 3: Sometimes the perpetrators themselves file bankruptcy to discharge the debt they incurred as part of their mortgage fraud schemes. 

Financial Consultant Schemes

• This is the most common mortgage rescue frauds encountered in bankruptcy. In this scenario, the perpetrators falsely tell desperate homeowners that, for a fee, they can help the homeowners save their homes by working with their lenders to stop foreclosure and modify or refinance their loans. Perpetrators identify homeowners through advertising on TV, on radio, in local newspapers, or on the Internet; through connections with churches and other affinity-based ethnic groups; or through foreclosure lists available from local governmental agencies. Homeowners are told to make their mortgage payments to the perpetrators or are required to pay the perpetrators a monthly consulting fee, or both. Of course, the perpetrators do not contact the lenders. Instead, they file serial fraudulent bankruptcy cases in the homeowners' names, sometimes without the homeowners' knowledge or consent, to use the automatic stay to stop the foreclosure.
• Here's a variation: homeowners are directed by the perpetrators to quitclaim fractional interests in their homes to fictitious individuals or businesses. Bankruptcy cases are then filed serially in the names of the fictitious individuals or businesses to continue the operation of the automatic stay. A third variation involves the perpetrators transferring fractional interests to unsuspecting individual debtors with pending bankruptcy cases without their knowledge or consent. Under any of these scenarios, because collection activity has been suspended, homeowners mistakenly believe that the perpetrators have fulfilled their false promises, and the homeowners' continue to pay the perpetrators.

Red Flags

Mortgage payments stop being made.

Mortgage payments abruptly stop with no contact from the homeowner and/or default occurs on the mortgage within a month or two after the loan is made.

The foreclosure process is stayed by a bankruptcy filing.

The filing of the bankruptcy case may be in tandem with the sudden failure to make regular mortgage payments.

The debtor in the bankruptcy case that stayed the foreclosure is not the borrower.

The debtor does not disclose a fractional interest and/or other ownership in real property in his/her bankruptcy documents.

Failure to disclose such interests may indicate a fractional interest or property transfer scheme.

Serial bankruptcy cases are filed and/or numerous lenders file motions seeking relief from the automatic stay to proceed with foreclosure and/or eviction actions.

Where the perpetrators file serial bankruptcy cases, especially those involving fractional interest schemes, financial institutions should expect to see other lenders filing motions seeking relief from the bankruptcy automatic stay as well.

Sale-Lease Back and Property Transfer Schemes

• In this scheme, the perpetrator gains control of an individual's home and skims real or manufactured equity from the property. The perpetrator tells the homeowner that the home can be saved by selling it to a third-party purchaser chosen by the perpetrator - also known as a "straw purchaser" - and then renting it back from the purchaser for an amount less than the homeowner's current mortgage payment. Frequently the perpetrator promises that the homeowner can buy the home back within a certain period of time at the same price at which it was sold, thus protecting the homeowner's "equity." (In some schemes, the perpetrator persuades the homeowner to file bankruptcy in order to repair the homeowner's credit and place the homeowner in a better position to obtain financing to buy back the home.)
• The perpetrators of these schemes profit by gaining control of the properties and obtaining fraudulent loans in the straw purchasers' names based on inflated appraisals of the properties' value. The inflated sales price creates a significant amount of "fake" equity that the perpetrators take through fees that are included in the closing payoffs. Moreover, the perpetrators may arrange to have any remaining sales proceeds signed over to them, rather than to the homeowners. The straw purchasers usually receive some money at closing for each property purchased. Eventually the straw purchasers file bankruptcy to discharge the mortgage debt incurred in their names. Usually, they do not disclose payments received at closing in their bankruptcy documents. In the end, the homeowners lose their homes.
• A version of this scheme involves renters. Homeowners desperate to sell their homes are persuaded to "sell" their property to the perpetrators based on false promises that the perpetrators will obtain new loans to pay off the homeowners' existing mortgages. The perpetrators do not get financing, but instead put renters in the properties and collect the rents. No mortgage payments are made and the financial institutions are not notified of the title transfer. To further the scheme, the perpetrators may file incomplete serial bankruptcy cases in the homeowners' and/or renters' names without their knowledge or consent for purposes of obtaining the automatic stay to stop the collection actions.
  

Plethora of Languid Foreclosure Prevention Programs

Keeping foreclosures down and homeownership up has been the stated goal of policy makers for the last few years. The record shows that nearly all of the promulgated programs have failed to provide much relief to lenders or borrowers. And even if there were a chance for them to succeed, the obstacles to their viability are daunting.

I think a brief review of such programs is in order.

My list is not meant to be complete, but it is indicative of the success of presumptive remedies to the foreclosure crisis.

The Land of Cockaigne

I don't think many Americans ever really bought the 'spiel' about "a car in every driveway," "a chicken in every pot," "a salary for every able-bodied person," and "a house for every citizen." But it's not as though they weren't given plenty of reasons to pursue the so-called American Dream - at least the homeownership version. Presidents and their Administrations have equated owning a home with being as American as Apple Pie. Congress followed the narrative and fortified the burgeoning real estate industry with seemingly infinite funds boosted by and through the GSEs. The Federal Reserve did its part. But it was all trumped-up! Unsupported by the fundamentals of economic theory, dream-thinking nevertheless entrenched itself.

In the 13th century, a French poem described the "pays de cocaigne," which is Middle French for "The Land of Cockaigne." A fair translation of the poem portrays Cockaigne as a country where "the houses were made of sugar cakes, the streets were paved with pastry, and shops provided goods for nothing." (My translation.) Later, in the 16th century, the Dutch artist Pieter Bruegel the Elder depicted Cockaigne as an imaginary land of self-indulgent luxury and idleness, a utopia of gluttony, complacency, instant gratification, and physical excesses, where the lowly and beleaguered peasants could finally be free of their oppressive, daily struggles to survive.

In effect, Cockaigne was a medieval peasant's dream. But it was a chimera!

This is not to say that the modernized version of Cockaigne, perhaps our own American Cockaigne, was meant to curry the favor of people who were gluttonous or complacent in return for their votes. It is not to say that Americans are peasants in the fashion of medieval peasants. And it is not to say that we should run away from our dreams. But living a dream has consequences. 

So, let's take a look at some of those consequences. Let's see how foreclosure prevention programs have fared in mending the harm caused by our own version of Cockaigne.

The "Job's Bill"

The Obama Administration has proposed a plan to provide $15 billion to fix foreclosed and vacant properties. The idea is to provide a means to revitalize communities blighted by foreclosures. It would also offer a boost to construction jobs. Is there anybody reading this who actually believes that this bill, at least in its current form, will receive even a scintilla of Congressional approval anytime soon?

Converting Vacant and Foreclosed Homes to Rentals

The Administration has asked for proposals to convert foreclosed houses into rental properties. This would reduce the oversupply of foreclosed properties and reduce the demand causing rising rents for existing rentals. As far as I know, no politically viable proposals have been publicly announced. However, some statistics indicate that benefits could be outweighed by adverse consequences.

Principal Reduction

In effect, this approach asks banks to adjust the total amount owed on a mortgage, based on the post-bubble value of a home. However, this could lead to strategic foreclosures and perhaps an incentive for borrowers to take out riskier loans. I get that this remedy is supposed to be a way to deal with the $800 billion overhang, that is, the amount that borrowers owe above the value of their homes.

These so-called "underwater" mortgages are being just left out there dangling away! It seems to me that principal reduction could work, given the right methodologies. For instance, most mortgages are either owned or guaranteed by Fannie and Freddie, so the overall public could benefit through principal reduction.

However, here's the nasty secret: the FHFA, the regulator overseeing Fannie and Freddie, will not even consider principal reduction, because it would adversely impact the GSE's bottom line. Even after being bailed out, the GSEs are $141 billion in the negative. So, a decision to keep the losses off the books leads principal reduction into a dead end.

Bailout Money

At least President Obama recently admitted that his Administration had not made "enough progress" on dealing with the foreclosure crisis and he is "going back to the drawing board." This is how many years since the bubble burst? Going "back to the drawing board?"

With what money? After all, $30 billion in unused bailout money from the previous foreclosure programs cannot be used to fund new programs.

Making Home Affordable

This program was supposed to encourage servicers to lower mortgage payments. Political pundits labeled it the "homeowner bailout."

It began in the spring of 2009 and was meant to assist four million homeowners who were facing foreclosure. But MHA is a major malfunction. Servicers were thrown into backlogs, improperly processed cases, made numerous errors, all while regulators did very little to prevent this debacle. As of August 2011, as I have reported previously, only about 816,000 homeowners had received loan modifications through MHA - which is less than 25% of those who applied for MHA assistance!

Here's yet another nasty secret: the government is expected to spend about $7 billion of the $46 billion in bailout funds that were set aside to help homeowners. Consequently, nearly $30 billion meant to address the foreclosure crisis may instead be used to pay down the deficit. Yes, that would be those same $30 billion I mention above, meant to address the foreclosure crisis, and will instead likely be spent to pay down the deficit.

Home Affordable Refinance Program

This is the program that permits homeowners to refinance their mortgages at lower interest rates. It is another program from 2009. With much fanfare, the Administration estimated that five million homeowners would be served. As of June 2011, just 838,000 homeowners had refinanced through the program.

But where is this program going? The FHFA stands in the way, since refinancing is deemed to be more risk to Fannie and Freddie, which happens to own or guarantee about 5 million mortgages that are underwater.

President Obama has stated that he would increase the number of homeowners in the program. How is that supposed to happen, given that the FHFA's professed mission now is to further protect Fannie and Freddie from taking on any new risk?

Emergency Homeowners' Loan Program

The basic concept of this program is to loan money to jobless homeowners so they can avoid foreclosure. I fail to see how this is a solution at all to foreclosure. At best, maybe it postpones it. As promulgated in 2010 and commenced in June 2011, the program consists of $1 billion and is supposed to affect 30,000 families, by offering interest-free federal loans of up to $50,000 to qualifying homeowners. Essentially, to be qualified for this program, the borrower must have lost income because of unemployment or a medical condition. To date, only 10,000 to 15,000 of the 100,000 applicants have actually qualified for these loans.

But here's the catch: there is a deadline of September 30, 2011 for lending out money to eligible homeowners before the unused funds are to be returned to the Treasury. So, the application period has now expired. At this point, it is estimated that only half the allotted funds will be spent.

States Foreclosure Prevention Programs

The notion of giving funds to states to remedy the foreclosure epidemic goes back to February 2010, when the Administration promised almost $8 billion to finance "innovative" programs. The money was supposed to go to the states that had the worst foreclosure problems.

But reports issued in July indicate that only $478 million of the government's $8 billion had been actually loaned. I have read several reports that some of these states have failing programs due to burdensome enrollment procedures. In Arizona, for instance, 4,000 homeowners were to be assisted through principal reduction. But recent news reports indicate that Arizona only approved three homeowners for this remedy. And, again, banks and the GSEs do not want to participate in principal reduction, a particular feature of that state's "innovative" program.

Bankruptcy Protection

I seem to recall that candidate Obama expressed a willingness to permit bankruptcy judges the power to lower mortgage payments. The modern vernacular calls this a "cramdown." Banks were against cramdown from the start. Members of Congress, particularly some Democrats, tried to pass legislation permitting cramdown. But the legislation was defeated. And, anyway, President Obama's very own economic advisers rejected it. At this point, the Obama Administration has virtually abandoned it as a remedy.

Cockaigne Redux

Pieter Bruegel the Elder lived during the time of the famed Dutch Revolt. There is much symbolism in his painting, "The Land of Cockaigne." That symbolism, according to some authorities, refers to the failure of leadership, the effects of complacency, and the proclivity of the people to become dependent on their formidable abundance, while being unwilling to take risks that would bring needed systemic change.

I wonder: is the American Cockaigne a dream from which we refuse to wake up?