In early 2008 a directive came down from FBI headquarters in Washington, D.C., to 24 field divisions including Chicago to prioritize resources to combat mortgage fraud. The crime has been identified as a “serious threat” affecting entire communities as well as financial institutions and the lending and real estate industries.

Since then the Chicago FBI’s mortgage fraud case load has more than doubled with investigations involving multimillion dollar losses, says Supervisory Special Agent Anthony P. D’Angelo in charge of Financial Crimes for the Chicago Field Division of the Federal Bureau of Investigations (FBI) in an interview with Illinois REALTOR® Magazine in early September. D’Angelo, a white-collar crime specialist and 24-year veteran with the Bureau was transferred after 9/11 to the counter-terrorism unit to lead the Joint Terrorism Task Force. But after the subprime meltdown fueled a significant surge in mortgage fraud, he was recalled to white-collar crime where he created the Mortgage Fraud Task Force involving 11 federal, state and local agencies in a massive and sophisticated hunt to uncover the major players.

“What we are trying to do is go after the big fish and hit all strata—attorneys, appraisers, accountants, hard money lenders, currency exchanges, developers and real estate agents—to make an impact on systemic fraud involving multiple people in huge financial losses,” says D’Angelo.

“When there are industry professionals involved they are generally going to be involved in multiple schemes and they won’t quit until they are out of business or behind bars.”

Illinois makes the top-10 list for several sources that track mortgage fraud. The Mortgage Asset Research Institute placed it No. 3 in its first quarter 2008 report. The crime wave followed the real estate boom when the ranks of the lending and real estate industries exploded and the housing market contracted.

Says D’Angelo: “In the boom everybody was making money and supporting their families. Now there are fewer clients out there so people are a little more desperate and innovative. You don’t have the Alt-A loans any more or stated income loans so fraud is more prevalent, but it’s a little harder to do at this time.”

On June 19, 2008, the U.S. Department of Justice sent shockwaves through the real estate and lending communities with its sweeping public charges against 400 defendants including mortgage brokers, loan officers, real estate agents, home builders and five attorneys; 67 from the Chicago area. Code-named “Operation Malicious Mortgage,” a nationwide effort to crack down on fraudulent home-lending schemes, the package of Chicago cases involved more than $170 million in fraudulently-obtained home mortgages resulting in over $40 million in losses to lending companies after the loans went into default and the properties were foreclosed upon.

The FBI tells IAR that a second set of charges focusing on Chicago is expected this fall. D’Angelo compares the FBI’s heightened efforts to what happened during the savings and loan crisis in the late ’80s and early ’90s when the Bureau allocated “significant resources” to identify criminal wrongdoing. It’s interesting to note that, separately, economists John Tuccillo of JTA Inc. and Geoff Hewings of the University of Illinois both have compared the recent turmoil in the financial sector and subsequent government bailout proposals to the savings and loan crisis.

Ultimately, mortgage fraud hurts the housing market, which is already suffering from the subprime fallout, a sluggish economy and a delayed recovery due to chaos in the financial sector.

“What the FBI would like to see is for the real estate community to be informed, not turn a blind eye to fraud and to have a conduit for reporting the bad apples,” says D’Angelo. “If your membership is involved it behooves them to report it because it will impact the industry, property values and the community.”

He adds: “When we open an investigation and push comes to shove and we get an appraiser, developer or straw buyer to cooperate, the first thing they will do is dime out anybody involved in the transaction and that will include the real estate agent.”

So what are the dominant schemes and red flags REALTORS® should look for? Here are several emerging schemes in the Chicago area.

Developer Cash-Back Incentives at Closing
Chicago-based Appraisal Research Counselors reported the pipeline of condos in development as of July 2008 in Chicago’s West Loop, Streeterville, South Loop, River North, Near North, Loop/New Eastside, and Gold Coast neighborhoods at 16,024. This glut of excess inventory combined with tightened credit and decreasing values fuels the crime wave. The FBI sees developers more desperate to sell employing tactics involving incentives that aren’t reflected in the closing.

In these cases, REALTORS® should watch for falsification of employment, assets and income as well as inflated appraisals that don’t line up with comparables in the neighborhood. Another red flag is when the developer brings in a “straw buyer” who ultimately will not own or occupy the unit. (The identity of the borrower is concealed through the use of a straw buyer who allows the borrower to use his name and credit history to apply for a loan.)

Mining for Straw Buyers in Minority Neighborhoods
The FBI reports more cases of identity theft targeting ethnic groups such as ads in Polish community newpapers that ask “Are you going back to Poland? If you have good credit we’ll give you $5,000” or “Looking for credit investors.” The perpetrator then uses the person’s credit history and identity to commit mortgage fraud.

Bogus Appraisals
The FBI is finding inflated appraisals prevalent in renovated 8-flats, 12-flats and 16-flats in Chicago. In a typical scenario the developer buys the building and rehabs one of the units with granite counter tops and stainless steel appliances. The rest of the units are gutted. In this case the appraiser knowingly uses the picture of one unit in the transactions for all other units in the building.
Stolen Identity / Home Equity Lines of Credit
In a case involving residential properties a criminal ring of appraisers and real estate agents in the Chicago suburbs, one of the victims was a Northern Illinois University employee who discovered his identity and credit history were stolen when he tried to refinance his home of 20 years to a lower interest rate. The bank refused to refinance since the victim’s credit report showed he had made no payments on a $1.5 million home in Glenview that he did not even own.

Release of Liens
One of the latest twists to mortgage fraud involves forged release of liens. At the closing forged documents show a previously identified lien has been released when actually it has not been released resulting in two mortgages on one property.

Stalled REO Sales
Another tactic shared by the FBI involves REO (real estate owned) bank-owned homes, whereby the real estate agent prevents the sale of the home to would-be buyers by not returning phone calls related to the transaction. The home sits unsold until the price is greatly reduced and then is purchased by friends or family of the real estate agent. 

By Ann Londrigan

November 2008 Illinois REALTOR magazine