Mortgage Fraud

by Catherine Geason
March 2009

Catherine is a guest author to Review. She is currently a student at the University of Minnesota in the Geographic Information Systems Master's Degree program and was a student intern with the LMI Office in 2007.

The area of Minneapolis at 21st Avenue North and Penn Avenue North was chosen by the Northside Residents Redevelopment Council (NRRC) to illustrate the current problems with housing and economic development on the Northside. The 79 parcels studied have had 365 owners in the past 20 years for an average of 4.45 owners apiece.

The 79 parcels have had 107 Lis Pendens actions filed. This is a legal proceeding informing the current owner that a lawsuit has been filed about the real estate in question. Sheriff’s sales, the next step after Lis Pendens, have affected 67 of the properties since 1988 which means that only 40 of the Lis Pendens actions were “cured” or settled of before reaching the stage of sheriff’s sale (see Map 1 for properties affected by sheriff’s sale).

Map 2 shows the value of each property according to 2007 Tax Year information. The average home value for a parcel in this cluster was approximately $135,000. When this value is compared to the current mortgages, however, 28 of the 70 properties have higher mortgages than the property was taxed at, and the average amount above the property value is $57,661.

Of the 18 mortgage refinances in the cluster block, half of them were subprime or lent at a higher rate than the prime rate. Of the prime refinances the average mortgage value increased by $35,735. Of the subprime refinances the average mortgage value increased by $41,300.

Of the 79 parcels in the cluster block 16 or 20 percent of the parcels are vacant, four are possibly vacant, four are for sale, and one is undeveloped.

While these maps and statistics show the unstable housing history of this cluster block, they do not tell the whole story which includes mortgage fraud. According to the FBI mortgage fraud is 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” (Federal Bureau of Investigation, 2007) [1]. Mortgage fraud is further divided into fraud for housing and fraud for profit. Fraud for housing involves “minor misrepresentations by the applicant solely for the purpose of purchasing a property for a primary residence.” Fraud for profit “often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales” (FBI, 2007). How does this happen? Here are three housing histories where fraud probably contributed to the properties’ colorful pasts.

Property A

In 1993 this property was foreclosed and transferred between owners until September of 1995 when Glen and Mattie L. bought the property for $500 or less. At that time they took out a mortgage for $89,644. In 2002 Glen and Mattie L. refinanced their home for $124,950. In 2003 they refinanced for the second time for $186,300. This loan was adjustable rate, starting at 9.35 percent for two years and adjusting up to 15.35 percent. Seven months later on December 5, 2003, the L.s took out a second mortgage for $165,600. This mortgage was also subprime with an initial rate of 9.7 percent for one year adjusting up to 15.7 percent. On May 27, 2004, the L.s received a notice of pendency proceedings about their mortgage refinance of $186,300, and on July 22, 2004, their home was sold at a sheriff’s sale to LaSalle Bank NA. In 2005 the property was resold to a homeowner for $187,000.

While mortgage fraud was not definitely a part of this housing history, it seems likely that fraud for housing occurred. Either the L.s or other parties present in the loan process, including loan agents or appraisers, may well have misrepresented or omitted facts so that the L.s could refinance their property for ever increasing amounts and take out a second mortgage for 185 percent of their initial mortgage.

Property B

In 1996 this property was sold to Patricia H. for an amount less than or equal to $500. In 1998 H. sold the property to Stephen and Melinda C. for $78,000. At that time the C.s took out a mortgage for $58,500. On June 23, 1999, the C.s received a notice of pendency proceedings, and a sheriff’s sale was conducted on August 13, 1999. At that time the deed reverted to Aames Capital Corporation, the C.s’ lender, who then sold it to Home Equity Enhancers LLC for $43,000 on October 9, 2002. Four months later on February 7, 2001, they sold the property to Kirk G. for $80,000. At the time of the sale Kirk G. took out a mortgage for $77,503. On May 30, 2002, one year later, he refinanced for $100,000. On July 3, 2003, he refinanced again for $121,500. G.’s continual refinancing of his property is an example of a type of fraud known as equity stripping. Equity stripping occurs when money is borrowed against a property for personal gain. One unpleasant consequence is that neighboring home values and consequently property taxes are artificially inflated.

On February 5, 2004, Kirk G. received a notice of pendency proceedings against the property, and on April 8, 2004, a sheriff’s sale was held. Five months later on September 2, 2004, Bernard D. took out a subprime mortgage of $135,000. This money was used to pay National City Mortgage Company the $121,500 that Kirk G. owed, preventing the sheriff’s sale from moving to its final phase – property received by the wining bidder. On the same day Bernard D. took out a second mortgage from Kirk G. for the amount of $7,500. Later that month on September 22, 2004, Kirk G. sold the property to Bernard D. for $150,000. On September 6, 2005, approximately one year after D. obtained the property, he sold it back to G. for $500 through a quitclaim deed, an action that “quits” or disclaims any interest in a piece of real property. Not until April 25, 2006, did Bernard D. satisfy his mortgage of $135,000.

This section of Property B’s history is quite confusing. It is unclear in the documentation what the relationship is between G. and D. From the paper trail it would appear that G. made money off the foreclosure process. But the only thing that is clear from this section is that G. and D. were working together to protect G.’s interests. On June 26, 2006, Kirk G. sold the property to Pleasant L. for $183,000. This meant that over the five year period of G. and D.’s combined ownership the property escalated in value from $80,000 to $183,000.

When the property was sold to L. she took out two loans to cover this amount, one subprime mortgage in the amount of $146,400 with First Franklin and one mortgage with Kirk G. for $36,600. This second mortgage appears to be a variant of the popular builder bailout fraud scheme. The builder bailout scheme occurs when a builder is having a hard time selling a property so he or she offers buyers the incentive of a mortgage with no down payment. In this situation the builder will inflate the value of the property 20 percent above what he or she wishes to make so that when the buyer goes to the bank it appears that the buyer has already invested his or her own money, creating equity in the property. If the home forecloses, the lender has no equity in the property, leaving the lender with the foreclosure expenses according to the FBI. In the sale to L. the second mortgage between G. and L. is for $36,600 or 20 percent of $183,000. On August 7, 2007, after approximately one year of home ownership, L. received a notice of pendency proceedings, and on October 4, 2007, the sheriff’s sale was held.

Property C

This was a stable property, owned by the W. family until August 2007 when they sold it to T.M.C. Properties Inc for $57,000. At that time T.M.C. Properties took out a mortgage of $84,210. Two months later on October 17, 2007, the parcel was sold to EG & R Investments LLC for $117,000, and EG & R Investment took out a loan for $120,980. This is an example of property flipping, the most common type of mortgage fraud according to the FBI. Property flipping occurs when a property’s value is inflated and resold for a higher price. In this example the property’s value increased by $60,000 (from $57,000 to $117,000) in two months.

On January 8, 2008, the parcel was sold to Edgar and Raynell F. for $500 or less. At the same time they took out a mortgage on the property for $122,500. On March 4, 2008, EG & R Investment LLC’s mortgage of $120,980 was satisfied. This last transaction is quite interesting because Edgar and Raynell F. purchased the property for $500 or less yet they took out a mortgage for $122,500 making it appear that the F.s took out their loan to pay off EG & G Investment LLC’s mortgage. Since the last sale, the property has featured a homemade “For Sale” sign in the front lawn.

Conclusion

The 21st and Penn Avenue North cluster block has experienced an extremely high turnover rate since 1988. The high turnover rate is partially caused by mortgage fraud. The presence of subprime loans in the neighborhood has also affected the stability of the neighborhood by driving prices up. The trends presented throughout this analysis are common across the Northside of Minneapolis and have had a glaring affect on the area as a whole.

[1] Federal Bureau of Investigation. 2006 Mortgage Fraud Report: http://www.fbi.gov/publications/fraud/mortgage_fraud06.htm which was released in 2007.