The Financial Crimes Enforcement Network (FinCEN) released its full year 2011 update of mortgage loan fraud reported suspicious activity reports (MLF SARs) that shows financial institutions submitted 92,028 MLF SARs last year, a 31 percent increase over the 70,472 submitted in 2010. The increase can primarily be attributable to mortgage repurchase demands.
Financial institutions submitted 17,050 MLF SARs in the 2011 fourth quarter, a 9 percent decrease in filings over the same period in 2010 when financial institutions filed 18,759 MLF SARs. While too soon to call a trend, the fourth quarter of 2011 was the first time since the fourth quarter of 2010 when filings of MLF SARs had fallen from the previous year. FinCEN also updated its SAR data sets used in the report.
The report also provides clues that there is significant improvement in mortgage lending due diligence since the height of the housing bubble. For example, 40 percent of MLF SAR narratives, where SAR filers provide details of why an activity appears suspicious, indicated the filing institution turned down the subject’s loan application, short sale request, or debt elimination attempt because of the suspected fraud reported in the SAR.
“The FinCEN report shows we’re seeing financial institutions spotting activity that appears to be fraud before it happens and in the process, helping to prevent it,” said FinCEN Director James Freis Jr. “Even though we’re seeing the market work through its backlog of the book of business now in default, FinCEN data is revealing possible fraud that institutions are using to help defeat scammers.”
For instance, in the majority of income fraud-related SARs, filers detected a misrepresentation before funding a loan request, based on record checks during the underwriting process, and declined the application. Additionally, in all of the debt elimination SARs, filers recognized that documents submitted to cancel mortgage obligations or pay off loan balances were invalid, and communicated to customers that their mortgages were still due.
Filers addressed short sales in ten percent of the sample SARs, often in conjunction with appraisal fraud. In the majority of these SARs, filers detected potential “fraud for profit” and stopped the short sale transaction before closing. Several narratives noted red flags in short sale contracts, such as language indicating that the property could be resold promptly. Narratives also often noted low appraisal values, non-arms length relationships between short sale buyers and sellers, or previous fraudulent short sale attempts.
Another SAR described a “fraud for profit” scheme including three short sales, collusion between two realtors, and a “home preservation” firm “representing” both sellers and buyers. The filer declined these short sales and described the “home preservation” firm as potentially involved in a foreclosure rescue scam.
One short sale “fraud for profit” scheme involved collusion between the same buyer and seller on several properties. The buyer also owned the real estate agency handling the sales. When the filer first rejected the short sale transactions due to these conflicts, the subjects changed the contracts to indicate that several limited liability companies (LLCs) were the buyers. The filer also rejected these changes, noting that the LLCs lacked current state registrations.
One SAR described an attempted short sale on a luxury property where the filer noted “common flip verbiage” in the sales contract and discovered that the “buyer’s agent” was not a licensed realtor. In addition, the filer knew the buyer due to misrepresentations on several past short sale attempts. In supporting a short sale purchase price 90 percent below the property’s value at the market peak, the buyer insisted that the home itself was worthless, but the land still had value. The filer rejected the bid based on its own appraisal results, and rejected a subsequent higher bid from the same subject.
In 2011, 84 percent of reported activities occurred more than two years prior to filing, compared to 77 percent in 2010. In 2011 fourth quarter, 80 percent of reported activities occurred more than two years prior to filing, compared to 82 percent in 2010 fourth quarter.
FinCEN also released per capita rankings of MLF SARs subjects by state and by county. The top five counties ranked per capita and by MLF SAR subjects in 2011 were Santa Clara County, Calif.; Orange County, Calif., Riverside County, Calif., Broward County, Fla. and, Los Angeles. The top five states ranked by per capita and by SAR subject in 2011 were: California, Hawaii, Florida, Nevada, and the District of Columbia (D.C. is counted as a state for purposes of this report.)