FIU case study: Condominium conversion bailout and investment property scheme
Mortgage fraud is all over the news once again. With fewer loan originations, new technological advancements and borrowers facing unprecedented economic difficulties, the mortgage industry is seeing an increase in fraudulent activity. Data analysis by the Mortgage Asset Research Institute (MARI®), a LexisNexis® service, reveals that fraud is at an all-time high, comprised of misrepresentations and multiple verification-oriented issues.
Freddie Mac remains committed to helping the mortgage industry fight fraud and our Fraud Investigation Unit (FIU) is at the forefront of all our efforts. FIU helps identify and prevent fraudulent mortgage schemes and creates awareness of fraud trends among industry constituents.
FIU case study
In past issues of Single-Family News, we featured a series of articles that covered condominium conversion bailouts, fraudulent investment properties, illegal property flips, affinity fraud, and straw buyers. Below is another example from an actual case involving these issues that was investigated by Freddie Mac.
The set up
An individual purchased distressed multi-unit apartment-style properties (duplexes, triplexes, etc.), and converted the apartments to condominiums. The properties were then flipped and sold at inflated values to local and out-of-state buyers as investment properties.
The buyer/borrowers were told that:
- The properties would be long-term rental properties and would be managed to ensure cash flow from rental payments for the mortgage payments.
- The mortgage loans were to be no-income loan applications, but high FICO scores were needed.
- They would receive instant equity in the units.
- No down payment was required to purchase the properties.
The end result
- Lenders were told that the borrowers were purchasing the units as second homes. In some instances, the borrowers purchased up to 8 "second homes" within a 2-3 mile radius and all within a 1-2 month timeframe.
- The same loan officer originated the multiple "second home" loans.
- Loan applications contained misrepresentations.
- The HUD-1 Forms for the subject loans falsely stated that the borrowers provided cash at closing to purchase the properties.
- The same appraiser was used to provide inflated property values.
- There was no property management or maintenance provided as originally promised.
- Tenants were placed in the properties, but because the perpetrator pocketed the rental income, the borrowers did not receive the rent money to make mortgage payments and they became delinquent.
- The lenders ended up with non-performing loans that were "upside down" (loans that are higher than the value of the property) because the original values were inflated and the borrowers never actually made the down payment.
Important Freddie Mac fraud prevention resources
Leverage the following resources that provide more information on dealing with fraud:
- Freddie Mac Fraud Hotline: 800 4 FRAUD 8
- Freddie Mac's Quality Control Resources and Fraud Prevention Web site