A federal bill to improve enforcement of mortgage fraud, securities fraud, financial institution fraud, and other frauds related to federal assistance and relief programs, has been passed by the United States Senate by a majority of 84-4. Senate Bill 386 (S.386) extends the reach of federal fraud laws into mortgage lending and directs nearly $250 million dollars to federal agencies charged with investigating and prosecuting people and institutions who commit real estate and mortgage fraud.

Similar legislation is pending in the U.S. House of Representatives. Both the Senate and House must agree on a final version of the legislation before it can be signed into law, which President Obama is expected to do.

S. 386 broadens the coverage of current laws against financial crimes, including fraud affecting mortgages. Once signed into law by the President, it would authorize the appropriation of $245 million for each of fiscal years 2010 and 2011 for the Department of Justice (DOJ), the Postal Inspection Service, and other federal agencies to investigate and prosecute violators of the bill’s provisions. For each of those years the bill would authorize:

• $75 million for the FBI
• $90 million for offices of the United States Attorneys and the DOJ criminal, civil, and tax divisions
• $30 million for the Postal Inspection Service
• $30 million for the Inspector General for the Department of Housing and Urban Development
• $20 million for the United States Secret Service

S. 386 also would amend certain provisions of the False Claims Act (FCA), which allows private individuals with knowledge of past or present fraud committed against the government to file claims against federal contractors.

Metro Dream Homes (also known as Metropolitan Grapevine LLC, POS Dream Homes, and POS DH LLC) had all the trappings of success — its top officials lived lavish lifestyles, kept a fleet of chauffeur-driven cars, and donated generously to charities. And it used slick marketing to sell its “Dream Homes Program,” which promised to pay homeowners’ mortgages in return for an up-front fee that would be invested in profitable business ventures.

But the dream turned into a $70 million nightmare for more than a thousand investors — among the latest victims of real estate and mortgage fraud.

According to federal grand jury returned on April 22, 2009, and unsealed today, the five people behind Metro Dream Homes and the bogus mortgage payment program — Andrew Hamilton Williams, Jr., 58, of Hollywood, Fla., founder and owner of MDH; Michael Anthony Hickson, 46, of Commack, N.Y., the chief financial officer; Isaac Jerome Smith, 46, of Spotsylvania, Va., the president; and Alvita Karen Gunn, 31, of Hanover, Md., the vice president of operations — were actually running an elaborate deception… one eventually unraveled through the cooperative efforts of federal and state law enforcement agencies.

Here’s how the scam worked:

• Between 2005 and 2007, victims were persuaded into investing at least $50,000 with Metro Dream Homes, either by refinancing their existing homes or buying new homes at inflated prices.
• Investors were told not to worry about high mortgages because Metro Dream Homes would pay their future monthly payments and pay off their mortgages within five to seven years using returns on the homeowner’s original investment. Then the homeowner and Metro Dream Homes would own an equal interest in the home.
• Victims were told that their $50,000—not including an administrative fee of up to $5,000—would be used to fund investments in automated teller machines, flat-screen TV displays that carried commercial advertisements, and Touch-N-Buy electronic kiosks that sold telephone calling cards and other items.
• To make the scam seem more legitimate, the company marketed its program through live presentations at posh hotels in Washington, D.C.; Baltimore; and even Beverly Hills, California.

In the end, it was a classic Ponzi scheme: the proceeds from later investors went to pay the mortgages of earlier investors. The ATM machines, flat-screen TVs, and electronic kiosks never generated any meaningful revenue, federal prosecutors contend.

And the bulk of the money? It lined Williams’, Hickson’s, Smith’s, and Gunn’s pockets — with $200,000-a-year salaries, luxury cars, and travel to major sporting events like the Super Bowl.

By the time law enforcement shut down Metro Dream Homes, homeowners had invested about $70 million. When Metro Dream Homes stopped making the mortgage payments, the homeowners were left holding the bag. The defendants, meanwhile, are facing long prison terms for multiple counts of fraud, conspiracy to commit money laundering, and other charges.

The two owners of a Roseville, Minnesota, real estate company have been sentenced in federal court for mortgage fraud in connection with a scheme involving 162 properties, principally in north Minneapolis, and mortgage proceeds of approximately $35 million. Last week in Minneapolis, MN, U.S. District Court Judge Joan Ericksen sentenced Jonathan Helgason, 46, of Chisago City, and Thomas Balko, 38, of Rogers, MN, to to eight years in prison and seven years in prison respectively.

According to their plea agreements, Jonathan Helgason (a licensed real estate agent) and Thomas Balko were the owners of numerous companies, including TJ Waconia, Total Title LLC, Complete Real Estate Services, Inc. and CityWide Management, LLC and Investor’s Warehouse LLC (the TJ Group).

From approximately 2005 to 2007, Helgason and Balko executed a scheme to defraud and to obtain money by means of false and fraudulent pretenses. Using the TJ Group, Helgason and Balko purchased approximately 162 properties throughout the Twin Cities metropolitan area. They would then resell the property within a few weeks to an investor who would purchase the property, sight unseen, at a price set by Helgason and Balko without negotiation, oftentimes $20,000 to $60,000 more than TJ Group had paid.

According to the plea agreements, people were told by Helgason and Balko that the investors were simply lending their credit to TJ Waconia. In exchange for lending their credit, the investors would receive a kickback payment of about $2,500 and a promise of an additional payment after two years when the TJ Group was to repurchase the property from the investor.

Through the scheme, the defendants perpetrated a fraud on the lenders who were led to believe that the investors were the actual owners of the properties, when, in fact, the investors’ ownership was in name only. During the two-year period during which the investor owned the property, the TJ Group was responsible for all payments and maintenance on the property. In some instances, Helgason and Balko also provided investors with funds to pay the buyer’s portion of the property purchase price and worked with others to provide lenders with false loan applications on behalf of the investors so that they would qualify for the loan, according to the plea agreements.

The two men, on behalf of the investors, obtained approximately $35 million in mortgage proceeds to purchase the properties from the TJ Group. Ultimately, the scheme collapsed, and the TJ Group did not repurchase the properties or continue making payments to the investors in order to pay their mortgages. The investors were left owning properties with mortgages that exceeded their property’s market value.

At the sentencing hearing held last week, Minneapolis City Council President Barb Johnson and Mike Christienson, Director of the Minneapolis Department of Community Planning and Economic Development both testified regarding the significant impact suffered by the city and the community as a result of the fraud.

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The FBI and U.S. Attorney’s Office today announced plans to ramp up efforts to identify and prosecute real estate and mortgage fraud in Oregon. As part of this multi-agency effort, a dedicated e-mail address and telephone tip line have been established to enable the public to report mortgage fraud.

Oregonians can send tips to the FBI at mortgagefraudtips.portland@ic.fbi.gov or call (503) 273-5813.

The FBI says a special Federal Mortgage Working Group in Oregon operating since 2007 continues to tackle the real estate and mortgage fraud issue on multiple fronts. Most FBI investigators assigned to mortgage fraud are working major cases involving multiple suspects, multiple borrowers, and millions of dollars worth of fraudulent loans. Many of these cases involve the falsification of income, liabilities, or employment on applications and/or falsification of appraisals. The task force is also focusing on emerging trends, as analysts predict an even higher number of foreclosures in the future.

Emerging Trends

Foreclosure Rescue Schemes: One of the biggest concerns for consumers now comes in the form of unscrupulous foreclosure specialists. In some cases, desperate homeowners sign over the deed to their home to these so-called specialists, believing that they can stay in the home, make rent payments, and eventually re-purchase their property. In many cases, the rent payments that are supposed to go to the mortgage company never get sent. The specialist simply pockets the payments and any extra fees. The home continues into foreclosure, and the homeowner loses even more money.

Short Sale Scams: A second emerging trend according to the FBI involves short sales scams. In this instance, a buyer purchases a home with no intention of making payments. Oftentimes, additional funds are included in the loan for improvements. The buyer pockets that money and informs the bank several months later that the house will foreclose. The buyer presents a possible pre-foreclosure buyer. This second fraudster makes a deal with the lender to purchase the home below the current loan amount. The lender agrees, not knowing that the mortgage payments were deliberately not made to fabricate a short-sale situation. Sometimes, the new buyer or previous homeowner will damage the house to prove its lower worth. After the deal closes, the fraudster repairs the damage, gets the home appraised at a higher level, and re-sells it for a profit.

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R. Alexander Acosta, United States Attorney for the Southern District of Florida, Michael Fithen, Special Agent in Charge, U.S. Secret Service, Miami Field Office, Daniel W. Auer, Special Agent in Charge, Internal Revenue Service, Criminal Investigation, Duncan Foster, Chief of Police, Coral Springs Police Department, and Sheriff Al Lamberti, Broward Sheriff’s Office, announced that Peter Affatati, 39, of Coral Springs, FL, was sentenced to 13 years in prison in federal court in West Palm Beach for his role in a multi-million dollar mortgage fraud scheme. Affatati was also ordered to pay restitution in the amount of $8.8 million.

Specifically, Peter Affatati was charged with and pled guilty to orchestrating a $40 million mortgage fraud scheme that involved more than 50 residential mortgages, most of them in South Florida. Affatati used nominee purchasers/straw buyers to purchase the homes, then used his company, Assurance Title, to falsify the straw buyers’ employment, income, and asset information to qualify them for large mortgages from institutional lenders.

Upon the funding of the mortgage, Affatati diverted a large portion of the proceeds for his personal benefit.

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The State of Florida unveiled a new website today designed to help homeowners avoid real estate and mortgage fraud-related scams. The website, Florida Mortgage Fraud, provides homeowners and their loved ones with access to current investigations, complaint forms, and tips to identify and avoid a number of different types of real estate and mortgage fraud, including foreclosure rescue fraud.

“Companies and individuals are taking advantage of our homeowners in these tough economic times by preying on their financial situations,” said Florida’s Attorney General, Bill McCollum, in announcing the launch of the website. “If we can increase consumer education and empower people to spot scams and avoid them in advance, we can help decrease the number of victims targeted by this fraud.”

Homeowners can use the site to obtain information about active litigation involving companies the State of Florida has taken action against and can download affidavit forms to fill out if they feel they have been victimized by one of the companies on the list. You can also use the site to access a list of investigations being conducted by the Attorney General’s Mortgage Fraud Task Force to see if a particular company is currently being scrutinized.

The website also features answers to frequently asked questions about real estate and mortgage fraud, consumer tips, and a list of warning signs that a company or an individual might be engaging in foreclosure rescue fraud. Additional resources are also available, including a link to a new Florida Bar website containing information for attorneys and consumers on legal training, housing help workshops and clinics being held in Florida, and information concerning the Florida Bar Lawyer Referral Service and qualified legal aid agencies throughout Florida.

In 2007, Florida’s Attorney General initiated an agency-wide Mortgage Fraud Task Force to address the issues of mortgage and foreclosure rescue fraud. Since then, the Task Force has filed six lawsuits, has settled with seven companies, and is actively investigating more than 50 additional companies under the Foreclosure Rescue Fraud Prevention Act, which took effect October 1, 2008. The Task Force has also reviewed information pertaining to the business practices of more than 200 foreclosure rescue businesses.

The Federal Trade Commission (FTC) has stepped up its efforts in the battle against real estate and mortgage fraud. As I reported in September of 2007 (see “FTC Issues Warning on Mortgage Lenders Ads“), the FTC has long had its eye on deceptive practices within the real estate industry, so it comes as no surprise that the Commission today announced a massive crackdown on suspected fraud and deception by loan modification companies.

The FTC, which administers a wide variety of consumer protection laws, is seeking to halt the proliferation of mortgage relief scams—which, Flipping Frenzy readers know, targets distressed and vulnerable homeowners who are delinquent on their mortgage payments or facing foreclosure—through increased law enforcement, consumer outreach, and close coordination with federal, state, and non-profit partners.

Watch FTC Chairman Jon Leibowitz explaining today’s development:

Specifically, the FTC announced law enforcement actions against five loan modification and foreclosure rescue operations using what it calls “deceptive tactics to market their mortgage modification and home foreclosure relief services,” including firms that marketed their services by giving what the FTC calls “the false impression they were affiliated with the federal government.” Today’s move brings to 11 the number of loan modification and mortgage foreclosure rescue scams brought down by the FTC in the last year.

The FTC also announced today it has sent warning letters to 71 companies who may be deceptively marketing loan modification or foreclosure rescue services. The FTC identified these companies through a nationwide review of Internet and other advertisements and warned these companies that their ads may violate federal law.

The FTC’s five law enforcement actions target what’s what the Commission believes to be perpetrators of mortgage-related scams. According to the FTC, these schemes typically operate in the following way.

• First, they use terms like “guarantee” and “97% success rate” to mislead consumers about the mortgage modification or foreclosure relief services they can provide
• They charge up-front fees for these services—fees legitimate nonprofit organizations do not charge
• They use copycat names or look-alike Web sites to appear to be a nonprofit or government entity
• Often, after collecting the fee, these companies do little or nothing to help consumers, contends the FTC

In each case described below, the FTC is seeking or has already obtained a temporary restraining order to halt the company’s alleged illegal conduct:

• Federal Loan Modification Law Center (FedMod). FedMod markets mortgage loan modification and foreclosure relief services to homeowners who are in financial distress, delinquent on their mortgages, or in danger of losing their homes to foreclosure. According to the FTC’s complaint, FedMod charges consumers from $1,000 to $3,000 in fees for these services, much of which must be paid up-front, but fails in numerous instances to obtain the promised loan modifications. In radio advertisements, the FTC alleges, FedMod induces homeowners to call its toll-free number by misrepresenting that it is part of or affiliated with the federal government, although it is not. According to the complaint, FedMod often fails to answer or return consumers’ calls or provide updates about the status of their loan modifications, and assures consumers that negotiations with their lenders are proceeding when, in fact, little or no effort has been made to contact the lender.
• Bailout.hud-gov.us. According to the FTC’s complaint, defendant Thomas Ryan used a foreign Internet registrar to falsely register two sites – bailout.hud-gov.us and bailout.dohgov.us. The sites were used to entice financially strapped consumers to seek mortgage loan modification services under the guise that the services were associated with, or were actually, the U.S. government, including HUD and the Treasury Department. The FTC alleges that the defendant misled consumers nationwide. A federal district court granted the FTC’s motion for a temporary restraining order which required the Internet Service Provider (ISP) hosting the sites to immediately remove them from the Internet. The FTC and the defendant stipulated to a preliminary injunction prohibiting him from holding himself out as an agency of any U.S., state, or local government, or as being affiliated with any such agency.
• Home Assure d/b/a Expert Foreclosure. In this case, the FTC alleges that the defendants promise consumers facing imminent home foreclosure that they can stop the foreclosure, regardless of the amount the consumer owes his or her lender. The defendants are charged with falsely claiming that they have special relationships with lenders, have helped thousands of consumers avoid foreclosure, and will provide a 100 percent satisfaction money-back guarantee. They typically charge consumers an up-front fee of $1,500 to $2,500 but, the FTC alleges, do little or nothing to help them avoid foreclosure and fail to give refunds when foreclosures are not stopped.
• Hope Now Modifications LLC and New Hope Property LLC d/b/a New Hope Modifications LLC. On March 24, the FTC announced two related cases alleging that the defendants misled consumers about their ability to provide mortgage loan modification and foreclosure relief, and misrepresented that they were affiliated with or part of the HOPE NOW Alliance, the non-profit, HUD-endorsed organization that is a broad-based coalition of credit and home ownership counselors, lenders, and other mortgage market participants. In each case, the court issued a temporary restraining order with an asset freeze and set dates for a preliminary injunction hearing. The New Jersey Attorney General also filed state court actions against both sets of defendants, and those cases are in litigation.

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When I first read about John Pistole’s Congressional testimony before the House Committee on the Judiciary, I figured I’d take an hour or so to read through his testimony myself and summarize it for readers here on Flipping Frenzy. Little did I know that Pistole, who currently serves as the FBI’s Deputy Director, would have so much to say.

Rather than attempt to summarize Pistole’s remarks about real estate and mortgage fraud’s role in our current economic tsunami, here is the Deputy Director’s comments in full (emphasis/bold is of my own doing):

John S. Pistole

April 1, 2009

Good morning Mr. Chairman, Ranking Member, and Members of the Committee. I want to thank you for the opportunity to testify before you today about the Federal Bureau of Investigation’s (FBI) efforts to combat mortgage fraud and other financial frauds. Much the same as the Savings and Loan (S&L) Crisis of the 1980s crippled our economy, so too has the current financial crisis. Many of the lessons learned and best practices from our work during the past decade, such as the Enron investigation, will clearly help us navigate the expansive crime problem currently taxing law enforcement and regulatory authorities.

In the late 1980s and early 1990s, the United States experienced a similar financial crisis with the collapse of the savings and loans. The Department of Justice (DOJ), and more specifically the FBI, were provided a number of tools through the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and Crime Control Act of 1990 (CCA) to combat the aforementioned crisis. As stated in Senate Bill 331 dated January 27, 2009, “in the wake of the Savings and Loan crisis of the 1980s, a series of strike forces based in 27 cities was staffed with 1000 FBI agents and forensic experts and dozens of federal prosecutors. That effort yielded more than 600 convictions and $130,000,000 in ordered restitution.”

However, today’s financial crisis dwarves the S&L crisis as financial institutions have reduced their assets by more than $1.2 trillion related to the current global financial crisis compared to the estimated $160 million lost during the S&L crisis. Mortgage and related corporate fraud were not the sole sources of the current financial crisis; however, it would be irresponsible to neglect mortgage fraud’s impact on the U.S. housing and financial markets.

As the FBI’s Assistant Director for the Criminal Division testified in 2004 before the House Financial Services Sub-Committee:

“If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market. Investors may lose faith and require higher returns from mortgage backed securities. This may result in higher interest rates and fees paid by borrowers and limit the amount of investment funds available for mortgage loans.”

He also noted that the FBI supported new approaches to address mortgage fraud and its effects on the U.S. financial system, to include:

• a mechanism to require the mortgage industry to report fraudulent activity, and
• the creation of “Safe Harbor” provisions to protect the mortgage industry under a mandatory reporting mechanism.

What has occurred has been far worse than predicted. Mortgage fraud and related financial industry corporate fraud have shaken the world’s confidence in the U.S. financial system. The fraud schemes have adapted with the changing economy and now individuals are preyed upon even as they are about to lose their homes. But what is mortgage fraud?

Although there is no specific statute that defines mortgage fraud, each mortgage fraud scheme contains some type of material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.

The FBI delineates mortgage fraud in two distinct areas: 1) Fraud for Profit; and 2) Fraud for Housing. Fraud for Profit uses a scheme to remove equity, falsely inflate the value of the property or issue loans relating to fictitious property(ies). Many of the Fraud for Profit schemes rely on “industry insiders”, who override lender controls. The FBI defines industry insiders as appraisers, accountants, attorneys, real estate brokers, mortgage underwriters and processors, settlement/title company employees, mortgage brokers, loan originators, and other mortgage professionals engaged in the mortgage industry.

Fraud for Housing represents illegal actions perpetrated by a borrower, typically with the assistance of real estate professionals. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding the borrower’s income or employment history to qualify for a loan.

The FBI compiles data on mortgage fraud through Suspicious Activity Reports (SARs) filed by financial institutions and through the Department of Housing and Urban Development (HUD) Office of Inspector General (OIG) reports. The FBI also receives complaints from the industry at large.

While a significant portion of the mortgage industry is void of any mandatory fraud reporting and there is presently no central repository to collect all mortgage fraud complaints, SARs from financial institutions have indicated a significant increase in mortgage fraud reporting. For example, during Fiscal Year (FY) 2008, mortgage fraud SARs increased more than 36 percent to 63,173. The total dollar loss attributed to mortgage fraud is unknown. However, 7 percent of SARs filed during FY 2008 indicated a specific dollar loss, which totaled more than $1.5 billion. Only 7 percent of SARs report dollar loss because of the time lag between identifying a suspicious loan and liquidating the property through foreclosure and then calculating the loss amount. As of February 28, 2009, there were 28,873 mortgage fraud SARs filed in fiscal year 2009.

Fraud Trends

The current financial crisis has produced one unexpected consequence: it has exposed prevalent fraud schemes that have been thriving in the global financial system. These fraud schemes are not new but they are coming to light as a result of market deterioration. For example, current market conditions have helped reveal numerous mortgage fraud, Ponzi schemes and investment frauds, such as the Bernard Madoff scam. These schemes highlight the need for law enforcement and regulatory agencies to be ever vigilant of White Collar Crime both in boom and bust years.

The FBI has experienced and continues to experience an exponential rise in mortgage fraud investigations. The number of open FBI mortgage fraud investigations has risen from 881 in FY 2006 to more than 2,000. In addition, the FBI has 566 open corporate fraud investigations, including matters directly related to the current financial crisis. These corporate and financial institution failure investigations involve financial statement manipulation, accounting fraud and insider trading. The increasing mortgage, corporate fraud, and financial institution failure case inventory is straining the FBI’s limited White Collar Crime resources.

Although there are many mortgage fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders who are part of organized enterprises engaged in Mortgage Fraud for Profit. Industry insiders are of priority concern as they are, in many instances, the facilitators that permit the fraud to occur. The FBI utilizes SAR data to help identify fraud schemes perpetrated by insiders. However, SAR data does not capture suspicious activity identified by the entire mortgage industry. Requiring the entire industry to report suspicious activity would give us a more complete data set to exploit. The FBI is engaged with the mortgage industry in identifying fraud trends and educating the public. Some of the current rising mortgage fraud trends include: equity skimming, property flipping, mortgage identity related theft, and foreclosure rescue scams.

Equity skimming is a tried and true method of committing mortgage fraud and criminals continue to devise new schemes. Today’s common equity skimming schemes involve the use of corporate shell companies, corporate identity theft and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors.

Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers and shell companies, along with industry insiders to conceal their methods and override lender controls.

Identity theft in its many forms is a growing problem and is manifested in many ways, including mortgage documents. The mortgage industry has indicated that personal, corporate, and professional identity theft in the mortgage industry is on the rise. Computer technology advances and the use of online sources have also assisted the criminal in committing mortgage fraud. However, the FBI is working with its law enforcement and industry partners to identify trends and develop techniques to thwart illegal activities in this arena.

Foreclosure rescue scams are particularly egregious in that fraudsters take advantage and illegally profit from other individuals’ misfortunes. As foreclosures continue to rise across the country, so too have the number of foreclosure rescue scams that target unsuspecting victims. These scams include victims losing their home equity or paying thousands of dollars in fees, and then receiving little or no services, and ultimately losing their home to foreclosure. The FBI is again working with our law enforcement and regulatory partners along with industry partners to target, disrupt and dismantle the individuals and/or companies engaging in these fraud schemes.

Proactive Approach to Financial Frauds

The FBI has implemented new and innovative methods to detect and combat mortgage fraud. One of these proactive approaches was the development of a property flipping analytical computer application, first developed by the Washington Field Office, to effectively identify property flipping in the Baltimore and Washington areas. The original concept has evolved into a national FBI initiative which employs statistical correlations and other advanced computer technology to search for companies and persons with patterns of property flipping. As potential targets are analyzed and flagged, the information is provided to the respective FBI field office for further investigation. Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially valued properties are then sold at a higher price to an associate of the “flipper” at a substantially inflated price. Often flipped properties go into foreclosure and are ultimately repurchased for a fraction of their original value.

Other methods employed by the FBI include sophisticated investigative techniques, such as undercover operations and wiretaps. These investigative measures not only result in the collection of valuable evidence, they also provide an opportunity to apprehend criminals in the commission of their crimes, thus reducing loss to individuals and financial institutions. By pursuing these proactive methods in conjunction with historical investigations, the FBI is able to realize operational efficiencies in large scale investigations.

In December 2008, the FBI dedicated resources to create the National Mortgage Fraud Team at FBI headquarters in Washington, D.C. The Team has the specific responsibility for all management of the mortgage fraud program at both the origination and corporate level. This Team will be assisting the field offices in addressing the mortgage fraud problem at all levels. The current financial crisis, however, has required the FBI to move resources from other white collar crime and criminal programs in order to appropriately address the crime problem. Since January 2007, the FBI has increased its agent and analyst manpower working mortgage fraud investigations. The Team provides tools to identify the most egregious mortgage fraud perpetrators, prioritize pending investigations, and provide information to evaluate where additional manpower is needed.

Partnerships

One of the best tools the FBI has in its arsenal for combating mortgage fraud is its long-standing partnerships with other federal, state and local law enforcement. This is not a new tool employed by the FBI. Collaboration, communication, and information-sharing have long been a proven solution to the nation’s most difficult crimes. In response to a growing gang problem, for example, the FBI stood up Safe Streets Task Forces across the country. In response to crimes in Indian Country, the FBI developed the Safe Trails Task Force Program. In response to this new threat, the FBI stood up Mortgage Fraud Task Forces across the country.

Presently, there are 18 mortgage fraud task forces and 47 working groups in the country. With representatives of federal, state, and local law enforcement, these task forces are strategically placed in areas identified as high threat areas for mortgage fraud. Partners are varied but typically include representatives of HUD-OIG, the U.S. Postal Inspection Service, the Internal Revenue Service, FinCEN, the Federal Deposit Insurance Corporation, as well as State and local law enforcement officers across the country.

While the FBI has increased the number of agents around the country who investigate mortgage fraud cases from 120 Special Agents in FY 2007 to currently over 250 Special Agents as of February 28, 2009, this multi-agency model serves as a force-multiplier, providing an array of resources to adequately identify the source of the fraud, as well as finding the most effective way to prosecute each case, particularly in active markets where fraud is widespread. We are pleased to report that the model is working.

Last June, for example, we worked closely with our partners on “Operation Malicious Mortgage” – a massive multiagency takedown of mortgage fraud schemes involving more than 400 defendants nationwide. That operation focused primarily on three types of mortgage fraud: lending fraud, foreclosure rescue schemes, and mortgage-related bankruptcy schemes. Among the 400-plus subjects of “Operation Malicious Mortgage”, there have been 164 convictions and 81 sentencings so far for crimes that have accounted for more than $1 billion in estimated losses. Forty-six of our 56 field offices around the country took part in the operation, which has resulted in the forfeiture and/or seizure of more than $60 million in assets.

In addition to the effort placed in standing up mortgage fraud task forces, the FBI is one of the DOJ participants in the national Mortgage Fraud Working Group (MFWG), which DOJ chairs. The MFWG represents the collaborative effort of multiple Federal agencies and facilitates the information sharing process across the aforementioned agencies, as well as private organizations. Together, we are building on existing FBI intelligence databases to identify large industry insiders and criminal enterprises conducting systemic mortgage fraud.

The FBI is also a member of the President’s Corporate Fraud Task Force which is comprised of investigators from the Securities and Exchange Commission, the Internal Revenue Service, the U.S. Postal Inspection Service, the Commodity Futures Trading Commission, and the FinCEN. The purpose of the Corporate Fraud Task Force is to maximize intelligence sharing between membership agencies and to ensure the violations related to corporate fraud are appropriately addressed. The FBI also participates in the Securities and Commodities Fraud Working Group, a national interagency coordinating body established by DOJ to provide a forum for exchanging information and discussing violation trends, law enforcement issues and techniques. In addition, since April 2007, FBI headquarters personnel have met with representatives from the Securities and Exchange Commission once a month to coordinate the respective Corporate Fraud inventories focused on the current financial crisis and to share intelligence.

Industry Liaison

In addition to its partners in law enforcement and regulatory areas, the FBI also continues to foster relationships with representatives of the mortgage industry to promote mortgage fraud awareness. The FBI has spoken at and participated in various mortgage industry conferences and seminars, including those sponsored by the Mortgage Bankers Association (MBA).

To raise awareness of this issue and provide easy accessibility to investigative personnel, the FBI has provided contact information for all FBI Mortgage Fraud Supervisors to relevant groups including the MBA, Mortgage Asset Research Institute, Fannie Mae, Freddie Mac and others. Additionally, the FBI is collaborating with industry to develop a more efficient mortgage fraud reporting mechanism for those not mandated to report such activity. The FBI supports providing a “safe harbor” for lending institutions, appraisers, brokers and other mortgage professionals similar to the provisions afforded to financial institutions providing SAR information. The “ Safe Harbor” provision would provide necessary protections to the mortgage industry under a mandatory reporting mechanism. This will also better enable the FBI to provide reliable mortgage fraud information based on a more representative population in the mortgage industry.

Lenders are painfully aware that fraud is affecting their bottom line. Through routine interaction with FBI personnel, industry representatives are aware of our commitment to address this crime problem. The FBI frequently participates in industry sponsored fraud deterrence seminars, conferences and meetings which include topics such as quality control and industry best practices to detect, deter, and prevent mortgage fraud. These meetings play a significant role in training and educating industry professionals. Companies share current and common fraud trends, loan underwriting weaknesses and best practices for fraud avoidance. These meetings also increase the interaction between industry and FBI personnel.

Additionally, the FBI continues to train its personnel and conduct joint training with HUD-OIG and industry on mortgage fraud. As a training model, the FBI seeks industry experts to assist in its internal training programs. For example, industry has assisted training FBI personnel on mortgage industry practices, documentation, laws and regulations. Industry partners have offered to assist the FBI in developing advanced mortgage fraud investigative training material and fraud detection tools.

Conclusion

Mr. Chairman, the FBI remains committed to its responsibility to aggressively investigate significant financial crimes which include mortgage fraud. We will continue to work with the Office of Management and Budget, and the Congress to ensure that adequate resources are available to address these threats. To maximize our current resources, we are relying on intelligence collection and analysis to identify emerging trends to target the greatest threats. We also will continue to rely heavily on the strong relationships we have with both our law enforcement and regulatory agency partners.

The FBI looks forward to working with you and other members of this committee on solving this serious threat to our nation’s economy. Thank you for allowing me the opportunity to testify before you today. I look forward to taking your questions.

This is the kind of story you’d expect to hear about on April Fools Day, but sadly it’s true. Michigan’s Office of Financial and Insurance Regulation (OFIR) has ordered an entity claiming to be a mortgage company to cease and desist from doing business. OFIR believes Southfield, MI-based Capita Management Group, through its website, www.capitamanagementgroup.com (which has since been shut down by OFIR has contacted Godaddy.com), was as a legitimate mortgage company in an attempt to steal consumers’ money and identity. The fraudulent company encouraged customers to apply for loans by providing personal information including social security and financial account numbers.

“OFIR will continue to make it our business to put these fake companies out of business,” OFIR Commissioner Ken Ross said. “Michigan consumers need to be on the lookout for these classic advance loans scams, where they are lured into paying upfront fees for services they never get in return.”

OFIR found that Capita was not licensed under the state’s Mortgage Brokers, Lenders and Servicers Licensing Act.

To find out if a mortgage company in Michigan is licensed to do business in the state, contact OFIR toll-free at 877-999-6442 or visit the agency’s website www.michigan.gov/ofir and click “Who We Regulate.”
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