U.S. Attorney A. Brian Albritton has announced that Robert Policastro has been sentenced to five years and three months in federal prison for conspiracy to commit mail and wire fraud (mortgage fraud). The court also entered a monetary judgment in the amount of $9,082,394.20, the proceeds of the mortgage fraud conspiracy. Policastro had pleaded guilty on May 17, 2010.

According to court documents, Policastro, who was an architect, conspired with a Florida licensed title agent to commit mortgage fraud. Policastro took out primary loans to buy several million-dollar properties in Miami, and then, without the knowledge of the primary lender, obtained a “silent second” loan on each property. The “silent seconds” financed Policastro’s downpayments for the properties and allowed him secretly to take money out of the deals. To hide the “silent seconds,” the title agent prepared false, “dueling” HUD-1s to send to both the primary and the “silent second” lenders so that each was unaware that Policastro had obtained two loans on each property. The loans were closed in Pinellas County.

This case was investigated by Federal Bureau of Investigation. It was prosecuted by Assistant United States Attorney Thomas N. Palermo.

This case is a part of the Middle District of Florida’s Mortgage Fraud Initiative, a joint effort by the U.S. Attorney’s Office and federal, state, and local law enforcement agencies throughout the Middle District of Florida. It is a “Phase II” case, brought following the initial wave of Mortgage Fraud Initiative prosecutions, the Mortgage Fraud Surge, which occurred over ten months in 2009 and netted more than 100 defendants. Phase II of the Mortgage Fraud Initiative seeks to build upon the Surge, expanding upon surge leads and techniques to uncover and prosecute increasingly complex mortgage frauds.

Strongly recommended reading from a very well respected colleague… Ann Fulmer of Interthinx (courtesy of National Mortgage News Online):

What Goes Around…

By Ann Fulmer, VP of Industry Relations, Interthinx

The mortgage lending landscape has changed dramatically in the past few months. Dozens of lenders have gone out of business, tens of thousands of workers have lost their jobs and tighter underwriting guidelines are reducing origination volume. Under these circumstances, someone might conclude that mortgage fraud would also be declining.

That would be completely wrong.

The majority of fraudsters are industry insiders who leverage their knowledge to take advantage of weaknesses in lenders’ processes and defenses. Thus mortgage fraud does not disappear during the “down” portion of the mortgage cycle, it just morphs to take advantage of current market conditions. If your company is still in business and originating mortgage loans, it is a target. The question is will your staff recognize a fraudulent application if it sees one?

I ask that question because a friend, who recently took over as the underwriting manager at a community bank, told me that she was teaching her staff to examine disbursements from the seller’s proceeds when one of the employees asked her why they should bother since the money belonged to the seller. My friend explained that mortgage fraudsters use bogus claims and liens against the seller as a way to extract loan proceeds. The employee retorted that their department had never, ever, been hit by fraud. What is much more likely is that these employees simply didn’t recognize fraud because their institution had not been a primary target during the expansion phase of the real estate/credit bubble.

This lack of fraud recognition is not limited to employees of smaller lending institutions. It also plagues some so-called financial experts. For example, last year, I was driving down the road listening to the radio show of a nationally syndicated consumer advocate. A caller told the advocate that his house was for sale, that someone had offered him $100,000 more than the asking price, and could the advocate please tell him how he should respond? The expert said, “I have no earthly idea why someone would offer you more than your asking price.” I nearly drove off the road because I was screaming at the top of my lungs, “I do! It’s mortgage fraud!”

But I digress.

With lenders returning to more old-fashioned underwriting standards and requiring full documentation, W-2s, higher FICO scores and higher downpayments, “old” frauds are on the rise. So, it’s not surprising that Interthinx investigators and clients are reporting an increase in “silent seconds” and self-employed borrowers. The Interthinx F.R.A.U.D. Report shows that income and employment misrepresentations in new applications doubled between the first and second quarters of this year, and that there are still significant rates of misrepresentation regarding collateral value even in this declining market.

Just as the use of utility and phone records for no-file or thin-file borrowers won’t ensure credit worthiness, requiring full documentation will not stop fraud. In both cases, the required documents are easily forged.

In addition to training staff in the use of automated fraud detection technology to spot “silent seconds,” false collateral values, identity theft and occupancy issues, underwriters must also be able to recognize forgeries and credit profiles that don’t match the borrower’s income, especially when the borrower represents self-employment.

Unfortunately, the old adage, “What goes around, comes around” is all too true. If the industry is content to ignore certain types of mortgage fraud or take a less than aggressive approach to training and automated detection designed to prevent mortgage fraud in the pre-funding stage, then the financial fallout that is sure to follow will bring even more job losses and company closures.

The decision rests with each of us. The time to act is NOW.

When you apply for a mortgage loan to purchase a home, your loan officer or lender gathers financial information from you and plugs it into a program that analyzes the loan’s relative level of risk. The information you supply includes your monthly or annual income, the total value of your assets (cash, savings, retirement, cars, any other property you own, etc.), and any other loans you may owe on. If the information you provide qualifies you as a low-risk borrower, the lender can afford to offer you a few perks, including a hassle-free loan approval, lower interest rate, and not requiring you to purchase mortgage insurance.

Banks and other lending institutions hedge their bets on statistical models that assess risks, and one factor they consider in that model is the down payment. Statistics show that borrowers who can afford a down payment of 10 percent or more are less likely to default on the mortgage than borrowers who cannot afford a 10 percent down payment. And if you are one of the unfortunate masses who cannot come up with that 10 percent down payment, you may find yourself either not being able to qualify for a mortgage loan or having to pay extra in interest and for mortgage insurance.

To get around the down-payment requirement, some real estate insiders are guiding homeowners or home buyers to bend the rules a bit—they use a silent second mortgage (or “silent second,” for short) to cover the down payment. A silent second mortgage is a mortgage loan from another lender or a seller held second, that covers the down payment but is not disclosed to the first mortgage lender. The silent second essentially fools the lender into thinking that you are a low-risk borrower and really could afford the down payment. It is a somewhat subtler form of Real Estate and Mortgage Fraud.

Now, many people attempt to justify the practice of silent seconds by saying, “There is nothing silent about the mortgage. I know about it, the person lending me the money for the silent second knows about it, and the bank that is lending me the money for the first mortgage is getting its required 10 percent down payment, so what is the problem?”

Well, several problems accompany silent second scenarios.

• First, by using a silent second, you are borrowing 100 percent of the home’s value. If house values dip or you fail to properly maintain the property, it could quickly become worth less than you owe on it. If you default on the loan, the bank stands to lose money.
• Second, it falsely qualifies you for perks that you do not legitimately qualify for, such as not having to pay mortgage insurance.
• Third, it misleads the lender into approving a loan application it may have rejected had you provided accurate financial information. It is an additional debt with a repayment schedule that the lender does not know about.

Whenever you apply for a loan, you are required to sign a Uniform Residential Loan Application, often referred to as a 1003 (ten-oh-three) stating that the information you provided on the loan application is accurate and complete. Omitting a “minor” detail, such as a silent second you took out to cover the cost of the down payment, would make you guilty of committing Mortgage Fraud—a felony. No matter how harmless it may seem, no matter how many other people are doing it, it is still fraud, so don’t do it.

What if your relatives loan you the money? If they loan you the money, you are still fall in the silent second scenario. Now if they give you the money, you are safe and have committed no crime.

Remember, whenever you fail to disclose information to a lender that may compromise your ability to obtain loan approval, whatever the reason, it results in deceiving the lender and failing to honor the letter and the spirit of the law.