HOC PPT (3)
.pptx
School
Boston University**We aren't endorsed by this school
Course
QST PL 360
Subject
Economics
Date
Dec 17, 2024
Pages
23
Uploaded by CorporalGoatPerson1222
A House of CardsUnderstanding Mortgage Fraud
A HOUSE OF CARDSMeet Toby GrovesFounder and president of Groves Funding Corp.The co-mingling of his client accounts with his business accounts resulted in approximately $250,000 losses to the clients.
A HOUSE OF CARDSGroves Funding Corp.Toby began working as a mortgage broker. Groves Funding put together mortgage packages for home buyers and expanded into mortgage lending.Business expanded into the mortgage lending business.The business made loans to home buyers with the goal of selling the closed loans at a profit on the secondary mortgage market.
A HOUSE OF CARDSHistory of the Mortgage IndustryIn the 1800s-1900s, home buyers were required to put down 50% of the cost of a home.Many people could not afford this upfront cost.President Roosevelt established the Federal Housing Administration (FHA) as a result of the Great Depression.Created to insure mortgage lenders against losses from defaults.
A HOUSE OF CARDSHistory of the Mortgage IndustryThe government established the Federal National Mortgage Association (FNMA) in 1938.Known as “Fannie Mae”$1 billion in fundingDesigned to increase liquidity in the mortgage market.Created the secondary mortgage market.Created an efficient, fair, and stable system for home loans that worked well for decades.
A HOUSE OF CARDSHistory of the Mortgage IndustryBy 1970, there was a concern about lack of competition in the mortgage industry.In response, the federal government created a new GSE called the Federal Home Loan Mortgage Corporation (Freddie Mac) to provide for more competition in the secondary mortgage market.Freddie Mac concentrated on buying loans from savings and loan association institutions.
A HOUSE OF CARDSTypes of MortgagesFixed term mortgagesRequired a certain sized down payment in relation to the value of the loan (called the loan to value rate).Adjustable Rate Mortgages (ARMs)The interest rate on an ARM loan is adjustable depending on various economic indicators.Buy-downsThe seller subsidizes the borrower for short period of time.
A HOUSE OF CARDSTypes of MortgagesGraduated Payment Mortgages Start with low payments that rise over time.Negative Amortization Loans The payment is less than is needed to pay off the loan over time and so, the loan gradually gets larger over time.Subprime mortgagesLoans made to people who would not normally qualify for regular loans because of their inadequate credit.
A HOUSE OF CARDSWarehouse Line of CreditSome mortgage brokers began to originate their own loans, using what is called a warehouse line of credit.They became short-term lenders.They would borrow from their warehouse line of credit and fund a mortgage loan for a home buyer, and then sell the loan on the secondary market (e. g., to Fannie Mae) for a profit.
A HOUSE OF CARDSNew Mortgage ProductsMortgage Backed Security (MSB)Introduced in 1970.Also known as a “Pass Through” security.Based on a collection (“pool”) of mortgagesThe MSB is usually put together by a bank or government agency, such as Fannie Mae and then sold to investors.
A HOUSE OF CARDSNew Mortgage ProductsCollateralized Mortgage Obligations (CMOs)Introduced in 1983A CMO is a collection of mortgage backed securities that is divided into different classes (also called “tranches”) based on the creditworthiness of the borrowers and that is offered for sale by what is called a special purpose entity.
A HOUSE OF CARDSNew Mortgage ProductsSpecial purpose entity (SPE)The SPE sells bonds based on the different classes in the CMO, with the bonds paying different rates depending on the creditworthiness of the mortgages that make up each particular class.If enough borrowers in any of the tranches default on their loans, then the CMO becomes worthless and investors lose some or all of the money they have invested in the bond.
A HOUSE OF CARDSThe OffenseToby and his company were not prepared for the move into mortgage banking.Many of the loans that they wanted to sell on the secondary market had problems, such as missing or incorrect documentation.The loans could not be sold on the market for a profit.
A HOUSE OF CARDSThe OffenseToby’s company was losing money that belonged to his clients. Funds that had been placed into escrow to cover insurance premiums and taxes was being used to cover ordinary business expenses.Resulted in approximately $250,000 losses to the clients.
A HOUSE OF CARDSThe Offense Toby decided to apply for a “no income qualifier” loan for himself using his warehouse line of credit.Misstated his income on the application.He could have reported losses, but was concerned about his reputation.Ended up more than $1 million in debt.
A HOUSE OF CARDSThe UnravelingTo continue to get loans, Toby also had to rely on other people and companies in the real estate industry to help him falsify documents as he began to create documents to get loans on entirely fictitious homes.Someone blew the whistle on Toby in 2006.
A HOUSE OF CARDSAnalysis of the CaseToby was motivated by a fear of failing.Toby’s situation became a “slippery slope offense”.The offender does not have a grand plan to engage in a large scale criminal offense.The initial offense is viewed as a temporary and short term solution to a crisis that the offender is experiencing.
A HOUSE OF CARDSAnalysis of the CaseToby’s ability to continue his offense for several months was facilitated by two factors:Little to no oversight of his actions.Willing cooperation of others in the industry.
A HOUSE OF CARDSWhite-Collar Crime CharacteristicsWhite-collar offenders have legitimate access to the target of their illegal activities because of their occupational positions.The illegal actions of a white-collar offender have a superficial appearance of legitimacy.White-collar offenders are often spatially separated from their victims.
A HOUSE OF CARDSOther Mortgage Related CrimesPredatory Lending to Subprime BorrowersMortgage brokers and lenders would use fraud and deceit to conceal the true cost of the loans to the borrower.Homebuyers were tricked into taking on loans that they could not afford and for more expensive homes than they needed.
A HOUSE OF CARDSOther Mortgage Related CrimesIllegal Property FlippingUsually involves a team of insiders, such as mortgage brokers, real estate agents, appraisers, and settlement agents. How it works:Insiders use a straw buyer to purchase a home.Put back on the market at an artificially inflated price that is supported by a fraudulent appraisal.The house is eventually sold to an unsuspecting home buyer and the insiders pocket the profit.
A HOUSE OF CARDSOther Mortgage Related CrimesIdentity TheftCriminals obtain someone’s personal information and use it to take mortgage financing on the victim’s home.After getting their money, the criminals then default on the loan.
A HOUSE OF CARDSConclusionsNot all white-collar crimes are motivated by a desire for gain. They are often motivated by a desire to avoid a loss.White-collar crimes are almost always based in or part of legitimate business activities.This feature makes them difficult to detect and control.Social, economic and regulatory conditions can create a perfect storm for white-collar offenses to occur.