Mortgage Fraud: Fraud for Profit and Fraud for Housing

Criminal Defense Expectations of Increased Mortgage Fraud Prosecutions in Texas

The Dallas-Fort Worth metroplex is one of the top residential real estate markets in the country today, and the popularity of buying homes here – usually with a mortgage – is predicted to be “particularly attractive” this year.  For details, read “The 12 hottest housing markets in 2022,” written by Paul Centopani and published on November 24, 2021 in the National Mortgage News, where the DFW area is listed as seventh (7^th) in the country for residential home lending.

Rising Popularity of Mortgage Fraud in Coming Decade

From a Texas criminal defense perspective, this economic forecast comes with a corresponding prediction there will be an even more aggressive jump in mortgage fraud scenarios.  It’s not just criminal defense lawyers who think so:  a continued rise in mortgage fraud is predicted by economists and real estate industry experts to continue in 2022 onward into 2029.  See, discussion regarding the latest Global Mortgage Application Fraud Market Research Report published by MarketWatch on April 20, 2022.  Also note that CoreLogic’s Mortgage Fraud Risk Index reports a 15% jump in mortgage fraud from the first quarter of 2021 to the first quarter of 2022.

Why?  Mortgage fraud is big business here in Texas, across the United States, and around the world.  An expanding residential real estate market comes with its temptations.  So, for this year (and in the years to come), law enforcement as well as criminal defense attorneys practicing in both state and federal court are revving up for a substantial increase in investigations, arrests, indictments, prosecutions, and convictions for serious felony fraud charges involving residential mortgages.  Banks – i.e., Financial Services Organizations (FSOs) — have been warned, as well, by the American Bar Association.

Law Enforcement Going After Mortgage Fraud

At every level of government, the concern about growing fraud involving residential mortgages is so great that specific actions have been taken to go after suspected fraudulent transactions for arrest under either state or federal law.  Lots and lots of agents and officers, ADAs and AUSAs, are dedicating significant time to dredging out all kinds of mortgage fraud here in Texas and elsewhere.

FBI Announces Federal Focus on Mortgage Fraud Investigations

The Federal Bureau of Investigation (FBI) has announced on its website that one of its particular areas of interest involves mortgage fraud investigations.  From the FBI:

“The FBI is committed to aggressively pursuing those who endanger the stability of our banking system and the safety of assets and personal information the public has entrusted to its care….

“[Mortgage fraud] is crime characterized by some type of material misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by a lender. A lie that influences a bank’s decision—about whether, for example, to approve a loan, accept a reduced payoff amount, or agree to certain repayment terms—is mortgage fraud.

 The FBI and other entities charged with investigating mortgage fraud, particularly in the wake of the housing market collapse, have broadened the definition to include frauds targeting distressed homeowners.”

Moreover, the federal agents are open to working with other investigators, either at sister federal agencies (think Fannie Mae, for instance) or those at the state or local levels:  “[t]he FBI seeks to maximize its impact on the mortgage fraud and financial institution fraud as a whole thorough collaboration.”

Texas is Also Targeting Mortgage Fraud Cases

Obviously, Ken Paxton as the Attorney General for the State of Texas has assigned specific state assistant attorneys general to pursue mortgage fraud matters.  Other state agencies involved in the fight against mortgage fraud include the Texas Department of Savings and Mortgage Lending.  Online, the Office of the Attorney General’s Consumer Protection Division provides the opportunity to report possible mortgage fraud for state investigation using a free online complaint  form.

However, the incentive isn’t limited to Austin.  Local district attorneys are also getting involved.  One example:  the Collin County District Attorney’s Office’s Special Crimes Division is targeting mortgage fraud prosecutions within Collin County.  For more, read, “Collin County’s Mortgage Fraud Squad and ‘Operation Stolen Dreams’” published by Laws in Texas on May 11, 2021. 

Another example:  the Tarrant County Clerk’s Office has set up a free online automated reporting form for anyone concerned with possible fraud, noting that “… property and mortgage fraud is the fastest growing white-collar crime in the United States.”

Types of Mortgage Fraud

There are a variety of types of mortgage fraud, and as the years pass new and clever versions will undoubtedly be developed.  What is it, essentially? The Texas Department of Banking defines mortgage fraud broadly as “…a person intentionally or knowingly makes a materially false or misleading written statement to obtain a mortgage loan.”

Of course, criminal defense lawyers experienced in fraud matters are prepared to advocate for those accused of any type of mortgage fraud, at either the state or federal level.  However, defense attorneys forecast that most prosecutions in the near future will involve what the FBI considers to be the “two distinct areas of mortgage fraud—fraud for profit and fraud for housing.”

1.       Mortgage Fraud for Profit

Those accused of this type of fraud – mortgage fraud for profit – are usually white-collar professionals whose work involves some aspect of the residential mortgage financing process.  Investigations can involve not only employees and officers of FSOs (banks, savings & loans, credit unions, etc.), but real estate appraisers, mortgage brokers, title company employees, and even real estate attorneys.  Key here is the expertise and industry knowledge of the accused: they will have the ability or authority, and/or the acumen and detailed knowledge of completing residential mortgage transactions.  There may be a team effort here, with what the authorities call “collusion” between several individuals to get deals done.

The goal of mortgage fraud for profit is money.  These transactions are done in order to get cash and/or equity for the participants that comes from the lenders (FSOs) and/or the homeowners.

2.       Mortgage Fraud for Housing

Home loan borrowers and residential mortgage loan applicants are the targets of fraud investigations when mortgage fraud for housing is involved.  Usually, there isn’t a team or organization involved that is targeted by law enforcement.  Instead, those who have signed on the loan documents are investigated for the accuracy of their information.

Fraud for housing happens when that loan documentation information does not jive with data compiled by the investigators.  Arrests can be made if there are different amounts for things like gross income, net income, fair market value of assets, or the appraised value of the property subject to the pending loan.

The goal of mortgage fraud for housing is ownership of the property.  These transactions are done in order to get financing for a home, condo, townhouse, etc., that the applicant otherwise would not be able to finance.

Common Mortgage Fraud Schemes Targeted by Law Enforcement

Mortgage fraud prosecutions across the country have been studied and categorized into several popular plans or “schemes” that tend to be used, often because they are successful and easy to do.  Among them, as described by the FBI, are (this is not a complete list):

• Air Loans. Here, real estate brokers with vivid imaginations make up both borrowers and real estate properties, and set up accounts to take payments as well as escrow accounts.  These can be big operations where a web of phone numbers, email addresses, websites, etc.  is created for phony employers; appraisers; etc. that can respond should anyone decide to check on the fraudulent loan applications.
• Silent Second. A buyer borrows the down payment for their mortgage loan from the seller of the home who asks for a second mortgage in exchange for it.  The seller does not record the second mortgage.  Meanwhile, the primary lender thinks the buyer has provided the down payment from cash funds (savings).
• Equity Skimming. Here, a straw buyer is used to get the mortgage loan.  For more on these tactics, read our earlier discussion on the use of straw buyers in Mortgage Fraud “Straw Buyer” Cases Are Major Target of Federal Fraud Investigations.
• Illegal Flipping. A buyer purchases a home and then has it fraudulently appraised at a much higher market value and sells ( ”flips” ) it.  Federal agents will be looking for lots of things in documentation here aside from the hiked value, such as inflated buyer income and kickbacks to title company employees, real estate appraisers, etc.

Mortgage Fraud Criminal Statutes: State and Federal Felony Penalties

Both federal and state law forbids mortgage fraud through specific statutes.  These laws impose felony punishments in most instances upon conviction.  They are also broad umbrellas to be used by prosecutors who, upon conviction, can argue for the accused to be sentenced to decades behind bars and (in federal court) up to $1,000,000 in monetary fines.

Federal Law – Mortgage Fraud

The Fraud Enforcement and Recovery Act of 2009 (FERA), 18 U.S.C. 1014, makes it illegal for anyone to knowingly make false statements or omissions with the intent to defraud a mortgage lender. Often, federal prosecutors will add additional charges, based upon independent criminal statutes, to the indictment.

Texas Law – Mortgage Fraud

Under Texas law, mortgage fraud is made illegal by several state statutes, including the following:

Texas Penal Code Section §32.32:  FALSE STATEMENT TO OBTAIN PROPERTY OR CREDIT OR IN THE PROVISION OF CERTAIN SERVICES.

(a)  For purposes of this section, “credit” includes: (1)  a loan of money; (2)  furnishing property or service on credit; (3)  extending the due date of an obligation; (4)  comaking, endorsing, or guaranteeing a note or other instrument for obtaining credit; (5)  a line or letter of credit;(6)  a credit card, as defined in Section 32.31 (Credit Card or Debit Card Abuse); and

(7)  a mortgage loan.

(b)  A person commits an offense if he intentionally or knowingly makes a materially false or misleading written statement to obtain property or credit, including a mortgage loan.

(b-1)  A person commits an offense if the person intentionally or knowingly makes a materially false or misleading written statement in providing an appraisal of real property for compensation.

Texas Finance Code §343.105: NOTICE OF PENALTIES FOR MAKING FALSE OR MISLEADING WRITTEN STATEMENT.

 (a)  A lender, mortgage banker, or licensed mortgage broker shall provide to each applicant for a home loan a written notice at closing.

(b)  The notice must:

(1)  be provided on a separate document;

(2)  be in at least 14-point type; and

(3)  have the following or substantially similar language: “Warning: Intentionally or knowingly making a materially false or misleading written statement to obtain property or credit, including a mortgage loan, is a violation of Section 32.32, Texas Penal Code, and, depending on the amount of the loan or value of the property, is punishable by imprisonment for a term of 2 years to 99 years and a fine not to exceed $10,000.

“I/we, the undersigned home loan applicant(s), represent that I/we have received, read, and understand this notice of penalties for making a materially false or misleading written statement to obtain a home loan.

“I/we represent that all statements and representations contained in my/our written home loan application, including statements or representations regarding my/our identity, employment, annual income, and intent to occupy the residential real property secured by the home loan, are true and correct as of the date of loan closing.”

(c)  On receipt of the notice, the loan applicant shall verify the information and execute the notice.

(d)  The failure of a lender, mortgage banker, or licensed mortgage broker to provide a notice complying with this section to each applicant for a home loan does not affect the validity or enforceability of the home loan by any holder of the loan.

Severe Punishment Upon Conviction of Mortgage Fraud

Significant time periods of imprisonment can happen to anyone convicted of mortgage fraud in either federal or state court.  Given today’s residential real estate prices, mortgage fraud may result in very serious felony convictions.  Consider, for instance, that Texas Penal Code §32.32(c) allows for felonies tied to the amount of the mortgage involved, as follows:

• State jail felony for mortgage $2,500- $30,000;
• A felony of the third degree for mortgage $30,000 – $150,000;
• A felony of the second degree for mortgage $150,000 – $300,000; and
• A felony of the first degree got mortgage of $300,000 or more.

Things are even tougher in federal court.  Under federal law, 18 U.S.C. 1014 provides a sentencing range upon conviction of: (1) up to 30 years’ incarceration in a federal prison facility and (2) up to $1,000,000 in monetary fines, or (3) both, as well as (4) restitution.  In each case, the individual case sentencing will be determined by the federal judge at the federal sentencing hearing pursuant to the United States Sentencing Guidelines.

• For more, read: Loss Amounts in Federal Sentences: Calculating Economic and Financial Losses in Federal Felonies and Restitution Under Federal And Texas Law: Criminal Defense Overview.

Defenses to Mortgage Fraud Charges

When an experienced fraud defense attorney agrees to represent someone facing investigation or actual charges of mortgage fraud, particularly fraud for profit or fraud for housing, an extensive effort must be made into the factual circumstances of the particular case.

Not only does the fraud defense lawyer interview people who may have knowledge of relevant facts pertaining to the subject transactions, there will also be the need to track down a great deal of paperwork, including things like:

• History of loan applicant’s income;
• Documentation supporting income stated on the loan application(s);
• Records of all deposits and down payments regarding the transaction(s);
• Any recorded verifications of income or down payment;
• Any and all loan applications, including those not completed or submitted;
• Record titles for the property(ies) in question;
• Deeds of trust and mortgage deeds for the property(ies) in question;
• Any and all title opinions;
• Federal Income Tax Returns (the State of Texas does not have an income tax); and
• All communications made regarding the transaction, including phone records and text messages along with e-mails, formal letters and notices, etc.

Afterwards, the defense lawyer will deep dive into the file compiled by law enforcement as provided by law by the prosecution.  From all these efforts, legal defenses will be researched that can include:

1. Mistake – an honest mistake lacks the necessary intent to commit fraud and cannot support a conviction under federal or state fraud laws;
2. Identity Theft – as cybercrimes become more commonplace, the possibility that the accused has been the victim of hacking and identity theft may create a legal defense to the charges presented; see, Fraudulent Use Or Possession Charges In Texas: Identity Theft And Fake Credit Cards; and
3. Constitutional Rights Violations – both state and federal law enforcement must abide by the constitutional protections of due process, including proper search and seizure laws, as found in the Fourth Amendment. Disrespect of constitutional provisions can result in the defense filing motions to suppress evidence or even motions to dismiss the case in its totality.  See, What is a Motion to Suppress? and Challenging the Search Warrant in Texas: Illegal Search and Seizure.

Criminal Defense for Texas Mortgage Fraud Investigations and Arrests

Mortgage fraud is going to be a big issue for law enforcement over the next several years.  Anyone who is suspicious that someone from local, state, or federal law enforcement is looking into their potential involvement in mortgage fraud, especially (1) mortgage fraud for profit or (2) mortgage fraud for housing, should consider aligning themselves with an experienced fraud criminal defense attorney as soon as possible.

How will you know?  Sometimes, it’s a gut call or overheard rumors or gossip that a criminal investigation is underway.  However, there are times when it’s not really up for debate.  You may learn about a pending investigation by an official letter sent to you.  Read: Federal Investigations:  Target Letters, Proffers, and Plea Deals.

Mortgage fraud charges are serious matters that can result in felony convictions with significant time behind bars and the potential for substantial financial consequences.  Having a criminal advocate to argue your rights on your behalf in these matters, given the zealous and dedicated efforts being undertaken against mortgage fraud today, can be vital for you and your loved ones.

For more information on mortgage fraud and white-collar crime investigations, read:

• Financial Institution Fraud (FIF): Criminal Defense Overview;
• FBI Investigations and DOJ Prosecutions: Fighting for Your Privacy Rights;
• Mortgage Fraud Investigations Finally In the Limelight: Expect to See More Federal Mortgage Fraud Charges in the Future; and
• White Collar Crime: Indictments of Texas Professionals.

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For more information, check out our web resources, read Michael Lowe’s Case Results, and read his in-depth articles,” Pre-Arrest Criminal Investigations”  and “10 Questions to Ask Before You Hire a Criminal Defense Lawyer.“