Fraud on the home front: Spotting and stopping mortgage scams and schemes

To his victims, many elderly, Michael “Mickey” Henschel might have seemed like the homeowner’s hero, rescuing people over their heads on their mortgages.

In reality, Henschel was not an angel of home possession but rather a devil possessed. In May, the 70-year-old career con man from Van Nuys, California, pleaded guilty in a federal court to netting nearly $20 million in ill-gotten gains from his mortgage scams, while costing homeowners about $10 million.

According to court documents, Henschel—who used various aliases, including “Frank Winston,” “Steve Lopez” and “Ron Berman”—worked with co-conspirators to trick distressed homeowners into signing fraudulent property deeds. His lure: false promises that the deeds would shield their properties from creditors.

The bogus deeds allowed Henschel and the others to fraudulently file documents on the titles to the targeted homeowners’ properties. These included falsified grant deeds that supposedly conveyed an interest in the properties to entities that Henschel controlled. They also created fake trust deeds based on fictional loans supposedly guaranteed by the targeted homeowners, and false liens that recorded an interest in the properties based on fictional debts.

The scam pulled off by Henschel and his cronies represents one of the most costly types of mortgage fraud, says industry expert Bridget Berg.

“The most costly mortgage fraud situations are fraud-for-profit,” says Berg, principal, Fraud Solutions at CoreLogic , a property and mortgage data intelligence firm. There, she leads the delivery of fraud risk management solutions to the mortgage industry. Berg expressed concern about several types of mortgage crime, including email compromise—where an imposter emails a party in a pending real estate sale to fool them into wiring the down payment or loan proceeds to the imposter.

Other fraud methods include:

• Diversion of funds: This is the theft of down payments or loan proceeds by misdirecting funds via email compromise or embezzlement. 
• Real estate investment schemes: Investors are recruited to purchase rental property at inflated prices with promises of unrealistic appreciation or cash flows; they are encouraged to purchase multiple properties and may hide the level of activity by using multiple lenders concurrently.
• Straw buyers: These stand-in buyers help fraudsters get a property loan.
• Illegal flipping: The purchase and resale of a property occurs at a grossly inflated price.
• Foreclosure rescue schemes: Fraudsters target victims who fall behind in mortgage payments; various schemes offer “help” in exchange for payments to the perpetrators, making the victim believe this will save the home from foreclosure.

Fraud-for-property prevalence

Fraud-for-profit scams such as Henschel’s may cost victims the most but Berg notes that fraud-for-property scams are the most prevalent. In this scenario, the borrower’s financial situation or loan purpose is misrepresented to qualify for a loan or get more favorable terms.

The most common such schemes, she says, are:

• Undisclosed changes: Perpetrators do not update the lender on changes during the loan process, such as a job change or new debt.
• Down payment misrepresentation: This disguises a personal loan as a gift or inflates the sales price to make the down payment appear larger.
• Income or asset misrepresentation: The fraudster provides inflated or fabricated documents such as pay stubs, W-2s, tax returns and bank statements.
• Credit and liability misrepresentation: To hide bad credit, fraudsters dispute accounts with false identity theft claims. They conceal liabilities or concurrent loan applications.
• Occupancy misrepresentation: This revolves around false claims that a property will be owner-occupied to get better loan terms or rented to use the income to qualify.

While mortgage fraud risk has been steady the last few months it has increased since last year, according to recent studies by Core Logic and First American Financial Corp., a leading global provider of title insurance, settlement services and risk solutions for real estate transactions.

CoreLogic’s National Mortgage Application Fraud Risk Index shows the collective level of loan application fraud risk the mortgage industry has increased roughly 6 percent, to 152 for the first quarter of 2019 compared to 144 from the Q1 2018.

Meanwhile the First American Loan Application Defect Index for March 2019—which estimates the frequency of defects, fraudulence and misrepresentation in mortgage loan applications—has remained steady in recent months. Still, it points a 15.9 percent increase since March 2018.

Home loan improvement: The right tools

There is some good news, though: First American’s Defect Index is down 6.8 percent from the high point of risk in October 2013. CoreLogic’s Berg points out that the industry has several methods for detecting and preventing mortgage fraud.

“In addition to anti-fraud policies, quality control programs, third party monitoring and staff training, most lenders use fraud detection tools,” she says. (One such type is the company’s LoanSafe Fraud Manager.)  “Using automation ensures consistency and thoroughness in the fraud review. High-risk loans should be assessed by experienced staff for resolution.”

Berg adds that strong tools:

• validate data in the loan application with independent sources,
• automate red flag identification,
• score the loan for probability of fraud, and
• minimize false positives to focus the reviewer on the highest-risk loans.

There is also the imperative to vet applicant information through vigorous anti-fraud measures. In the American Bar Association whitepaper “Mortgage Fraud at Financial Institutions: Prevention and Response,” author Travis P. Nelson identifies collecting, validating and correlating mortgage application data as three top priorities.

A former enforcement counsel for the U.S. Department of the Treasury and teacher of financial institutions regulation at Villanova University, Nelson adds that detecting fraud patterns is also essential. “Recently opened credit accounts under the same social security number but different names would be a red flag,” he writes; as a final-yet-crucial step, be sure to seek “additional verification to confirm or double-check the individual’s intent in opening the account.”

Still, the mortgage industry must remain ever vigilant, says David Reiss, law professor and research director at Brooklyn Law School’s Center for Urban Business Entrepreneurship (CUBE).

“When regulators and prosecutors turn their attention to a particular type, fraudsters will turn in another direction, or a new type of fraudster will pop up in a new area of the mortgage market,” Reiss says. “This happens for much the same reason that Willie Sutton was said to rob banks: ‘That’s where the money is.’”

Except, as Mickey Henschel proved, you don’t need a gun: among other things, just a homeowner under the gun will do.

Want more Banking Strategies? Sign up for our free newsletter!

Howard Altman oversees coverage of issues affecting troops and their families as managing editor of Military Times. 

For more articles like this, check out our recent executive report: Compliance: Beyond the Regulations.