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MORTGAGE FRAUD (Continued)
Mortgage Fraud Prosecuted Under 18 U.S.C. § 1341 (2007) (Mail Fraud)
For a more in-depth explanation of what constitutes mail fraud, please look at our mail fraud page, here.
United States v. Bryson, 2004 U.S. App. LEXIS 6977 (7th Cir. 2004).
Bryson is a very good case to be aware of. While it has no precendential value, it does a very good job of explaining the appraisal and closing processes, as well as outlining the various elements of fraud. The defendants in this case were indicted on, among other charges, three counts of mail fraud in conjunction with a mortgage fraud scheme. Bryson at **2. The scheme in this case was "large and complex." Id. at **3. The genesis began with a man named Fagan, who began buying real estate through a mortgage company owned by a man named Dailey. Id. Fagan used inflated appraisals and falsified income documentation to obtain loans on residences in excess of the true value, obtaining the misleading documentation from an account named Killebrew, who created falsified W-2s, check stubs and tax returns. Id. Killebrew also created false invoices that showed liens on properties that needed to be paid at closing, causing money that lenders thought was being paid to pay the liens to go to Fagan. Id. At first, Fagan used the excess money to renovate the properties, but he quickly fell behind on the loan payments and thereafter began pocketing the extra money and defaulting on the loans. Id. Because of the defaults, Fagan's credit prevented him from obtaining additional loans, so he began using people with good credit histories as straw purchases to obtain more properties and case from loans. Id. He shared the excess loan proceeds with the straw purchasers, who also defaulted on the loans, but Fagan still received several hundred thousand dollars in the scheme. Id. at **3-**4.
Because Fagan needed inflated appraisals for his scheme to work, he would tell appraisers the target value of the property; one of the defendants was one of the people who provided Fagan with the inflated appraisals. Id. at **4. "Appraisals follow a standard format and are supposed to include certain information.: Id. One piece of information is data from the multiple listing service (hereinafter, MLS), which lists properties offered through real estate agents. The MLS, which is available to all real estate agents, includes the asking price and a description of the property. Id. Using the listing price and any recent sales, an appraiser can determine the fair market value of a property; appraisers are also supposed to state whether, according to the MLS, the property is currently for sale or has been listed or sold in the past 12 months. Id.
The appraisals made by one of the defendants were significantly higher than the MLS listing price-between 50 and 223 percent higher. Id. at **4-**5. This defendant did not explain why he had appraised the property higher than the MLS listing price; instead, the he either falsely stated that the properties had not been listed in the MLS in the past 12 months or did not answer the question. Id. at **5.
After the inflated appraisals and falsified loan applications were completed, Dailey's mortgage company would mail the loan application packages via FedEx to one of several lenders. Id. After the loan was approved Fagan or Dailey's employees would designate the title company at which the closing would take place, with the companies being selected "based upon their willingness to let Fagan and [the mortgage company] control the closing," which would ensure that the seller and lender were kept in the dark. Id. at **5-**6.
To keep the seller and lender in the dark, Fagan needed two HUD statements: "one for the seller showing the true selling price, and one for the lender showing an inflated selling price." Id. at **6. Fagan, then, used the other defendant, who happened to be a closing agent at a title company. Id. He instructed her how to close the loans he obtained through the straw purchasers, telling her to write checks contrary to the lender's instruction, including writing checks to the straw borrowers and to fictitious companies. Id. The HUDs that were sent to the lenders by FedEx never disclosed that the defendant wrote checks to the borrower; instead, "the HUDs falsely stated that the borrower provided a down payment and that most of the loan funds were disbursed to the seller." Id. The lender HUDs reflected a false purchase price far above the true purchase price; in one instance, the HUD sent to the lender showed that $96,000 was the purchase price, whereas the seller's HUD showed a $44,500 purchase price. Id. at **6-**7.
This defendant also prepared disbursement ledgers for the closing. Id. at **7. In the closing just mentioned, the ledger showed that the only money collected and disbursed by the defendant was the lender's money ($81,129.00), while the borrower received $28, 798.13-a sum not reported on either HUD. Id. No down payment was collected or disbursed, even though one was listed on the HUD, which she signed, certifying that the forms were "true and accurate" accounts of the transaction. Id. She received $200 under the table from Fagan for each double-HUD closing she did.
This $200 did not satisfy this defendant, so she "devised another way to make money from each transaction." Id. She used the fraudulent loan closing proceeds to write checks drawn on her employer's escrow account to individuals named Montgomery, Egger, and Kirby. Id. at **7-**8. These three people were recruited by the defendant and her husband to cash the checks and split the proceeds, telling the three individuals that they needed to cash the checks so the defendant could collect bonuses her employer would not pay her directly. Id. at **8. Fagan was not aware of this defendant's activity, which generated the money laundering charges. Id. At about the same time Fagan was closing the fraudulent loans through the defendant, the pattern of bank deposits into her personal bank accounts changed, as did her personal spending habits; she deposited cash totaling several thousand dollars , and she began spending roughly $1,000 a month on various home shopping networks. Id. at **9.
At trial, the defendant testified on her own behalf, admitting that she signed both of the certified-as-true HUDs at each closing, and that she signed the disbursement checks. Id. However, she maintained that she thought there was nothing wrong with her actions. Id. She further contended that her assistant, who was not a closing agent, prepared the checks even though she did not have the proper authority to do so. Id. Furthermore, the defendant explained that she "was so busy conducting closings that she did not notice the checks were made out to" a third party. Id. She also explained that the checks made payable to Montgomery were for work her husband had done on Fagan's properties, and that they were made payable to Montgomery so that her husband could hide the income from his former wife. Id.
United States v. Owens, 301 F.3d 521 (7th Cir. 2002)
The defendant, a real estate appraiser, was convicted of mail fraud and wire fraud for his part in a multi-million dollar real estate and mortgage fraud scheme. Owens at 523.
The scheme in this case involves a "flip," "which basically involved having people purchase distressed properties for cash and then immediately resell that same property at artificially-inflated prices." Id. The ringleader of the scheme would identify the property he wanted to buy through realtors using the MLS system, and then try to negotiate the lowest possible price for the property, offering to buy it with cash. Id. Simultaneously, he would prepare to sell the property at an artificially-inflated price to a second buyer, needing the second buyer to obtain approval for a home mortgage, and needing to obtain an inflated appraisal that could be used to justify the higher sales price to the lending institution. Id.
The ringleader's co-schemers worked to locate potential second buyers, offering to close with no money down with cash back. Id. The second buyers would have to secure a mortgage, but they typically did not have jobs or bank accounts and thus could not have normally qualified for a mortgage. Id. To overcome this obstacle, false documents, including W-2s, check stubs, and employment verifications were created to submit to the lender institutions. Id. The mortgage brokers also worked with an appraiser to ensure that the appraisal matched the contract price for the second sale in order to maximize profits. Id. By omitting critical MLS information from the appraisal reports, the appraisers were able to inflate the value of these properties; profits ranged from approximately $10,000 to $180,000 per flip transaction. Id. The profits from each transaction were used to pay the co-schemers. These profits, however, "came at the expense of lending institutions and the federal government because the second buyers could not or would not pay the mortgage payments due on the properties." Id. at 524. Private lending institutions lost millions of dollars when the properties went into foreclosure because the mortgages were based on inflated values which had already been pocketed by Parr and the co-schemers. Id. Because many of the loans on the properties were insured by the FHA, a substantial portion of the losses ultimately were incurred by the United States Department of Housing and Urban Development. Id.
United States v. Nguyen, 1999 U.S. App. LEXIS 170 (9th Cir. 1999).
Nguyen, discussed supra in conjunction with section 1014, also discussed mail fraud in relation to mortgage fraud. In this case, the defendants were actually acquitted on the mail fraud counts. The details of the mortgage fraud scheme are discussed supra. The district court examined the indictment and the evidence admitted at trial, and determined "that the government failed to meet its burden of establishing the elements of mail fraud. Nguyen at *18. "In order to convict for mail fraud, the government must prove: (1) the existence of a scheme to defraud, and (2) that the defendant used or caused the mail to be used in furtherance of the scheme." Id. at n.8 (citing United States v. Lothian, 976 F.2d 1257, 1262 (9th Cir. 1992). The district court concluded that when the County Recorder mailed the deeds, that was not in furtherance of the fraudulent loan scheme. Id. at *18. Rather than accepting an expansive concept of fraud, the district court determined that the fraudulent conduct charged in the indictment, which was procuring the residential loans from the mortgage company, was completed once the mortgage company provided the loan proceeds to the defendants. Id. Therefore, "all conduct after receipt after receipt of the proceeds, including the mailings set forth in the indictment, was not done 'in furtherance of' the scheme to defraud." Id.