Re-emerging Scheme: Builder-Bailout Example

1. Re-emerging Scheme: Builder-Bailout Example • Builder wishes to sell a property worth $200,000 to a buyer. • The property’s value is fraudulently inflated to $240,000. • The lender funds a mortgage loan of $200,000 believing that $40,000 was paid to the builder, creating home equity. The builder forgives the buyers $40,000 down payment. Hence, the lender unknowingly funds 100 percent of the home’s value.

2. Re-emerging Scheme: Builder-Bailout

3. Emerging Scheme: Seller Assistance • Perpetrators are exploiting the depreciating housing market by assisting sellers and providing buyers to conduct property sales that are based on inflated appraisals. • In a typical seller assistance scam, a perpetrator solicits an anxious seller or his realtor and offers to find a property buyer. The perpetrator negotiates the amount that the property seller is willing to accept for the home.

4. Emerging Scheme: Seller Assistance • The perpetrator then hires an appraiser to inflate the property’s value. • The property is sold at the inflated rate to a buyer who is recruited by the perpetrator. • The buyer takes out a mortgage for the inflated amount.

5. Emerging Scheme: Seller Assistance • The seller then receives the asking price for the home, and the perpetrator pockets a “servicing fee”: the difference between the home’s market value and the fraudulently inflated value.

6. Emerging Scheme: Seller Assistance • Some industry sources have coined the phrase “cash back purchase” or “one transaction flip” to describe the scheme because it eliminates the need for two property transactions to generate a profit.

7. Emerging Scheme: Short-Sale Fraud • A real estate short sale is a type of pre-foreclosure sale in which the lender agrees to sell a property for less than the mortgage owed. • Short-sale fraud schemes are difficult to detect since the lender agrees to the transaction, and the incident is not reported to internal bank investigators or the authorities.

8. Emerging Scheme: Short-Sale Fraud

9. Re-emerging Scheme: Foreclosure Rescue Scams • Perpetrators convince homeowners that they can save their homes through deed transfers and up-front fees. • Involves a manipulated deed process that results in the preparation of forged deeds. • Perpetrators may sell the home or secure a second loan without the homeowners’ knowledge.

10. Re-emerging Scheme: Foreclosure Rescue Scams

11. Emerging Scheme: ID Theft and HELOCs • Stolen customer identification information is being used to compromise Home Equity Lines of Credit (HELOC) accounts.

12. The Sub-Prime Loan Process Potential Areas for Criminal Activity UNCLASSIFIED//FOUO

13. Sub-Prime Meltdown Timeline 2004 Federal Reserve began a series of Fed Funds Rateincreases. By June 2006, there will have been 17 consecutive increases raising the rate from 1% to 5.25%. June 2006 December The weakest subprime mortgage originators begin to fail; by December 2007, over 110 mortgage origination companies will have closed their doors. 2007 April New Century (2nd largest originator of Sub-Prime loans) filed for bankruptcy. UNCLASSIFIED//FOUO

14. Sub-Prime Meltdown Timeline 2007 Bear Stearns announced that investors in their sub-prime hedge funds would receive little or no recovery; the two funds had lost 90% of their value. July RealtyTrac announced that foreclosures had risen 93% in one year. August November Goldman Sachs forecasted Sub-Prime losses for the financial sector would reach $400 billion. 2008 Sub-Prime losses reached $232 billion and the IMF estimated that financial institutions world-wide may face losses of $945 billion over the next two years. April UNCLASSIFIED//FOUO

15. The Sub-Prime Loan Process Hold in portfolio Loan Origination Secondary Market Bank Sell Loan Mortgage Broker Broker Loan Investment Bank, Brokerage House, or Real Estate Investment Trust Mortgage Banker Create special purpose entities Securitize loan and sell to investors Investors Pension Funds Life Insurance Companies Other Commercial Banks State & Local Governments Central Banks Fund Managers The Public Brokerage Firms Sell ownership interest to investors Special Purpose Entities UNCLASSIFIED//FOUO

16. Builders/ Developers Mortgage Lenders Brokerage Houses Sub-Prime Investigations Mortgage Brokers Investment Banks Hedge Funds FBI Sub-Prime Fraud Investigations Real Estate Investment Trusts UNCLASSIFIED//FOUO

17. SUB-PRIME COLLAPSE • 80.2% of securitized sub-prime loans originated during 2005 had adjustable rates; 74.9% of these loans were 2/28 adjustable-rate loans. • These ARMS had fixed mortgage rates for the first two years after origination and were subject to reset in 2007. Source: First American CoreLogic’s LoanPerformance The MarketPulse UNCLASSIFIED//FOUO

18. Impact of Sub-Prime “Crisis” • Problems Related to Credit Contraction • Economy slows • Reduced available credit for new development • More difficult for people to obtain mortgages • Refinancing opportunities are less available • Financing becomes more expensive • Reduced interest from foreign investors in MBSs • Problems Related to Poor Underwriting • Increased number of foreclosures • Depreciating real estate values • No room for equity withdrawals • Problems Related to Write-downs • Stock market declines • Reductions in dividends • Increased need for capital infusions: • (sources include sovereign wealth funds) $232 billion as of April ‘08 UNCLASSIFIED//FOUO

19. MoneyLaundering

20. Money Laundering • Money laundering is the process by which criminals conceal or disguise the proceeds of their crimes or convert those proceeds into goods and services. It allows criminals to infuse their illegal money into the stream of commerce, thus corrupting financial institutions and the money supply and giving criminals unwarranted economic power – U.S. Department of Justice

21. In Effect, Any Knowing Use of the Proceeds of Criminal Activity Is Money Laundering!

22. Case in PointMartin Frankel, et. al.