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Play # 4 - SBF, Madoff and Mortgages

Updated: Apr 5, 2023

Play #4 of The Two Minute Drill – Fraudsters loved mortgages first, but Crypto must have seemed like a fraudster’s dream. Talk about easy pickins for Sam Bankman-Freid(SBF) with so little actual control over the data and dollars. And Madoff’s Ponzi schemes of using new investor money to pay off the old ones probably has ancient origins. But real estate and mortgages have always been the real favorite of con artists. We learned the old axiom in childhood that originated with the land banking scams in the 1920’s on how gullible we can be, “if you believe that, I have some swamp land in Florida to sell you." The size of a real estate transaction makes mortgages one of the most attractive sources of big money fast for bad actors. And because real estate almost always appreciates in value, hiding fraud within a home loan is even easier. Fraudsters now have learned to keep payments current to prevent detection of their money laundering. The typical illegitimate source of down payment comes out clean when they sell the house for a profit. However, if another recession hits and values start to fall significantly, fraudsters are likely to be the first to default.

A recent in-depth analysis by the Federal Reserve of Philadelphia focused on occupancy fraud provides scholarly and compelling analytics that those who obtain a house under false occupancy status are more likely to strategically default. Read it here:

Here are two key findings from the Fed’s research:

1. Fraudulent investors default rates are more than double those of declared investors in both periods.

2. Fraudulent investors’ elevated default risk is driven by strategic motives, namely greater sensitivity to house price declines.

Their study also implicates the wider public in misrepresenting their occupancy intentions to obtain financing on better terms. The Fed categorized home buyers into four groups:

1. Honest Owner Occupants

2. Fraudulent Investors

3. Declared Investors

4. Second Home Buyers

The depth of the analysis behind the second group, Fraudulent Investors, provides empirical support for what many already suspect. It appears many otherwise law-abiding citizens think it is ok to misrepresent their intent to buy the house for investment rather than live it in it. Yet they, like professional criminals, will more often default when it is no longer economically viable to keep paying.

The broader point for lenders is that despite the statistical calm in fraud trend data, mortgage and real estate fraud is always prevalent. And even with the plethora of very helpful automated fraud screening tools, many types of mortgage fraud remains difficult to detect. Without a human dedicating specific time to evaluate the sum-total of automated and manually identified red flags in a mortgage loan file, fraud prevention becomes another rote, unproductive step in the origination process. SWS Risk Advisory has developed a 5-minute fraud finder tool that enables a “whole is greater than the sum of its parts” fraud review that only humans can do. Request it here.

Contact us for a version you can keep on your desktop

And for those who thought blockchain and bitcoin would usher in a new era of minimal fraud in our financial system, read more about the FTX meltdown in the latest issue of Fraud Magazine “Taming Fraud in the Wild West of Crypto”. As long as humans are involved, fraud will be there. What proactive steps is your firm taking to prevent fraud? Don’t become this headline, call us today.

For current and past “plays” (editions) of “The Two-Minute Drill” click here. And to learn how our awesome sponsors can help you with your Risk Management and QC needs, go to:

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