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.

Re-emerging Scheme: Builder-Bailout

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.

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. 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.

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.

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.

Emerging Scheme: Short-Sale Fraud

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. Perpetrators may sell the home or secure a second loan without the homeowners’ knowledge. Re-emerging Scheme: Foreclosure Rescue Scams

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

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

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

Sub-Prime Meltdown Timeline UNCLASSIFIED//FOUO 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 2007 RealtyTrac announced that foreclosures had risen 93% in one year. August Goldman Sachs forecasted Sub-Prime losses for the financial sector would reach $400 billion. November 2008 April 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.

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

Sub-Prime Investigations Mortgage LendersBuilders/ DevelopersHedge FundsInvestment Banks Real Estate Investment Trusts Brokerage HousesMortgage Brokers UNCLASSIFIED//FOUO FBI Sub-Prime Fraud Investigations

UNCLASSIFIED//FOUO 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 Source: First American CoreLogic’s LoanPerformance The MarketPulse SUB-PRIME COLLAPSE

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) UNCLASSIFIED//FOUO $232 billion as of April ‘08

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

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

Case in Point Martin Frankel, et. al.