All right, welcome back to the Deep Dive. And
I have to say, looking at this, this stack of
papers we have on the desk, you'd think we lost
a bet or something. It does look a little bit
like we're prepping for a tax audit, doesn't
it? Yeah. Not our usual material. It really does.
I mean, we've got loan applications, underwriting
guidelines, federal statutes, tax code. I mean,
on the surface, this has to be the driest pile
of research we have ever, ever tackled. I think
you're right. But then you start to read and,
you know, you get a few pages in and you realize
this isn't just paperwork. It's it's a crime
novel. That's a good way to put it. We're really
unpacking a world that is. I mean, incredibly
high stakes, high adrenaline even. And it involves
just massive, massive amounts of money that just
vanish into thin air. We are talking about mortgage
fraud. And we're not talking about the, you know,
oops, I forgot to sign this page kind of error.
No. We're talking about criminal schemes that.
honestly rival a bank heist in their complexity
and the amount of money involved. Yeah, that's
so true. The only real difference is, you know,
for a bank heist, you need a gun and a getaway
car. For mortgage fraud, you just need a pen,
a computer. Yeah. And well, a whole lot of nerve.
A lot of nerve. Yeah. And the penalties, they
absolutely reflect that. I was floored when I
was reading the sentencing guidelines here. I
mean, we are not talking about a slap on the
wrist. This isn't a fine. We were talking about
30 years. 30. 30 years in federal prison. Per
offense. That's the part people miss. If you
do it three times, that's not one charge. That's
three. So, yeah, it's treated with the same severity
as, you know, major drug trafficking or violent
bank robbery because the economic damage can
be just as catastrophic. OK, so here's our mission
for today's deep dive. We need to decode how
the housing market. Which is, you know, something
that pretty much every one of our listeners interacts
with or at least thinks about how it can be rigged.
Right. And we really need to parse the difference
between what people might tell themselves are
just, you know, little white lies. An actual
full blown organized crime. And through it all,
we're going to see how these little mechanics,
these little tricks of the trade, how they added
up and basically broke the world's economy back
in 2008. It's a fascinating topic because it
sits right at this intersection of like human
psychology. You know, why do people lie? And
massive systemic financial risk. It's all about
how a million seemingly small lies can add up
to collapse a global economy. So before we get
into the how -to, and I want to be very clear
to everyone listening, please do not use this
as an instruction manual. Please don't. That
30 -year prison sentence is very, very real.
But before we get into the mechanics, we need
a baseline definition. Because when I hear mortgage
fraud, my brain immediately jumps to predatory
lending. Yeah, that's common. I feel like those
terms just get thrown around together in the
news. But looking at the definitions here in
our notes, they're actually polar opposites,
aren't they? They are completely distinct and,
you know, mixing them up is a very common mistake.
Think of it this way. Predatory lending is when
the bank or the lender is the bad guy. They're
the ones tricking the borrower. Maybe they're
hiding fees in the fine print or they do a bait
and switch on the interest rate or they'll lend
to someone they know can't possibly pay it back
just so they can foreclose and seize the property.
In that case, the borrower is the victim. Right.
And that's kind of the narrative you hear from
movies like The Big Short, right? The big bad
banks exploiting the little guy. Exactly. That's
predatory lending. But mortgage fraud, which
is what we're focusing on today, it flows the
other way. In this scenario, the lender is the
victim. The lender is the one being deceived
either by the borrower acting alone or more often
by a whole ring of industry. insiders, brokers,
appraisers, you name it. So in the eyes of the
law, it's the bank that's actually getting scammed.
Generally, yes. The legal statute defines it
as the intentional misstatement, misrepresentation,
or omission of information that an underwriter
or a lender relies on to fund a loan. And the
key word in all of that is intentional. This
isn't you accidentally forgetting you have a
second car loan. This is you actively hiding
it to get the money. And, you know, it's interesting
because there isn't a single law just called
the Mortgage Fraud Act, is there? At least not
in the sense of a single charge you can point
to. So how do prosecutors actually go after this?
The notes mention a whole kitchen sink of charges.
They absolutely throw the book at you. You're
usually looking at wire fraud because the money
is almost always moving electronically between
banks. Sure. Bank fraud, for obvious reasons.
Mail fraud, if you send any documents through
FedEx or the U .S. Postal Service. And then money
laundering, because once you get that illegal
cash from the loan, you have to do something
with it to make it look legitimate. It's funny
you mentioned mail fraud. I feel like that sounds
so... quaint, you know, like something out of
a 1950s movie. But isn't that actually one of
the most powerful tools federal prosecutors have
in their arsenal? Oh, it's the atomic bomb of
federal prosecution. Yeah. Seriously, if you
use the U .S. mail system at any point to further
a criminal scheme, federal jurisdiction is immediate
and the conviction rates for that charge are
just incredibly high. They love using it. OK,
so the stakes are clearly set. We're talking
major prison time, a slew of federal charges,
financially ruined lives. Let's break this down.
The research seems to stack this into two main
categories. You have fraud for housing and then
fraud for profit. Right. I want to start with
fraud for housing because this feels like the
area where, you know, normal, otherwise law abiding
people can kind of. Slip up. This is the white
lie territory. Fraud for housing is. Yeah. It's
exactly what it sounds like. Yeah. The borrower's
motivation isn't necessarily to steal a bunch
of cash and run off to a tropical island. Right.
The motivation is just to get the keys to the
house. You really want that home. But your financial
reality, your paperwork, it says no. Yeah. So
you adjust reality a little bit. And the most
common version of this, according to the notes,
is something called occupancy fraud. I was looking
at the interest rate differences on this, and
honestly, I can. I can kind of get the temptation.
Temptation is purely financial. It's huge. So
here's the setup. You want to buy a house. Maybe
it's a second home, a vacation place, or maybe
you want to be a landlord and rent it out. An
investment property. An investment property,
exactly. You go to the bank, and they pull up
their rate sheet for the day. And the interest
rate for a primary residence, meaning the house
you actually live in, is significantly lower
than the rate for an investment property. I ran
some quick math on this just based on some current
averages. On, say, a $500 ,000 loan, the difference
between a primary residence rate and an investment
property rate could easily be half a percent,
maybe even three quarters of a percent. Over
a 30 -year mortgage, that's not chump change.
That's tens of thousands of dollars. Tens of
thousands in interest. And that's not even the
biggest hurdle. The bank usually wants a massive
down payment for an investment property. We're
talking... 20, maybe 25%. Whereas for a primary
home, you might get in with, what, 3 % down,
5%. Exactly. So the borrower looks at that math
and they think, well, who's really going to know?
Who's going to check? So they just check the
box that says owner occupied. They'll sign an
affidavit at closing that says, I solemnly swear
I intend to live here for at least 12 months.
But they have zero intention of doing so. Zero.
They have a tenant lined up to move in two weeks
after closing. And so the bank is just sitting
there holding this loan that is statistically
much, much riskier than they realize. That is
the core of the issue. It's all about risk pricing.
All the data shows that if you lose your job
or the economy goes south, you will fight to
the death to pay the mortgage on the house where
you and your family sleep. Of course. But that
rental property across town. You'll walk away
from that in a heartbeat. You'll let it go into
foreclosure. It's a business decision. So the
bank charges a premium, a higher interest rate
for that extra risk. By lying on the application,
you're essentially denying the bank their fair
compensation. for the risk they're taking on.
It's one of those things that probably feels
like a victimless crime to the borrower, right?
They're thinking, look, I'm making the payments,
so what's the big deal? But what you're saying
is that it fundamentally degrades the quality
and the safety of the bank's entire loan portfolio.
It does. And it has these ripple effects that
people don't think about. Think about taxes.
If you're claiming it's your primary residence
to the bank, you are almost certainly claiming
the homestead exemption on your property taxes,
too. So now you're defrauding the local city
or county government. Yep. And what about when
you sell it in 10 years? Are you going to claim
the huge capital gains tax exclusion that's reserved
only for primary residences? Right. Now you're
defrauding the IRS. One little lie on a loan
application usually necessitates five more lies
down the road to keep the story straight. It
really is a slippery slope. Okay, so let's move
to the other big white lie, income and employment
fraud. This is where we get into the infamous
history of the liar loan. The stated income loan.
This. This is the poster child for the entire
2008 financial crisis. You know, for our younger
listeners, or maybe for those of us who have
just blocked that traumatic era out of our memories,
can we just recap how absolutely wild this was?
Because looking back at the notes, it seems impossible
that this was ever legal. Well, it was not only
legal. For a time, it was the industry standard.
You'd go to a mortgage broker, they'd sit you
down, and they would ask, so how much do you
make a year? And you would say, I make $150 ,000
a year. And they would. Just write that down.
They'd write it down on the application. And
that was it. No pay stubs, no W -2s, no phone
call to your employer to verify, nothing. So
it was basically the honor system for a loan
worth hundreds of thousands of dollars. Essentially,
yes. They were called CISA, Loans Stated Income,
Stated Assets. The running joke in the industry
was that CISA actually stood for Salary Inflated
Savings Absent. But those days are long gone
now, right? You can't just walk into a bank and
pinky swear that you're a millionaire anymore.
Correct. The Dodd -Frank Act and a wave of other
regulations after the crisis pretty much killed
the true liar loan. Now, you have to prove your
income. They have what's called an ability to
repay rule. But this is where the fraud just
evolves. If you can't just say you make the money,
now you have to show you make the money. And
if you don't actually make it, well, you have
to forge the proof. So we're back to technology
again. The notes mention things like Photoshop,
but I have to imagine it's even easier and more
sophisticated than that now. It's gone from,
you know, a skilled forger to something anyone
can do. It's very catch me if you can. But for
the digital age, there are websites right now
where you can go and generate a fake pay stub.
for $5 or $10. I've seen those. You just plug
in a company name, a salary, your name, and it
spits out a perfect -looking PDF that's indistinguishable
from a real one. And I assume the same goes for
things like W -2s or tax returns. Absolutely.
People do it all the time. They'll take a legitimate
W -2 from last year, they'll scan it, open it
in an editor, and just change a 3 on their annual
income to an 8. Then they submit it or they'll
just invent an entire job from scratch. Which
brings us to the employment fraud piece of this.
Claiming you're the vice president of sales at
Vandelay Industries. Or at Vandelay, importer
exporter. Right. When Vandelay Industries is
really just your brother -in -law's cell phone
number and he's been coached on what to say if
the bank calls. Or a more subtle version. is
just inflating a real job. You might actually
work at a real large company. Maybe you're a
shift manager at a fast food chain. But on the
application, you list your title as regional
director of operations. And the lender might
not dig deep enough to see the difference? Right.
If the lender calls the main HR hotline to do
an employment verification, all the computer
will confirm is, yes, that person is an employee
here. They often won't confirm the specific title
or the salary. It's a game of inches of exploiting
the gaps in verification. And the third piece
of this fraud for housing puzzle is it's the
sin of omission, hiding your debt. This goes
right back to that key metric, the debt to income
ratio or DTI. This is critical, critical math
for any lender. They look at your gross monthly
income, right, the money you make before taxes.
And then they look at all your monthly debt obligations.
Right. Credit cards, car loans, student loans,
everything. And there's a hard limit. There is
a hard cap, usually somewhere around 43 % to
50 % these days. If your total monthly debt payments
eat up more than half of your gross income, you
simply don't get the loan. The computer says
no. So if I have, say, a secret credit card.
With a $20 ,000 balance that I'm paying on, or
maybe a personal loan from a family member that
doesn't show up on my credit report. You just
don't list it. You conveniently forget about
it. You leave that section of the application
blank, and suddenly your DTI number looks great.
You look like a very prudent, responsible borrower
on paper. But in reality, you're drowning in
debt. And the second you close on that house
and add that huge mortgage payment, you are financially
underwater. And this all connects so directly
to the 2008 meltdown. We often and rightly talk
about the banks selling these terrible, risky
loan products, and they did. But there is also
this massive volume of borrowers who are simply
lying to get into homes they knew they couldn't
afford. That was the gamble for everyone. They
were just betting that the housing prices would
just keep going up forever. That was the whole
game. It doesn't matter if I can't really afford
the monthly payments because in six months the
house will be worth $50 ,000 more and I'll just
refinance or sell it and walk away with cash.
When the prices stopped going up and then started
to fall, the math stopped working and the whole
house of cards just collapsed into mass defaults.
OK, so that's fraud for housing. It's bad. It's
definitely illegal. But it's usually one person
or one couple trying to get one house. Now I
want to pivot. We are officially leaving the
amateur league behind and we're going pro. Let's
talk about fraud for profit. This is where the
notes get really, really dark. This is a different
beast entirely. In fraud for housing, the borrower
actually wants the house. The house is the goal.
In fraud for profit, the house is just a prop.
It's a tool. It's a physical object used to extract
cash from a bank's vault. The fraudsters have
no intention of ever living there or renting
it out. The goal is the loan money itself. And
unlike the solo borrower who's, you know, messing
with a W -2 in Photoshop, this requires a team.
This is a full -blown conspiracy. You cannot
do this alone. It's impossible. You need a network
of corrupt insiders. We call it the cast of characters.
Okay, who's in the cast? First, you need the
inside man. This is usually a dishonest mortgage
broker. a loan officer at a bank. Someone who
knows the underwriting software, they know the
rules, and more importantly, they know how to
bend them or break them to push a bad file through
the system. Okay, so you have the insider, then
you need the face. The straw borrower. This is
the person whose name and credit score go on
all the paperwork. You know, I've always found
that term straw borrower so interesting. It implies
they're flimsy or fake or hollow. They're a scarecrow.
That's the perfect analogy. They look like a
real legitimate buyer from a distance, but there's
nothing inside. Sometimes the straw borrower
is a co -conspirator who gets a kickback for
their trouble, maybe $5 ,000 or $10 ,000 just
for letting their name and credit be used. And
other times. Other times, and this is the sad
part, they're a victim. someone elderly or with
diminished capacity, or someone who doesn't speak
English well, who is tricked into signing a stack
of documents they don't understand. That's awful.
Okay, so you have the inside man, you have the
straw borrower, then you need the validator.
The appraiser. This role is absolutely crucial.
Why? Well, look. If you want to steal $500 ,000
from a bank using a house that's only really
worth $100 ,000, you have to have a licensed
appraiser who is willing to sign a legal document
certifying that that dilapidated shack is actually
a mansion. The appraisal is what justifies the
loan amount. And finally, you have the cleaner.
The settlement agent. This is the person at the
title company or the attorney's office who handles
the closing. They control the flow of the money.
They are the ones who make sure that when the
bank wires the half million dollar loan, the
money doesn't actually go to the seller of the
property. It goes to the fraudsters. It gets
diverted into the fraudsters shell corporation
accounts. They might prepare two sets of settlement
statements, a fake one for the bank and a real
one for everyone else. They're the ones who launder
the money at the source. I want to look at a
specific mechanism of this because the notes
highlight something they call the investor trap.
And there's a specific case study referenced
here, a case called United States v. Quintero
Lopez. I dug into this a bit, and the sheer scale
of this operation is just staggering. Oh, the
analysis of that case is a classic study in how
these fraud rings operate. This wasn't a one
-off thing. This was a machine. It was an assembly
line for fraud that ran for three and a half
years and stole millions. So walk us through
the scheme. Let's say I'm a naive, aspiring investor.
I've got a decent job, good credit, but not a
lot of cash. How does a guy like Quintero Lopez
get his hooks into me? It almost always starts
with a seminar or a real estate investment club.
You see an ad online or get a flyer. You walk
into a hotel ballroom on a Saturday morning.
Coffee and donuts in the back. Of course. Everyone
is dressed nicely. And there's a very charismatic,
very persuasive leader at the front of the room
talking about passive income and generational
wealth. The classic guru pitch. Stop working
for your money. And make your money work for
you. Exactly. And the pitch is so seductive and
simple. Look, folks, we have found a gold mine,
a whole neighborhood of undervalued properties
that are about to pop. We need investor partners.
And we will do all the work. We'll find the houses.
We'll manage the repairs. We'll find good tenants.
We'll collect the rent checks. All you have to
do is supply the credit. You just bring your
good credit score to the table. Just sign here,
and we will split all the profits with you 50
-50. And the investor in the audience thinks,
wow, this is my big break. I'm finally going
to be a real estate tycoon. So they sign loan
applications for three, four, maybe five properties
at once. And the reality of the situation? The
reality is that the properties are garbage. They're
dilapidated, often condemned ruins. The purchase
price listed on the loan application is massively
inflated, thanks to that corrupt appraiser we
talked about. The ring organizer takes the bank's
loan money, pays off the actual seller for the
true, very low value of the house, and then pockets
the huge difference. And what about all the promises,
the repairs, the tenants? The split profits?
All phantoms. They don't exist. The organizer
might make the first few mortgage payments on
behalf of the investor, just to keep the bank
from getting suspicious too quickly. We call
those lulling payments. To lull them into a false
sense of security. Precisely. But eventually
the payments stop. The organizer takes the money,
changes their phone number, and vanishes. And
the investor, the person who thought they were
on the path to building generational wealth,
is left holding the bag. They are left... Completely
ruined. They're on the hook for five different
mortgages totaling millions of dollars, all on
properties that are uninhabitable and worth a
tiny fraction of the debt owed on them. Their
credit is destroyed. They're facing foreclosure
and bankruptcy. And the organizer is on a beach
somewhere or. more likely, has just moved to
the next town over to set up the exact same scam
with a new name. It's just devastating. And it
really, really preys on that very human desire
for easy money for a shortcut. Greed and trust,
a dangerous combination. That's what they exploit.
Let's dig into the toolkit a little more. We
mentioned the corrupt appraiser, but I want to
get a bit more technical on appraisal fraud because
it's not always just saying a house is worth
more than it is, right? The notes say you can
also commit fraud by saying it's worth less.
Yes, that's a scheme called flopping. It's essentially
the opposite of house flipping. Okay, explain
flopping to me. So let's say a bank has already
foreclosed on a house. It's now what they call
an REO or real estate owned property. The bank
just wants to get rid of it and get some of their
money back. Right. They're not in the property
management business. Not at all. So you, the
fraudster, want to buy it from them for cheap.
So you bribe an appraiser to go in and write
a report for the bank that says this place is
a complete disaster. The foundation is cracked.
It's full of black mold. The roof is caving in.
It's practically worthless. Even though the house
is actually in a perfectly fine condition. Exactly.
The bank, which is probably in another state
and has never seen the property, looks at this
official appraisal report, panics. and thinks
they're holding a toxic asset. So they agree
to sell it to you in a short sale for pennies
on the dollar, just to get it off their books.
You buy it for $50 ,000, maybe you paint the
walls and scrub the floors, and you turn around
and sell it the very next week for its true market
value of $200 ,000. You've defrauded the bank
by manipulating the valuation downward. That
is just, it's devious. And the notes also mention
something about cashback schemes. This sounds
like the rewards you get on your credit card,
but I'm guessing it's not nearly that innocent.
Not quite. This is a favorite trick of those
get -rich -quick in real estate courses you see
advertised late at night. It's often pitched
as a form of creative financing. I love that
term. Anytime I hear creative financing, I just
assume it means felony. In this context, that's
usually a safe assumption. Here's how it works.
Let's say a legitimate seller wants $300 ,000
for their house. The buyer, who is our fraudster,
comes to them and says, look, I'll offer you
$400 ,000 for your house, but we're going to
have a separate secret side agreement. Okay.
And in that side agreement, it says that after
the closing, you're going to write a check for
that extra $100 ,000 back to a consulting company
that I own for repairs or fees. And the lender,
who is the one actually putting up the $400 ,000?
They have no idea about this side deal. They
think the house is actually selling for $400
,000. They're lending 80 % or 90 % of that value.
But the true value is only $300 ,000. The borrower
walks away from the closing table with a house
and $100 ,000 of the bank's cash in their pocket.
That cashback payment is a kickback. And if it's
not disclosed on the official HUD -1 settlement
statement, it is straight -up bank fraud. It's
essentially taking out a huge unsecured personal
loan disguised as a mortgage, but with the added
bonus that you have no intention of ever paying
it back. Precisely. The house is just the excuse
to get the cash. All right. Now I want to talk
about my absolute favorite term in this entire
stack of research. Oh, yes. It sounds violent.
It sounds messy. And looking at the mechanics
of it, it is arguably the most chaotic and brazen
form of this fraud. It is the smash and grab
of mortgage fraud. It doesn't rely on subtlety.
It relies on pure brute force speed. OK, so walk
us through a timeline. If I'm a fraudster and
I want to shotgun a property, what does my week
look like? OK, let's say you own a house free
and clear, no mortgage on it, and it's worth
$500 ,000. Or you have a straw buyer who does.
On Monday morning, you go online and you apply
for a $400 ,000 cash -out refinance with Bank
A. Okay, that's standard enough. Then on Monday
afternoon, you apply for another $400 ,000 cash
-out refinance on the same house with Bank B.
On Tuesday morning, you hit Bank C. On Wednesday,
Bank D. So I've got four different loan applications
out at the same time. But hold on, don't the
banks check the title? Won't Bank B see that
I already applied for a loan with Bank A? Ah,
that's the key. They check the recorded title
at the county office. An application for a loan
is not a recorded lien office. It's just a piece
of paper sitting on a loan officer's desk. So
when Bank A's title company pulls the records,
the title is clean. When Bank B pulls it, it's
clean. Bank C, clean. They all think. They're
going to be the first position lien holder, which
is the safest spot to be in. So they all approve
the loans. And this is where the speed and coordination
come in. You schedule all four closings for the
same day or at least within a 24 hour period.
You literally run around town from one title
company. The next, signing papers. Bank A wires
you $400 ,000. Bank B wires you $400 ,000. Bank
C wires you $400 ,000. So you have a house that's
worth half a million dollars, but you've just
pocketed 1 .2, maybe $1 .6 million in cash. And
then? Yeah. You disappear. And the banks, what
happens to them? The banks collide. Yeah. A month
later, no payments have been made. So they all
start foreclosure proceedings. And that's when
they discover that there is one mortgage on the
house. There are four. And the house isn't worth
nearly enough to pay even two of them back, let
alone all four. So who gets paid first? Who actually
gets the house? Well, the lawyers get paid first,
that's for sure. The banks end up in massive,
expensive litigation to determine lien priority.
And it usually comes down to something as simple
as who managed to get their deed of trust time
-stamped at the county recorder's office first.
If Bank A's courier got their documents stamped
at 9 .00 a .m. and Bank B's got stamped at 9
.15 a .m., Bank A gets the house and will probably
get most of their money back. Bank B, C, and
D get nothing, a total loss. That is a perfect
segue into the really technical exploit that
makes shotgunning and other schemes possible.
The notes call it working the gap. And this isn't
a computer hack. It's a bureaucracy hack. It
is. It's a fundamental exploitation of a weakness
in the system. We like to think of our financial
system as this instant digital fiber optic network
where everything happens at the speed of light.
But the legal system, the actual system of property
ownership, is surprisingly analog. It still relies
on people in county recorder offices. So explain
the gap. What is physically happening in that
time? When you close on a loan, the title company
or the settlement agent has to physically send
the deed of trust document to the county courthouse
to be officially recorded in the public record.
In the old days, a courier in a van would literally
drive a stack of papers over. Now, it might be
e -filed, but there is still a processing queue.
A county cleric has to review the document, give
it an official stamp, index it, and then upload
it into the searchable public database. And that
process takes time. It's not instant. It creates
a blind spot. Delay might only be 24 hours, but
in some really busy urban counties, it might
be two weeks before it shows up. That period,
the time between when the loan officially closes
and when it appears in the public search results,
that is the gap. So if I'm a fraudster, I know
that if I close a loan on a Friday afternoon.
I know that no one is going to see that new lien
on the public record until at least Tuesday or
Wednesday of the following week. And that gives
you a three to four day window of complete invisibility
to go out and execute more loans against that
same property. It's like writing a check on a
Friday knowing the bank is closed all weekend.
You are exploiting the latency of government
bureaucracy. And I would imagine that if these
fraudsters ever get caught, they just play dumb.
Always. That's the built in defense. Oh, that
was just a clerical error. I'm so sorry. I thought
that other loan fell through at the last minute.
My broker handled all the paperwork. I had no
idea. They use the inherent chaos and slowness
of the system as their cover story. It's brilliant
in a really twisted sort of way. It highlights
that no matter how fast the money moves electronically,
the legal paperwork still moves at the speed
of government. Exactly. And that fundamental
discrepancy is where so much of this fraud lives
and breathes. I want to circle back to the victims
for a moment. We talked about the naive investors
who get tricked. But there's a category here
in the notes called identity and agency. This
is where completely innocent, uninvolved people
get dragged into this mess. Identity theft in
the context of mortgage fraud is an absolute
nightmare. This isn't just someone stealing your
credit card and buying a new TV. This is someone
stealing your entire identity and buying a house
in your name. So you could be sitting at home.
minding your own business, and you suddenly start
getting foreclosure notices in the mail for a
house in Florida that you've never even seen.
And unwinding that is incredibly difficult and
expensive. You have to prove a negative. You
have to prove that you didn't sign a legal document
that has what looks like your signature on it.
You need handwriting experts. You need lawyers.
The bank doesn't want to believe you. They just
want their money back. It can take years to clean
up. But there's another variation here in the
notes that I have to say it just makes my blood
boil. It's called falsification without borrower
knowledge. This is where the borrower is actually
the victim of their own broker. This is the truly
predatory side of mortgage fraud. So imagine
you have a good, honest family. They want to
buy a home. They have a modest income. Let's
say they make $3 ,000 a month combined. They
go to a mortgage broker and say, this is what
we make. Can we qualify for a loan? And the honest
ethical answer should be, I'm sorry, but no,
not for the house you want. Right. But that broker,
they work on commission. If they don't close
the loan, they don't get paid. So the broker
takes the family's application, walks into the
back room and just changes the numbers. That
$3 ,000 a month in income becomes $10 ,000 a
month. And they don't tell the family they've
done this. The family never sees the final falsified
application that actually gets submitted to the
bank. They just show up at closing and there's
a mountain of paperwork. The settlement agent
says sign here, initial here, sign here. The
loan gets approved. The broker gets a $5 ,000
or $10 ,000 commission check and disappears.
And the family moves into their new home and
three months later? They default. Of course they
default. They can't possibly make the mortgage
payments because the payments were calculated
for a family earning three times their actual
salary. They end up losing the home to foreclosure.
Their credit is destroyed for a decade. And we
didn't even know they were a party to a federal
crime. They were victims too. it just really
exposes the the perverse incentives that were
built into the system when everyone in the transaction
the agent the broker the loan officer when they
only get paid if the deal closes everyone has
a powerful financial incentive to look the other
way or in this case to actively cheat the system
that was the systemic rot The appraisers, the
brokers, the realtors, the loan officers. For
a time, they were all financially aligned against
the truth. Let's zoom out a bit to the historical
context because reading this timeline in the
notes, it's just so frustrating. This wasn't
a surprise. The alarm bells were ringing and
ringing loudly for years before the 2008 crash.
Oh, they were deafening. The notes mentioned
that BBC investigation way back in 2003. Right.
The money program. Yeah. They sent undercover
researchers. posing as borrowers, into mortgage
brokerage firms in the U .K., and the brokers
were caught on hidden camera explicitly telling
them to lie on their applications. Just say you're
self -employed. Make up a number for your income.
We don't check. This wasn't some hidden secret.
It was standard operating procedure. And then
here in the U .S., the FBI got involved, 2004.
That seems to be a key date. It is. Chris Swecker,
who was the assistant director of the FBI's Criminal
Investigative Division at the time, went before
Congress in September of 2004. He didn't use
soft language. He warned of an epidemic of mortgage
fraud. Epidemic. That's a very strong word to
use in a congressional testimony. It is. And
he explicitly said that if it wasn't brought
under control, it had the potential to cause
a financial crisis on the same scale as the savings
and loan crisis of the 1980s. A massive financial
collapse. He literally predicted the 2008 crisis
with startling accuracy four years before it
happened. Why didn't anyone listen? Why didn't
they do something? I think the simple, cynical
answer is that everyone was making too much money.
The banks were making a fortune packaging and
selling these loans. The brokers were making
huge commissions. The homeowners were watching
their property values skyrocket. Nobody wanted
to be the one to turn off the music while the
party was still going. Until the music stopped.
And then we all got the hangover. Which brings
us to the government finally striking back. The
Fraud Enforcement and Recovery Act of 2009. For
ERA. This was the cleanup crew legislation. The
government finally realized that their existing
laws and enforcement tools weren't sharp enough.
And maybe more importantly, they just didn't
have enough manpower to tackle a problem of this
magnitude. It always comes down to budget and
resources, doesn't it? You can have the best
laws in the world, but if you don't have the
prosecutors and agents to enforce them, nothing
happens. Exactly. And Farrow was designed to
pour gasoline on the enforcement fire. The Section
3 authorization was just massive. $165 million
went straight to the Department of Justice. What
does $165 million buy you in the DOJ? It buys
you a lot. It buys you dedicated teams of forensic
accountants who can follow the money. It buys
you dozens of new FBI field agents who do nothing
but investigate mortgage files. And crucially,
it buys you federal prosecutors who can afford
to spend two or three years building a complex,
airtight Ariko case against an entire fraud ring.
And looking at the rest of the breakdown, $30
million for the Postal Inspection Service. We
mentioned them earlier. And they deserved it.
Never, ever underestimate the postal inspectors.
They are some of the best financial crime investigators
in the entire world. And then there's $20 million
for the Secret Service. Now, that's the one that
jumped out at me. I think of them as the guys
in sunglasses protecting the president. Why are
they investigating mortgages in Ohio? It's a
common misconception. People forget that the
Secret Service was originally founded in 1865
to fight counterfeiting. Their DNA, their core
mission, is protecting the nation's financial
integrity. So financial fraud, wire fraud, access
device fraud, that is their absolute wheelhouse.
FRA basically unleashed them to hunt down the
money trails from the mortgage crisis. So we've
really gone from a single person fudging a number
on a W -2 form all the way up to a massive coordinated
mobilization of federal law enforcement. It has
been quite a journey through this stack of notes.
It really has and highlights the connectivity
of it all. Mortgage fraud isn't just about a
house or a single loan. It's about trust. global
financial system is ultimately built on the idea
that if a piece of paper says this is a secure
loan for $300 ,000, that that statement is actually
true. When you start to erode that fundamental
trust, the gears of the whole system just grind
to a halt. And as we close out here, I want to
leave our listeners with a final thought that
came up when we were discussing that concept
of working the gap. Right. We talked about how
these fraudsters were so brilliant at exploiting
the physical delay in the county recorder's office,
the slow speed of bureaucracy. The latency in
the system, yeah. So now we're entering this
era of AI, of blockchain technology, of instant
financial settlement. In theory, that technology.
should close that gap forever. We should be able
to have instant, immutable, perfectly verifiable
property records. That's the dream, yes. A fraud
-proof system. But then I think back to the evolution
from the liar loan to the Photoshop forgeries.
As the verification gets better, the fakes just
get better too. And that is the terrifying new
frontier. Imagine a deepfake video call. An underwriter
thinks they're on a FaceTime call with a borrower.
verifying their identity face -to -face, but
it's not them. It's an AI avatar that looks and
sounds exactly like them. Imagine an AI that
doesn't just generate a fake W -2, but generates
an entire fake digital footprint for a synthetic
identity, a fake LinkedIn profile, a fake company
website, years of fake email traffic. All of
it generated in seconds to fool the bank's underwriting
algorithm. So we might be moving from the era
of shotgunning and exploiting paper delays to
a new era of synthetic identity fraud that is
almost impossible for a human or even another
algorithm to detect. It's a perpetual arms race.
The banks build a 10 -foot wall. And the fraudsters
invent an 11 -foot ladder. It never truly ends.
Well, on that slightly terrifying note, for everyone
listening, I think the takeaway today is simple.
Read what you sign. Always. Yeah. If a deal sounds
too good to be true, like that passive income
real estate club, it absolutely is. And if any
professional ever tells you to just fudge the
numbers a little, you need to remember that just
fudging is a federal crime with a 30 -year cap.
Trust but verify. And then verify it again. Thanks
for diving into the dark side of the housing
market with us. It was a pleasure. We'll see
you on the next Deep Dive. And keep your paperwork
clean, everyone.