WEBVTT 00:00:00.000 --> 00:00:02.240 All right, welcome back to the Deep Dive. And 00:00:02.240 --> 00:00:05.820 I have to say, looking at this, this stack of 00:00:05.820 --> 00:00:09.119 papers we have on the desk, you'd think we lost 00:00:09.119 --> 00:00:11.640 a bet or something. It does look a little bit 00:00:11.640 --> 00:00:13.839 like we're prepping for a tax audit, doesn't 00:00:13.839 --> 00:00:17.260 it? Yeah. Not our usual material. It really does. 00:00:17.420 --> 00:00:19.780 I mean, we've got loan applications, underwriting 00:00:19.780 --> 00:00:22.699 guidelines, federal statutes, tax code. I mean, 00:00:22.719 --> 00:00:25.579 on the surface, this has to be the driest pile 00:00:25.579 --> 00:00:28.600 of research we have ever, ever tackled. I think 00:00:28.600 --> 00:00:30.640 you're right. But then you start to read and, 00:00:30.820 --> 00:00:32.920 you know, you get a few pages in and you realize 00:00:32.920 --> 00:00:35.840 this isn't just paperwork. It's it's a crime 00:00:35.840 --> 00:00:37.799 novel. That's a good way to put it. We're really 00:00:37.799 --> 00:00:40.179 unpacking a world that is. I mean, incredibly 00:00:40.179 --> 00:00:43.000 high stakes, high adrenaline even. And it involves 00:00:43.000 --> 00:00:45.740 just massive, massive amounts of money that just 00:00:45.740 --> 00:00:49.079 vanish into thin air. We are talking about mortgage 00:00:49.079 --> 00:00:51.759 fraud. And we're not talking about the, you know, 00:00:51.780 --> 00:00:53.799 oops, I forgot to sign this page kind of error. 00:00:53.939 --> 00:00:57.119 No. We're talking about criminal schemes that. 00:00:57.859 --> 00:01:00.399 honestly rival a bank heist in their complexity 00:01:00.399 --> 00:01:02.640 and the amount of money involved. Yeah, that's 00:01:02.640 --> 00:01:04.959 so true. The only real difference is, you know, 00:01:04.959 --> 00:01:07.260 for a bank heist, you need a gun and a getaway 00:01:07.260 --> 00:01:10.420 car. For mortgage fraud, you just need a pen, 00:01:10.640 --> 00:01:14.480 a computer. Yeah. And well, a whole lot of nerve. 00:01:14.599 --> 00:01:16.980 A lot of nerve. Yeah. And the penalties, they 00:01:16.980 --> 00:01:19.620 absolutely reflect that. I was floored when I 00:01:19.620 --> 00:01:21.239 was reading the sentencing guidelines here. I 00:01:21.239 --> 00:01:22.840 mean, we are not talking about a slap on the 00:01:22.840 --> 00:01:24.959 wrist. This isn't a fine. We were talking about 00:01:24.959 --> 00:01:30.040 30 years. 30. 30 years in federal prison. Per 00:01:30.040 --> 00:01:32.620 offense. That's the part people miss. If you 00:01:32.620 --> 00:01:35.719 do it three times, that's not one charge. That's 00:01:35.719 --> 00:01:39.760 three. So, yeah, it's treated with the same severity 00:01:39.760 --> 00:01:42.640 as, you know, major drug trafficking or violent 00:01:42.640 --> 00:01:44.920 bank robbery because the economic damage can 00:01:44.920 --> 00:01:48.060 be just as catastrophic. OK, so here's our mission 00:01:48.060 --> 00:01:51.579 for today's deep dive. We need to decode how 00:01:51.579 --> 00:01:54.200 the housing market. Which is, you know, something 00:01:54.200 --> 00:01:56.079 that pretty much every one of our listeners interacts 00:01:56.079 --> 00:01:58.799 with or at least thinks about how it can be rigged. 00:01:58.799 --> 00:02:00.560 Right. And we really need to parse the difference 00:02:00.560 --> 00:02:02.359 between what people might tell themselves are 00:02:02.359 --> 00:02:04.879 just, you know, little white lies. An actual 00:02:04.879 --> 00:02:08.120 full blown organized crime. And through it all, 00:02:08.219 --> 00:02:10.240 we're going to see how these little mechanics, 00:02:10.360 --> 00:02:12.520 these little tricks of the trade, how they added 00:02:12.520 --> 00:02:15.259 up and basically broke the world's economy back 00:02:15.259 --> 00:02:18.219 in 2008. It's a fascinating topic because it 00:02:18.219 --> 00:02:21.120 sits right at this intersection of like human 00:02:21.120 --> 00:02:24.400 psychology. You know, why do people lie? And 00:02:24.400 --> 00:02:28.020 massive systemic financial risk. It's all about 00:02:28.020 --> 00:02:31.199 how a million seemingly small lies can add up 00:02:31.199 --> 00:02:34.159 to collapse a global economy. So before we get 00:02:34.159 --> 00:02:36.080 into the how -to, and I want to be very clear 00:02:36.080 --> 00:02:38.560 to everyone listening, please do not use this 00:02:38.560 --> 00:02:40.240 as an instruction manual. Please don't. That 00:02:40.240 --> 00:02:42.919 30 -year prison sentence is very, very real. 00:02:43.300 --> 00:02:45.020 But before we get into the mechanics, we need 00:02:45.020 --> 00:02:47.280 a baseline definition. Because when I hear mortgage 00:02:47.280 --> 00:02:50.240 fraud, my brain immediately jumps to predatory 00:02:50.240 --> 00:02:52.639 lending. Yeah, that's common. I feel like those 00:02:52.639 --> 00:02:54.340 terms just get thrown around together in the 00:02:54.340 --> 00:02:56.960 news. But looking at the definitions here in 00:02:56.960 --> 00:02:59.479 our notes, they're actually polar opposites, 00:02:59.479 --> 00:03:01.740 aren't they? They are completely distinct and, 00:03:01.800 --> 00:03:03.860 you know, mixing them up is a very common mistake. 00:03:04.219 --> 00:03:06.860 Think of it this way. Predatory lending is when 00:03:06.860 --> 00:03:09.479 the bank or the lender is the bad guy. They're 00:03:09.479 --> 00:03:11.960 the ones tricking the borrower. Maybe they're 00:03:11.960 --> 00:03:14.259 hiding fees in the fine print or they do a bait 00:03:14.259 --> 00:03:16.060 and switch on the interest rate or they'll lend 00:03:16.060 --> 00:03:17.979 to someone they know can't possibly pay it back 00:03:17.979 --> 00:03:20.340 just so they can foreclose and seize the property. 00:03:20.729 --> 00:03:23.289 In that case, the borrower is the victim. Right. 00:03:23.409 --> 00:03:25.449 And that's kind of the narrative you hear from 00:03:25.449 --> 00:03:27.449 movies like The Big Short, right? The big bad 00:03:27.449 --> 00:03:29.789 banks exploiting the little guy. Exactly. That's 00:03:29.789 --> 00:03:32.870 predatory lending. But mortgage fraud, which 00:03:32.870 --> 00:03:36.090 is what we're focusing on today, it flows the 00:03:36.090 --> 00:03:39.210 other way. In this scenario, the lender is the 00:03:39.210 --> 00:03:42.150 victim. The lender is the one being deceived 00:03:42.150 --> 00:03:45.009 either by the borrower acting alone or more often 00:03:45.009 --> 00:03:48.620 by a whole ring of industry. insiders, brokers, 00:03:49.099 --> 00:03:51.439 appraisers, you name it. So in the eyes of the 00:03:51.439 --> 00:03:53.939 law, it's the bank that's actually getting scammed. 00:03:54.180 --> 00:03:56.879 Generally, yes. The legal statute defines it 00:03:56.879 --> 00:04:01.180 as the intentional misstatement, misrepresentation, 00:04:01.180 --> 00:04:03.680 or omission of information that an underwriter 00:04:03.680 --> 00:04:06.840 or a lender relies on to fund a loan. And the 00:04:06.840 --> 00:04:09.580 key word in all of that is intentional. This 00:04:09.580 --> 00:04:11.419 isn't you accidentally forgetting you have a 00:04:11.419 --> 00:04:13.800 second car loan. This is you actively hiding 00:04:13.800 --> 00:04:16.149 it to get the money. And, you know, it's interesting 00:04:16.149 --> 00:04:18.149 because there isn't a single law just called 00:04:18.149 --> 00:04:20.470 the Mortgage Fraud Act, is there? At least not 00:04:20.470 --> 00:04:22.089 in the sense of a single charge you can point 00:04:22.089 --> 00:04:25.709 to. So how do prosecutors actually go after this? 00:04:25.790 --> 00:04:29.850 The notes mention a whole kitchen sink of charges. 00:04:30.089 --> 00:04:31.769 They absolutely throw the book at you. You're 00:04:31.769 --> 00:04:34.250 usually looking at wire fraud because the money 00:04:34.250 --> 00:04:36.269 is almost always moving electronically between 00:04:36.269 --> 00:04:39.250 banks. Sure. Bank fraud, for obvious reasons. 00:04:39.370 --> 00:04:41.410 Mail fraud, if you send any documents through 00:04:41.410 --> 00:04:45.290 FedEx or the U .S. Postal Service. And then money 00:04:45.290 --> 00:04:47.110 laundering, because once you get that illegal 00:04:47.110 --> 00:04:49.250 cash from the loan, you have to do something 00:04:49.250 --> 00:04:51.310 with it to make it look legitimate. It's funny 00:04:51.310 --> 00:04:53.110 you mentioned mail fraud. I feel like that sounds 00:04:53.110 --> 00:04:55.790 so... quaint, you know, like something out of 00:04:55.790 --> 00:04:58.170 a 1950s movie. But isn't that actually one of 00:04:58.170 --> 00:05:00.930 the most powerful tools federal prosecutors have 00:05:00.930 --> 00:05:03.149 in their arsenal? Oh, it's the atomic bomb of 00:05:03.149 --> 00:05:05.310 federal prosecution. Yeah. Seriously, if you 00:05:05.310 --> 00:05:08.230 use the U .S. mail system at any point to further 00:05:08.230 --> 00:05:11.170 a criminal scheme, federal jurisdiction is immediate 00:05:11.170 --> 00:05:14.269 and the conviction rates for that charge are 00:05:14.269 --> 00:05:16.899 just incredibly high. They love using it. OK, 00:05:16.980 --> 00:05:19.620 so the stakes are clearly set. We're talking 00:05:19.620 --> 00:05:23.300 major prison time, a slew of federal charges, 00:05:23.519 --> 00:05:26.819 financially ruined lives. Let's break this down. 00:05:26.920 --> 00:05:28.879 The research seems to stack this into two main 00:05:28.879 --> 00:05:31.439 categories. You have fraud for housing and then 00:05:31.439 --> 00:05:33.899 fraud for profit. Right. I want to start with 00:05:33.899 --> 00:05:36.819 fraud for housing because this feels like the 00:05:36.819 --> 00:05:39.680 area where, you know, normal, otherwise law abiding 00:05:39.680 --> 00:05:42.300 people can kind of. Slip up. This is the white 00:05:42.300 --> 00:05:45.160 lie territory. Fraud for housing is. Yeah. It's 00:05:45.160 --> 00:05:47.000 exactly what it sounds like. Yeah. The borrower's 00:05:47.000 --> 00:05:49.819 motivation isn't necessarily to steal a bunch 00:05:49.819 --> 00:05:51.920 of cash and run off to a tropical island. Right. 00:05:51.980 --> 00:05:54.500 The motivation is just to get the keys to the 00:05:54.500 --> 00:05:57.939 house. You really want that home. But your financial 00:05:57.939 --> 00:06:00.600 reality, your paperwork, it says no. Yeah. So 00:06:00.600 --> 00:06:02.980 you adjust reality a little bit. And the most 00:06:02.980 --> 00:06:05.060 common version of this, according to the notes, 00:06:05.139 --> 00:06:07.800 is something called occupancy fraud. I was looking 00:06:07.800 --> 00:06:09.339 at the interest rate differences on this, and 00:06:09.339 --> 00:06:11.500 honestly, I can. I can kind of get the temptation. 00:06:11.899 --> 00:06:15.420 Temptation is purely financial. It's huge. So 00:06:15.420 --> 00:06:17.699 here's the setup. You want to buy a house. Maybe 00:06:17.699 --> 00:06:19.680 it's a second home, a vacation place, or maybe 00:06:19.680 --> 00:06:21.459 you want to be a landlord and rent it out. An 00:06:21.459 --> 00:06:22.980 investment property. An investment property, 00:06:23.100 --> 00:06:25.160 exactly. You go to the bank, and they pull up 00:06:25.160 --> 00:06:27.279 their rate sheet for the day. And the interest 00:06:27.279 --> 00:06:30.279 rate for a primary residence, meaning the house 00:06:30.279 --> 00:06:32.800 you actually live in, is significantly lower 00:06:32.800 --> 00:06:35.370 than the rate for an investment property. I ran 00:06:35.370 --> 00:06:37.689 some quick math on this just based on some current 00:06:37.689 --> 00:06:42.269 averages. On, say, a $500 ,000 loan, the difference 00:06:42.269 --> 00:06:44.769 between a primary residence rate and an investment 00:06:44.769 --> 00:06:47.889 property rate could easily be half a percent, 00:06:47.990 --> 00:06:50.490 maybe even three quarters of a percent. Over 00:06:50.490 --> 00:06:52.629 a 30 -year mortgage, that's not chump change. 00:06:52.930 --> 00:06:55.350 That's tens of thousands of dollars. Tens of 00:06:55.350 --> 00:06:56.889 thousands in interest. And that's not even the 00:06:56.889 --> 00:06:59.430 biggest hurdle. The bank usually wants a massive 00:06:59.430 --> 00:07:01.870 down payment for an investment property. We're 00:07:01.870 --> 00:07:05.639 talking... 20, maybe 25%. Whereas for a primary 00:07:05.639 --> 00:07:07.899 home, you might get in with, what, 3 % down, 00:07:08.079 --> 00:07:10.620 5%. Exactly. So the borrower looks at that math 00:07:10.620 --> 00:07:12.079 and they think, well, who's really going to know? 00:07:12.139 --> 00:07:13.899 Who's going to check? So they just check the 00:07:13.899 --> 00:07:17.319 box that says owner occupied. They'll sign an 00:07:17.319 --> 00:07:20.060 affidavit at closing that says, I solemnly swear 00:07:20.060 --> 00:07:23.100 I intend to live here for at least 12 months. 00:07:23.339 --> 00:07:26.220 But they have zero intention of doing so. Zero. 00:07:26.730 --> 00:07:29.410 They have a tenant lined up to move in two weeks 00:07:29.410 --> 00:07:31.709 after closing. And so the bank is just sitting 00:07:31.709 --> 00:07:34.290 there holding this loan that is statistically 00:07:34.290 --> 00:07:37.050 much, much riskier than they realize. That is 00:07:37.050 --> 00:07:39.490 the core of the issue. It's all about risk pricing. 00:07:39.629 --> 00:07:42.750 All the data shows that if you lose your job 00:07:42.750 --> 00:07:45.589 or the economy goes south, you will fight to 00:07:45.589 --> 00:07:48.050 the death to pay the mortgage on the house where 00:07:48.050 --> 00:07:51.310 you and your family sleep. Of course. But that 00:07:51.310 --> 00:07:53.819 rental property across town. You'll walk away 00:07:53.819 --> 00:07:55.560 from that in a heartbeat. You'll let it go into 00:07:55.560 --> 00:07:58.160 foreclosure. It's a business decision. So the 00:07:58.160 --> 00:08:00.620 bank charges a premium, a higher interest rate 00:08:00.620 --> 00:08:03.959 for that extra risk. By lying on the application, 00:08:04.199 --> 00:08:06.480 you're essentially denying the bank their fair 00:08:06.480 --> 00:08:08.959 compensation. for the risk they're taking on. 00:08:09.040 --> 00:08:10.639 It's one of those things that probably feels 00:08:10.639 --> 00:08:12.680 like a victimless crime to the borrower, right? 00:08:12.779 --> 00:08:14.180 They're thinking, look, I'm making the payments, 00:08:14.240 --> 00:08:16.399 so what's the big deal? But what you're saying 00:08:16.399 --> 00:08:18.759 is that it fundamentally degrades the quality 00:08:18.759 --> 00:08:21.720 and the safety of the bank's entire loan portfolio. 00:08:22.259 --> 00:08:25.360 It does. And it has these ripple effects that 00:08:25.360 --> 00:08:26.839 people don't think about. Think about taxes. 00:08:27.120 --> 00:08:29.240 If you're claiming it's your primary residence 00:08:29.240 --> 00:08:31.620 to the bank, you are almost certainly claiming 00:08:31.620 --> 00:08:33.480 the homestead exemption on your property taxes, 00:08:33.600 --> 00:08:36.360 too. So now you're defrauding the local city 00:08:36.360 --> 00:08:39.279 or county government. Yep. And what about when 00:08:39.279 --> 00:08:41.220 you sell it in 10 years? Are you going to claim 00:08:41.220 --> 00:08:44.720 the huge capital gains tax exclusion that's reserved 00:08:44.720 --> 00:08:47.240 only for primary residences? Right. Now you're 00:08:47.240 --> 00:08:50.230 defrauding the IRS. One little lie on a loan 00:08:50.230 --> 00:08:53.149 application usually necessitates five more lies 00:08:53.149 --> 00:08:55.350 down the road to keep the story straight. It 00:08:55.350 --> 00:08:58.029 really is a slippery slope. Okay, so let's move 00:08:58.029 --> 00:09:00.629 to the other big white lie, income and employment 00:09:00.629 --> 00:09:03.909 fraud. This is where we get into the infamous 00:09:03.909 --> 00:09:07.070 history of the liar loan. The stated income loan. 00:09:07.149 --> 00:09:09.929 This. This is the poster child for the entire 00:09:09.929 --> 00:09:12.769 2008 financial crisis. You know, for our younger 00:09:12.769 --> 00:09:14.490 listeners, or maybe for those of us who have 00:09:14.490 --> 00:09:17.049 just blocked that traumatic era out of our memories, 00:09:17.210 --> 00:09:19.769 can we just recap how absolutely wild this was? 00:09:19.870 --> 00:09:21.649 Because looking back at the notes, it seems impossible 00:09:21.649 --> 00:09:24.029 that this was ever legal. Well, it was not only 00:09:24.029 --> 00:09:26.389 legal. For a time, it was the industry standard. 00:09:26.610 --> 00:09:28.629 You'd go to a mortgage broker, they'd sit you 00:09:28.629 --> 00:09:30.610 down, and they would ask, so how much do you 00:09:30.610 --> 00:09:33.809 make a year? And you would say, I make $150 ,000 00:09:33.809 --> 00:09:35.750 a year. And they would. Just write that down. 00:09:35.970 --> 00:09:37.700 They'd write it down on the application. And 00:09:37.700 --> 00:09:42.259 that was it. No pay stubs, no W -2s, no phone 00:09:42.259 --> 00:09:45.320 call to your employer to verify, nothing. So 00:09:45.320 --> 00:09:47.259 it was basically the honor system for a loan 00:09:47.259 --> 00:09:49.700 worth hundreds of thousands of dollars. Essentially, 00:09:49.799 --> 00:09:53.460 yes. They were called CISA, Loans Stated Income, 00:09:53.460 --> 00:09:56.460 Stated Assets. The running joke in the industry 00:09:56.460 --> 00:09:59.460 was that CISA actually stood for Salary Inflated 00:09:59.460 --> 00:10:02.169 Savings Absent. But those days are long gone 00:10:02.169 --> 00:10:04.250 now, right? You can't just walk into a bank and 00:10:04.250 --> 00:10:05.809 pinky swear that you're a millionaire anymore. 00:10:06.070 --> 00:10:08.990 Correct. The Dodd -Frank Act and a wave of other 00:10:08.990 --> 00:10:11.970 regulations after the crisis pretty much killed 00:10:11.970 --> 00:10:14.490 the true liar loan. Now, you have to prove your 00:10:14.490 --> 00:10:16.590 income. They have what's called an ability to 00:10:16.590 --> 00:10:19.269 repay rule. But this is where the fraud just 00:10:19.269 --> 00:10:21.850 evolves. If you can't just say you make the money, 00:10:21.950 --> 00:10:24.110 now you have to show you make the money. And 00:10:24.110 --> 00:10:26.370 if you don't actually make it, well, you have 00:10:26.370 --> 00:10:28.509 to forge the proof. So we're back to technology 00:10:28.509 --> 00:10:32.220 again. The notes mention things like Photoshop, 00:10:32.399 --> 00:10:35.340 but I have to imagine it's even easier and more 00:10:35.340 --> 00:10:37.639 sophisticated than that now. It's gone from, 00:10:37.639 --> 00:10:41.519 you know, a skilled forger to something anyone 00:10:41.519 --> 00:10:44.960 can do. It's very catch me if you can. But for 00:10:44.960 --> 00:10:47.759 the digital age, there are websites right now 00:10:47.759 --> 00:10:50.279 where you can go and generate a fake pay stub. 00:10:50.990 --> 00:10:53.409 for $5 or $10. I've seen those. You just plug 00:10:53.409 --> 00:10:56.549 in a company name, a salary, your name, and it 00:10:56.549 --> 00:10:59.710 spits out a perfect -looking PDF that's indistinguishable 00:10:59.710 --> 00:11:01.970 from a real one. And I assume the same goes for 00:11:01.970 --> 00:11:05.049 things like W -2s or tax returns. Absolutely. 00:11:05.129 --> 00:11:07.169 People do it all the time. They'll take a legitimate 00:11:07.169 --> 00:11:09.549 W -2 from last year, they'll scan it, open it 00:11:09.549 --> 00:11:12.230 in an editor, and just change a 3 on their annual 00:11:12.230 --> 00:11:14.919 income to an 8. Then they submit it or they'll 00:11:14.919 --> 00:11:16.899 just invent an entire job from scratch. Which 00:11:16.899 --> 00:11:19.639 brings us to the employment fraud piece of this. 00:11:20.019 --> 00:11:22.700 Claiming you're the vice president of sales at 00:11:22.700 --> 00:11:25.059 Vandelay Industries. Or at Vandelay, importer 00:11:25.059 --> 00:11:27.480 exporter. Right. When Vandelay Industries is 00:11:27.480 --> 00:11:29.379 really just your brother -in -law's cell phone 00:11:29.379 --> 00:11:31.220 number and he's been coached on what to say if 00:11:31.220 --> 00:11:34.570 the bank calls. Or a more subtle version. is 00:11:34.570 --> 00:11:36.850 just inflating a real job. You might actually 00:11:36.850 --> 00:11:39.230 work at a real large company. Maybe you're a 00:11:39.230 --> 00:11:41.590 shift manager at a fast food chain. But on the 00:11:41.590 --> 00:11:43.610 application, you list your title as regional 00:11:43.610 --> 00:11:45.990 director of operations. And the lender might 00:11:45.990 --> 00:11:48.230 not dig deep enough to see the difference? Right. 00:11:48.309 --> 00:11:51.149 If the lender calls the main HR hotline to do 00:11:51.149 --> 00:11:53.649 an employment verification, all the computer 00:11:53.649 --> 00:11:56.190 will confirm is, yes, that person is an employee 00:11:56.190 --> 00:11:59.309 here. They often won't confirm the specific title 00:11:59.309 --> 00:12:02.590 or the salary. It's a game of inches of exploiting 00:12:02.590 --> 00:12:05.330 the gaps in verification. And the third piece 00:12:05.330 --> 00:12:09.070 of this fraud for housing puzzle is it's the 00:12:09.070 --> 00:12:11.850 sin of omission, hiding your debt. This goes 00:12:11.850 --> 00:12:14.330 right back to that key metric, the debt to income 00:12:14.330 --> 00:12:17.409 ratio or DTI. This is critical, critical math 00:12:17.409 --> 00:12:19.750 for any lender. They look at your gross monthly 00:12:19.750 --> 00:12:21.889 income, right, the money you make before taxes. 00:12:22.070 --> 00:12:24.090 And then they look at all your monthly debt obligations. 00:12:24.210 --> 00:12:26.649 Right. Credit cards, car loans, student loans, 00:12:26.789 --> 00:12:28.940 everything. And there's a hard limit. There is 00:12:28.940 --> 00:12:31.259 a hard cap, usually somewhere around 43 % to 00:12:31.259 --> 00:12:34.600 50 % these days. If your total monthly debt payments 00:12:34.600 --> 00:12:37.580 eat up more than half of your gross income, you 00:12:37.580 --> 00:12:39.840 simply don't get the loan. The computer says 00:12:39.840 --> 00:12:44.039 no. So if I have, say, a secret credit card. 00:12:44.519 --> 00:12:47.379 With a $20 ,000 balance that I'm paying on, or 00:12:47.379 --> 00:12:49.659 maybe a personal loan from a family member that 00:12:49.659 --> 00:12:51.919 doesn't show up on my credit report. You just 00:12:51.919 --> 00:12:54.340 don't list it. You conveniently forget about 00:12:54.340 --> 00:12:56.440 it. You leave that section of the application 00:12:56.440 --> 00:12:59.600 blank, and suddenly your DTI number looks great. 00:12:59.700 --> 00:13:02.539 You look like a very prudent, responsible borrower 00:13:02.539 --> 00:13:05.480 on paper. But in reality, you're drowning in 00:13:05.480 --> 00:13:07.559 debt. And the second you close on that house 00:13:07.559 --> 00:13:10.340 and add that huge mortgage payment, you are financially 00:13:10.340 --> 00:13:13.549 underwater. And this all connects so directly 00:13:13.549 --> 00:13:16.809 to the 2008 meltdown. We often and rightly talk 00:13:16.809 --> 00:13:18.710 about the banks selling these terrible, risky 00:13:18.710 --> 00:13:21.289 loan products, and they did. But there is also 00:13:21.289 --> 00:13:24.110 this massive volume of borrowers who are simply 00:13:24.110 --> 00:13:26.350 lying to get into homes they knew they couldn't 00:13:26.350 --> 00:13:28.570 afford. That was the gamble for everyone. They 00:13:28.570 --> 00:13:30.149 were just betting that the housing prices would 00:13:30.149 --> 00:13:32.110 just keep going up forever. That was the whole 00:13:32.110 --> 00:13:34.529 game. It doesn't matter if I can't really afford 00:13:34.529 --> 00:13:36.830 the monthly payments because in six months the 00:13:36.830 --> 00:13:39.350 house will be worth $50 ,000 more and I'll just 00:13:39.350 --> 00:13:41.230 refinance or sell it and walk away with cash. 00:13:41.720 --> 00:13:44.440 When the prices stopped going up and then started 00:13:44.440 --> 00:13:47.259 to fall, the math stopped working and the whole 00:13:47.259 --> 00:13:49.500 house of cards just collapsed into mass defaults. 00:13:49.539 --> 00:13:53.100 OK, so that's fraud for housing. It's bad. It's 00:13:53.100 --> 00:13:55.580 definitely illegal. But it's usually one person 00:13:55.580 --> 00:13:59.000 or one couple trying to get one house. Now I 00:13:59.000 --> 00:14:00.820 want to pivot. We are officially leaving the 00:14:00.820 --> 00:14:03.440 amateur league behind and we're going pro. Let's 00:14:03.440 --> 00:14:05.539 talk about fraud for profit. This is where the 00:14:05.539 --> 00:14:08.220 notes get really, really dark. This is a different 00:14:08.220 --> 00:14:11.850 beast entirely. In fraud for housing, the borrower 00:14:11.850 --> 00:14:14.690 actually wants the house. The house is the goal. 00:14:14.830 --> 00:14:17.090 In fraud for profit, the house is just a prop. 00:14:17.669 --> 00:14:20.590 It's a tool. It's a physical object used to extract 00:14:20.590 --> 00:14:23.330 cash from a bank's vault. The fraudsters have 00:14:23.330 --> 00:14:25.090 no intention of ever living there or renting 00:14:25.090 --> 00:14:27.769 it out. The goal is the loan money itself. And 00:14:27.769 --> 00:14:30.190 unlike the solo borrower who's, you know, messing 00:14:30.190 --> 00:14:32.570 with a W -2 in Photoshop, this requires a team. 00:14:32.610 --> 00:14:34.889 This is a full -blown conspiracy. You cannot 00:14:34.889 --> 00:14:37.850 do this alone. It's impossible. You need a network 00:14:37.850 --> 00:14:41.370 of corrupt insiders. We call it the cast of characters. 00:14:41.730 --> 00:14:43.769 Okay, who's in the cast? First, you need the 00:14:43.769 --> 00:14:46.090 inside man. This is usually a dishonest mortgage 00:14:46.090 --> 00:14:49.429 broker. a loan officer at a bank. Someone who 00:14:49.429 --> 00:14:51.649 knows the underwriting software, they know the 00:14:51.649 --> 00:14:54.070 rules, and more importantly, they know how to 00:14:54.070 --> 00:14:56.629 bend them or break them to push a bad file through 00:14:56.629 --> 00:14:58.850 the system. Okay, so you have the insider, then 00:14:58.850 --> 00:15:02.250 you need the face. The straw borrower. This is 00:15:02.250 --> 00:15:04.769 the person whose name and credit score go on 00:15:04.769 --> 00:15:06.789 all the paperwork. You know, I've always found 00:15:06.789 --> 00:15:09.429 that term straw borrower so interesting. It implies 00:15:09.429 --> 00:15:13.090 they're flimsy or fake or hollow. They're a scarecrow. 00:15:13.690 --> 00:15:15.809 That's the perfect analogy. They look like a 00:15:15.809 --> 00:15:18.720 real legitimate buyer from a distance, but there's 00:15:18.720 --> 00:15:21.200 nothing inside. Sometimes the straw borrower 00:15:21.200 --> 00:15:23.659 is a co -conspirator who gets a kickback for 00:15:23.659 --> 00:15:26.379 their trouble, maybe $5 ,000 or $10 ,000 just 00:15:26.379 --> 00:15:29.120 for letting their name and credit be used. And 00:15:29.120 --> 00:15:31.960 other times. Other times, and this is the sad 00:15:31.960 --> 00:15:35.299 part, they're a victim. someone elderly or with 00:15:35.299 --> 00:15:38.259 diminished capacity, or someone who doesn't speak 00:15:38.259 --> 00:15:41.279 English well, who is tricked into signing a stack 00:15:41.279 --> 00:15:43.679 of documents they don't understand. That's awful. 00:15:43.820 --> 00:15:45.740 Okay, so you have the inside man, you have the 00:15:45.740 --> 00:15:48.179 straw borrower, then you need the validator. 00:15:48.279 --> 00:15:51.279 The appraiser. This role is absolutely crucial. 00:15:51.659 --> 00:15:55.159 Why? Well, look. If you want to steal $500 ,000 00:15:55.159 --> 00:15:57.679 from a bank using a house that's only really 00:15:57.679 --> 00:16:00.860 worth $100 ,000, you have to have a licensed 00:16:00.860 --> 00:16:03.720 appraiser who is willing to sign a legal document 00:16:03.720 --> 00:16:07.320 certifying that that dilapidated shack is actually 00:16:07.320 --> 00:16:10.220 a mansion. The appraisal is what justifies the 00:16:10.220 --> 00:16:12.440 loan amount. And finally, you have the cleaner. 00:16:12.580 --> 00:16:14.519 The settlement agent. This is the person at the 00:16:14.519 --> 00:16:16.919 title company or the attorney's office who handles 00:16:16.919 --> 00:16:19.120 the closing. They control the flow of the money. 00:16:19.440 --> 00:16:21.200 They are the ones who make sure that when the 00:16:21.200 --> 00:16:23.679 bank wires the half million dollar loan, the 00:16:23.679 --> 00:16:25.659 money doesn't actually go to the seller of the 00:16:25.659 --> 00:16:28.039 property. It goes to the fraudsters. It gets 00:16:28.039 --> 00:16:30.000 diverted into the fraudsters shell corporation 00:16:30.000 --> 00:16:33.299 accounts. They might prepare two sets of settlement 00:16:33.299 --> 00:16:36.299 statements, a fake one for the bank and a real 00:16:36.299 --> 00:16:38.519 one for everyone else. They're the ones who launder 00:16:38.519 --> 00:16:40.659 the money at the source. I want to look at a 00:16:40.659 --> 00:16:42.700 specific mechanism of this because the notes 00:16:42.700 --> 00:16:44.700 highlight something they call the investor trap. 00:16:45.129 --> 00:16:46.769 And there's a specific case study referenced 00:16:46.769 --> 00:16:49.950 here, a case called United States v. Quintero 00:16:49.950 --> 00:16:53.490 Lopez. I dug into this a bit, and the sheer scale 00:16:53.490 --> 00:16:56.850 of this operation is just staggering. Oh, the 00:16:56.850 --> 00:16:59.690 analysis of that case is a classic study in how 00:16:59.690 --> 00:17:02.129 these fraud rings operate. This wasn't a one 00:17:02.129 --> 00:17:04.349 -off thing. This was a machine. It was an assembly 00:17:04.349 --> 00:17:06.490 line for fraud that ran for three and a half 00:17:06.490 --> 00:17:08.609 years and stole millions. So walk us through 00:17:08.609 --> 00:17:11.309 the scheme. Let's say I'm a naive, aspiring investor. 00:17:11.650 --> 00:17:13.910 I've got a decent job, good credit, but not a 00:17:13.910 --> 00:17:16.910 lot of cash. How does a guy like Quintero Lopez 00:17:16.910 --> 00:17:19.789 get his hooks into me? It almost always starts 00:17:19.789 --> 00:17:22.690 with a seminar or a real estate investment club. 00:17:22.769 --> 00:17:25.470 You see an ad online or get a flyer. You walk 00:17:25.470 --> 00:17:27.650 into a hotel ballroom on a Saturday morning. 00:17:27.849 --> 00:17:30.990 Coffee and donuts in the back. Of course. Everyone 00:17:30.990 --> 00:17:34.230 is dressed nicely. And there's a very charismatic, 00:17:34.470 --> 00:17:36.509 very persuasive leader at the front of the room 00:17:36.509 --> 00:17:38.789 talking about passive income and generational 00:17:38.789 --> 00:17:42.450 wealth. The classic guru pitch. Stop working 00:17:42.450 --> 00:17:44.990 for your money. And make your money work for 00:17:44.990 --> 00:17:48.470 you. Exactly. And the pitch is so seductive and 00:17:48.470 --> 00:17:52.650 simple. Look, folks, we have found a gold mine, 00:17:52.750 --> 00:17:55.230 a whole neighborhood of undervalued properties 00:17:55.230 --> 00:17:57.849 that are about to pop. We need investor partners. 00:17:58.460 --> 00:18:00.559 And we will do all the work. We'll find the houses. 00:18:00.680 --> 00:18:03.059 We'll manage the repairs. We'll find good tenants. 00:18:03.180 --> 00:18:04.720 We'll collect the rent checks. All you have to 00:18:04.720 --> 00:18:06.660 do is supply the credit. You just bring your 00:18:06.660 --> 00:18:08.900 good credit score to the table. Just sign here, 00:18:09.079 --> 00:18:11.039 and we will split all the profits with you 50 00:18:11.039 --> 00:18:13.660 -50. And the investor in the audience thinks, 00:18:13.779 --> 00:18:15.480 wow, this is my big break. I'm finally going 00:18:15.480 --> 00:18:18.019 to be a real estate tycoon. So they sign loan 00:18:18.019 --> 00:18:21.140 applications for three, four, maybe five properties 00:18:21.140 --> 00:18:23.789 at once. And the reality of the situation? The 00:18:23.789 --> 00:18:26.309 reality is that the properties are garbage. They're 00:18:26.309 --> 00:18:30.190 dilapidated, often condemned ruins. The purchase 00:18:30.190 --> 00:18:33.329 price listed on the loan application is massively 00:18:33.329 --> 00:18:35.509 inflated, thanks to that corrupt appraiser we 00:18:35.509 --> 00:18:38.730 talked about. The ring organizer takes the bank's 00:18:38.730 --> 00:18:41.589 loan money, pays off the actual seller for the 00:18:41.589 --> 00:18:44.609 true, very low value of the house, and then pockets 00:18:44.609 --> 00:18:47.230 the huge difference. And what about all the promises, 00:18:47.589 --> 00:18:51.650 the repairs, the tenants? The split profits? 00:18:52.190 --> 00:18:54.869 All phantoms. They don't exist. The organizer 00:18:54.869 --> 00:18:56.670 might make the first few mortgage payments on 00:18:56.670 --> 00:18:58.809 behalf of the investor, just to keep the bank 00:18:58.809 --> 00:19:00.710 from getting suspicious too quickly. We call 00:19:00.710 --> 00:19:03.369 those lulling payments. To lull them into a false 00:19:03.369 --> 00:19:05.890 sense of security. Precisely. But eventually 00:19:05.890 --> 00:19:08.329 the payments stop. The organizer takes the money, 00:19:08.430 --> 00:19:11.089 changes their phone number, and vanishes. And 00:19:11.089 --> 00:19:12.690 the investor, the person who thought they were 00:19:12.690 --> 00:19:14.369 on the path to building generational wealth, 00:19:14.509 --> 00:19:17.349 is left holding the bag. They are left... Completely 00:19:17.349 --> 00:19:19.750 ruined. They're on the hook for five different 00:19:19.750 --> 00:19:23.190 mortgages totaling millions of dollars, all on 00:19:23.190 --> 00:19:25.529 properties that are uninhabitable and worth a 00:19:25.529 --> 00:19:28.130 tiny fraction of the debt owed on them. Their 00:19:28.130 --> 00:19:30.990 credit is destroyed. They're facing foreclosure 00:19:30.990 --> 00:19:34.190 and bankruptcy. And the organizer is on a beach 00:19:34.190 --> 00:19:37.400 somewhere or. more likely, has just moved to 00:19:37.400 --> 00:19:40.059 the next town over to set up the exact same scam 00:19:40.059 --> 00:19:43.059 with a new name. It's just devastating. And it 00:19:43.059 --> 00:19:46.099 really, really preys on that very human desire 00:19:46.099 --> 00:19:49.700 for easy money for a shortcut. Greed and trust, 00:19:49.920 --> 00:19:52.480 a dangerous combination. That's what they exploit. 00:19:52.829 --> 00:19:54.329 Let's dig into the toolkit a little more. We 00:19:54.329 --> 00:19:55.769 mentioned the corrupt appraiser, but I want to 00:19:55.769 --> 00:19:57.910 get a bit more technical on appraisal fraud because 00:19:57.910 --> 00:19:59.930 it's not always just saying a house is worth 00:19:59.930 --> 00:20:02.329 more than it is, right? The notes say you can 00:20:02.329 --> 00:20:04.210 also commit fraud by saying it's worth less. 00:20:04.369 --> 00:20:06.589 Yes, that's a scheme called flopping. It's essentially 00:20:06.589 --> 00:20:09.029 the opposite of house flipping. Okay, explain 00:20:09.029 --> 00:20:11.609 flopping to me. So let's say a bank has already 00:20:11.609 --> 00:20:14.250 foreclosed on a house. It's now what they call 00:20:14.250 --> 00:20:18.289 an REO or real estate owned property. The bank 00:20:18.289 --> 00:20:19.789 just wants to get rid of it and get some of their 00:20:19.789 --> 00:20:21.500 money back. Right. They're not in the property 00:20:21.500 --> 00:20:24.059 management business. Not at all. So you, the 00:20:24.059 --> 00:20:26.119 fraudster, want to buy it from them for cheap. 00:20:26.259 --> 00:20:28.859 So you bribe an appraiser to go in and write 00:20:28.859 --> 00:20:31.599 a report for the bank that says this place is 00:20:31.599 --> 00:20:34.460 a complete disaster. The foundation is cracked. 00:20:34.720 --> 00:20:37.619 It's full of black mold. The roof is caving in. 00:20:37.720 --> 00:20:40.420 It's practically worthless. Even though the house 00:20:40.420 --> 00:20:42.500 is actually in a perfectly fine condition. Exactly. 00:20:42.700 --> 00:20:45.240 The bank, which is probably in another state 00:20:45.240 --> 00:20:47.440 and has never seen the property, looks at this 00:20:47.440 --> 00:20:50.259 official appraisal report, panics. and thinks 00:20:50.259 --> 00:20:52.880 they're holding a toxic asset. So they agree 00:20:52.880 --> 00:20:55.240 to sell it to you in a short sale for pennies 00:20:55.240 --> 00:20:57.140 on the dollar, just to get it off their books. 00:20:57.440 --> 00:21:00.319 You buy it for $50 ,000, maybe you paint the 00:21:00.319 --> 00:21:02.220 walls and scrub the floors, and you turn around 00:21:02.220 --> 00:21:04.759 and sell it the very next week for its true market 00:21:04.759 --> 00:21:08.180 value of $200 ,000. You've defrauded the bank 00:21:08.180 --> 00:21:10.640 by manipulating the valuation downward. That 00:21:10.640 --> 00:21:13.839 is just, it's devious. And the notes also mention 00:21:13.839 --> 00:21:16.779 something about cashback schemes. This sounds 00:21:16.779 --> 00:21:18.400 like the rewards you get on your credit card, 00:21:18.500 --> 00:21:20.299 but I'm guessing it's not nearly that innocent. 00:21:20.539 --> 00:21:23.099 Not quite. This is a favorite trick of those 00:21:23.099 --> 00:21:25.420 get -rich -quick in real estate courses you see 00:21:25.420 --> 00:21:27.859 advertised late at night. It's often pitched 00:21:27.859 --> 00:21:30.819 as a form of creative financing. I love that 00:21:30.819 --> 00:21:33.140 term. Anytime I hear creative financing, I just 00:21:33.140 --> 00:21:36.079 assume it means felony. In this context, that's 00:21:36.079 --> 00:21:38.299 usually a safe assumption. Here's how it works. 00:21:38.799 --> 00:21:41.420 Let's say a legitimate seller wants $300 ,000 00:21:41.420 --> 00:21:44.660 for their house. The buyer, who is our fraudster, 00:21:44.839 --> 00:21:47.140 comes to them and says, look, I'll offer you 00:21:47.140 --> 00:21:49.980 $400 ,000 for your house, but we're going to 00:21:49.980 --> 00:21:52.059 have a separate secret side agreement. Okay. 00:21:52.160 --> 00:21:54.400 And in that side agreement, it says that after 00:21:54.400 --> 00:21:56.359 the closing, you're going to write a check for 00:21:56.359 --> 00:21:59.180 that extra $100 ,000 back to a consulting company 00:21:59.180 --> 00:22:02.450 that I own for repairs or fees. And the lender, 00:22:02.470 --> 00:22:04.529 who is the one actually putting up the $400 ,000? 00:22:04.970 --> 00:22:07.450 They have no idea about this side deal. They 00:22:07.450 --> 00:22:09.410 think the house is actually selling for $400 00:22:09.410 --> 00:22:12.369 ,000. They're lending 80 % or 90 % of that value. 00:22:12.690 --> 00:22:17.109 But the true value is only $300 ,000. The borrower 00:22:17.109 --> 00:22:19.890 walks away from the closing table with a house 00:22:19.890 --> 00:22:22.869 and $100 ,000 of the bank's cash in their pocket. 00:22:23.349 --> 00:22:26.730 That cashback payment is a kickback. And if it's 00:22:26.730 --> 00:22:28.710 not disclosed on the official HUD -1 settlement 00:22:28.710 --> 00:22:31.500 statement, it is straight -up bank fraud. It's 00:22:31.500 --> 00:22:34.099 essentially taking out a huge unsecured personal 00:22:34.099 --> 00:22:37.279 loan disguised as a mortgage, but with the added 00:22:37.279 --> 00:22:39.539 bonus that you have no intention of ever paying 00:22:39.539 --> 00:22:41.700 it back. Precisely. The house is just the excuse 00:22:41.700 --> 00:22:43.500 to get the cash. All right. Now I want to talk 00:22:43.500 --> 00:22:45.599 about my absolute favorite term in this entire 00:22:45.599 --> 00:22:49.400 stack of research. Oh, yes. It sounds violent. 00:22:49.500 --> 00:22:51.359 It sounds messy. And looking at the mechanics 00:22:51.359 --> 00:22:54.519 of it, it is arguably the most chaotic and brazen 00:22:54.519 --> 00:22:56.700 form of this fraud. It is the smash and grab 00:22:56.700 --> 00:22:59.380 of mortgage fraud. It doesn't rely on subtlety. 00:22:59.539 --> 00:23:02.819 It relies on pure brute force speed. OK, so walk 00:23:02.819 --> 00:23:04.720 us through a timeline. If I'm a fraudster and 00:23:04.720 --> 00:23:07.079 I want to shotgun a property, what does my week 00:23:07.079 --> 00:23:09.619 look like? OK, let's say you own a house free 00:23:09.619 --> 00:23:12.079 and clear, no mortgage on it, and it's worth 00:23:12.079 --> 00:23:15.160 $500 ,000. Or you have a straw buyer who does. 00:23:15.789 --> 00:23:18.450 On Monday morning, you go online and you apply 00:23:18.450 --> 00:23:21.289 for a $400 ,000 cash -out refinance with Bank 00:23:21.289 --> 00:23:24.009 A. Okay, that's standard enough. Then on Monday 00:23:24.009 --> 00:23:26.710 afternoon, you apply for another $400 ,000 cash 00:23:26.710 --> 00:23:28.670 -out refinance on the same house with Bank B. 00:23:28.950 --> 00:23:32.380 On Tuesday morning, you hit Bank C. On Wednesday, 00:23:32.559 --> 00:23:34.920 Bank D. So I've got four different loan applications 00:23:34.920 --> 00:23:37.319 out at the same time. But hold on, don't the 00:23:37.319 --> 00:23:39.680 banks check the title? Won't Bank B see that 00:23:39.680 --> 00:23:42.000 I already applied for a loan with Bank A? Ah, 00:23:42.079 --> 00:23:44.400 that's the key. They check the recorded title 00:23:44.400 --> 00:23:46.680 at the county office. An application for a loan 00:23:46.680 --> 00:23:48.680 is not a recorded lien office. It's just a piece 00:23:48.680 --> 00:23:51.599 of paper sitting on a loan officer's desk. So 00:23:51.599 --> 00:23:53.460 when Bank A's title company pulls the records, 00:23:53.599 --> 00:23:56.200 the title is clean. When Bank B pulls it, it's 00:23:56.200 --> 00:23:59.849 clean. Bank C, clean. They all think. They're 00:23:59.849 --> 00:24:01.509 going to be the first position lien holder, which 00:24:01.509 --> 00:24:03.690 is the safest spot to be in. So they all approve 00:24:03.690 --> 00:24:06.230 the loans. And this is where the speed and coordination 00:24:06.230 --> 00:24:09.069 come in. You schedule all four closings for the 00:24:09.069 --> 00:24:11.430 same day or at least within a 24 hour period. 00:24:11.769 --> 00:24:14.490 You literally run around town from one title 00:24:14.490 --> 00:24:17.900 company. The next, signing papers. Bank A wires 00:24:17.900 --> 00:24:22.200 you $400 ,000. Bank B wires you $400 ,000. Bank 00:24:22.200 --> 00:24:24.759 C wires you $400 ,000. So you have a house that's 00:24:24.759 --> 00:24:26.440 worth half a million dollars, but you've just 00:24:26.440 --> 00:24:30.359 pocketed 1 .2, maybe $1 .6 million in cash. And 00:24:30.359 --> 00:24:33.059 then? Yeah. You disappear. And the banks, what 00:24:33.059 --> 00:24:36.319 happens to them? The banks collide. Yeah. A month 00:24:36.319 --> 00:24:38.059 later, no payments have been made. So they all 00:24:38.059 --> 00:24:40.279 start foreclosure proceedings. And that's when 00:24:40.279 --> 00:24:42.099 they discover that there is one mortgage on the 00:24:42.099 --> 00:24:44.470 house. There are four. And the house isn't worth 00:24:44.470 --> 00:24:46.809 nearly enough to pay even two of them back, let 00:24:46.809 --> 00:24:49.349 alone all four. So who gets paid first? Who actually 00:24:49.349 --> 00:24:51.690 gets the house? Well, the lawyers get paid first, 00:24:51.769 --> 00:24:54.470 that's for sure. The banks end up in massive, 00:24:54.509 --> 00:24:57.309 expensive litigation to determine lien priority. 00:24:58.289 --> 00:25:00.390 And it usually comes down to something as simple 00:25:00.390 --> 00:25:02.970 as who managed to get their deed of trust time 00:25:02.970 --> 00:25:05.009 -stamped at the county recorder's office first. 00:25:05.599 --> 00:25:08.160 If Bank A's courier got their documents stamped 00:25:08.160 --> 00:25:11.539 at 9 .00 a .m. and Bank B's got stamped at 9 00:25:11.539 --> 00:25:14.500 .15 a .m., Bank A gets the house and will probably 00:25:14.500 --> 00:25:17.319 get most of their money back. Bank B, C, and 00:25:17.319 --> 00:25:20.279 D get nothing, a total loss. That is a perfect 00:25:20.279 --> 00:25:22.980 segue into the really technical exploit that 00:25:22.980 --> 00:25:24.720 makes shotgunning and other schemes possible. 00:25:25.140 --> 00:25:27.839 The notes call it working the gap. And this isn't 00:25:27.839 --> 00:25:29.880 a computer hack. It's a bureaucracy hack. It 00:25:29.880 --> 00:25:32.079 is. It's a fundamental exploitation of a weakness 00:25:32.079 --> 00:25:34.400 in the system. We like to think of our financial 00:25:34.400 --> 00:25:37.440 system as this instant digital fiber optic network 00:25:37.440 --> 00:25:39.220 where everything happens at the speed of light. 00:25:39.319 --> 00:25:41.920 But the legal system, the actual system of property 00:25:41.920 --> 00:25:44.900 ownership, is surprisingly analog. It still relies 00:25:44.900 --> 00:25:47.359 on people in county recorder offices. So explain 00:25:47.359 --> 00:25:49.900 the gap. What is physically happening in that 00:25:49.900 --> 00:25:53.000 time? When you close on a loan, the title company 00:25:53.000 --> 00:25:55.700 or the settlement agent has to physically send 00:25:55.700 --> 00:25:58.079 the deed of trust document to the county courthouse 00:25:58.079 --> 00:26:00.599 to be officially recorded in the public record. 00:26:01.480 --> 00:26:04.799 In the old days, a courier in a van would literally 00:26:04.799 --> 00:26:08.059 drive a stack of papers over. Now, it might be 00:26:08.059 --> 00:26:10.240 e -filed, but there is still a processing queue. 00:26:10.700 --> 00:26:13.759 A county cleric has to review the document, give 00:26:13.759 --> 00:26:16.500 it an official stamp, index it, and then upload 00:26:16.500 --> 00:26:18.940 it into the searchable public database. And that 00:26:18.940 --> 00:26:21.319 process takes time. It's not instant. It creates 00:26:21.319 --> 00:26:24.900 a blind spot. Delay might only be 24 hours, but 00:26:24.900 --> 00:26:26.920 in some really busy urban counties, it might 00:26:26.920 --> 00:26:30.380 be two weeks before it shows up. That period, 00:26:30.539 --> 00:26:32.500 the time between when the loan officially closes 00:26:32.500 --> 00:26:34.319 and when it appears in the public search results, 00:26:34.460 --> 00:26:38.579 that is the gap. So if I'm a fraudster, I know 00:26:38.579 --> 00:26:40.400 that if I close a loan on a Friday afternoon. 00:26:40.640 --> 00:26:43.400 I know that no one is going to see that new lien 00:26:43.400 --> 00:26:46.400 on the public record until at least Tuesday or 00:26:46.400 --> 00:26:49.019 Wednesday of the following week. And that gives 00:26:49.019 --> 00:26:52.019 you a three to four day window of complete invisibility 00:26:52.019 --> 00:26:54.380 to go out and execute more loans against that 00:26:54.380 --> 00:26:56.779 same property. It's like writing a check on a 00:26:56.779 --> 00:26:58.880 Friday knowing the bank is closed all weekend. 00:26:59.119 --> 00:27:01.660 You are exploiting the latency of government 00:27:01.660 --> 00:27:03.920 bureaucracy. And I would imagine that if these 00:27:03.920 --> 00:27:06.039 fraudsters ever get caught, they just play dumb. 00:27:06.380 --> 00:27:09.160 Always. That's the built in defense. Oh, that 00:27:09.160 --> 00:27:11.519 was just a clerical error. I'm so sorry. I thought 00:27:11.519 --> 00:27:13.200 that other loan fell through at the last minute. 00:27:13.599 --> 00:27:15.859 My broker handled all the paperwork. I had no 00:27:15.859 --> 00:27:19.000 idea. They use the inherent chaos and slowness 00:27:19.000 --> 00:27:22.359 of the system as their cover story. It's brilliant 00:27:22.359 --> 00:27:25.039 in a really twisted sort of way. It highlights 00:27:25.039 --> 00:27:27.079 that no matter how fast the money moves electronically, 00:27:27.440 --> 00:27:29.660 the legal paperwork still moves at the speed 00:27:29.660 --> 00:27:32.039 of government. Exactly. And that fundamental 00:27:32.039 --> 00:27:35.299 discrepancy is where so much of this fraud lives 00:27:35.299 --> 00:27:37.859 and breathes. I want to circle back to the victims 00:27:37.859 --> 00:27:40.579 for a moment. We talked about the naive investors 00:27:40.579 --> 00:27:43.359 who get tricked. But there's a category here 00:27:43.359 --> 00:27:46.519 in the notes called identity and agency. This 00:27:46.519 --> 00:27:49.640 is where completely innocent, uninvolved people 00:27:49.640 --> 00:27:53.339 get dragged into this mess. Identity theft in 00:27:53.339 --> 00:27:56.000 the context of mortgage fraud is an absolute 00:27:56.000 --> 00:27:58.799 nightmare. This isn't just someone stealing your 00:27:58.799 --> 00:28:01.339 credit card and buying a new TV. This is someone 00:28:01.339 --> 00:28:03.940 stealing your entire identity and buying a house 00:28:03.940 --> 00:28:06.359 in your name. So you could be sitting at home. 00:28:07.209 --> 00:28:09.450 minding your own business, and you suddenly start 00:28:09.450 --> 00:28:12.069 getting foreclosure notices in the mail for a 00:28:12.069 --> 00:28:13.809 house in Florida that you've never even seen. 00:28:13.970 --> 00:28:16.529 And unwinding that is incredibly difficult and 00:28:16.529 --> 00:28:18.710 expensive. You have to prove a negative. You 00:28:18.710 --> 00:28:21.230 have to prove that you didn't sign a legal document 00:28:21.230 --> 00:28:23.069 that has what looks like your signature on it. 00:28:23.170 --> 00:28:25.269 You need handwriting experts. You need lawyers. 00:28:25.529 --> 00:28:27.170 The bank doesn't want to believe you. They just 00:28:27.170 --> 00:28:28.950 want their money back. It can take years to clean 00:28:28.950 --> 00:28:31.200 up. But there's another variation here in the 00:28:31.200 --> 00:28:33.579 notes that I have to say it just makes my blood 00:28:33.579 --> 00:28:36.799 boil. It's called falsification without borrower 00:28:36.799 --> 00:28:39.920 knowledge. This is where the borrower is actually 00:28:39.920 --> 00:28:43.559 the victim of their own broker. This is the truly 00:28:43.559 --> 00:28:46.519 predatory side of mortgage fraud. So imagine 00:28:46.519 --> 00:28:49.380 you have a good, honest family. They want to 00:28:49.380 --> 00:28:51.839 buy a home. They have a modest income. Let's 00:28:51.839 --> 00:28:54.539 say they make $3 ,000 a month combined. They 00:28:54.539 --> 00:28:56.680 go to a mortgage broker and say, this is what 00:28:56.680 --> 00:28:59.579 we make. Can we qualify for a loan? And the honest 00:28:59.579 --> 00:29:02.579 ethical answer should be, I'm sorry, but no, 00:29:02.759 --> 00:29:05.420 not for the house you want. Right. But that broker, 00:29:05.559 --> 00:29:07.099 they work on commission. If they don't close 00:29:07.099 --> 00:29:09.240 the loan, they don't get paid. So the broker 00:29:09.240 --> 00:29:10.880 takes the family's application, walks into the 00:29:10.880 --> 00:29:13.859 back room and just changes the numbers. That 00:29:13.859 --> 00:29:17.180 $3 ,000 a month in income becomes $10 ,000 a 00:29:17.180 --> 00:29:18.480 month. And they don't tell the family they've 00:29:18.480 --> 00:29:21.839 done this. The family never sees the final falsified 00:29:21.839 --> 00:29:23.680 application that actually gets submitted to the 00:29:23.680 --> 00:29:26.079 bank. They just show up at closing and there's 00:29:26.079 --> 00:29:28.359 a mountain of paperwork. The settlement agent 00:29:28.359 --> 00:29:31.140 says sign here, initial here, sign here. The 00:29:31.140 --> 00:29:34.019 loan gets approved. The broker gets a $5 ,000 00:29:34.019 --> 00:29:36.640 or $10 ,000 commission check and disappears. 00:29:37.000 --> 00:29:39.460 And the family moves into their new home and 00:29:39.460 --> 00:29:41.779 three months later? They default. Of course they 00:29:41.779 --> 00:29:43.720 default. They can't possibly make the mortgage 00:29:43.720 --> 00:29:45.720 payments because the payments were calculated 00:29:45.720 --> 00:29:47.539 for a family earning three times their actual 00:29:47.539 --> 00:29:50.539 salary. They end up losing the home to foreclosure. 00:29:50.759 --> 00:29:53.539 Their credit is destroyed for a decade. And we 00:29:53.539 --> 00:29:55.240 didn't even know they were a party to a federal 00:29:55.240 --> 00:29:57.890 crime. They were victims too. it just really 00:29:57.890 --> 00:30:01.690 exposes the the perverse incentives that were 00:30:01.690 --> 00:30:04.430 built into the system when everyone in the transaction 00:30:04.430 --> 00:30:06.769 the agent the broker the loan officer when they 00:30:06.769 --> 00:30:09.390 only get paid if the deal closes everyone has 00:30:09.390 --> 00:30:11.809 a powerful financial incentive to look the other 00:30:11.809 --> 00:30:14.769 way or in this case to actively cheat the system 00:30:14.769 --> 00:30:18.470 that was the systemic rot The appraisers, the 00:30:18.470 --> 00:30:21.369 brokers, the realtors, the loan officers. For 00:30:21.369 --> 00:30:23.650 a time, they were all financially aligned against 00:30:23.650 --> 00:30:25.910 the truth. Let's zoom out a bit to the historical 00:30:25.910 --> 00:30:28.569 context because reading this timeline in the 00:30:28.569 --> 00:30:30.529 notes, it's just so frustrating. This wasn't 00:30:30.529 --> 00:30:33.089 a surprise. The alarm bells were ringing and 00:30:33.089 --> 00:30:36.710 ringing loudly for years before the 2008 crash. 00:30:37.029 --> 00:30:38.869 Oh, they were deafening. The notes mentioned 00:30:38.869 --> 00:30:41.769 that BBC investigation way back in 2003. Right. 00:30:41.990 --> 00:30:44.329 The money program. Yeah. They sent undercover 00:30:44.329 --> 00:30:47.130 researchers. posing as borrowers, into mortgage 00:30:47.130 --> 00:30:49.490 brokerage firms in the U .K., and the brokers 00:30:49.490 --> 00:30:52.170 were caught on hidden camera explicitly telling 00:30:52.170 --> 00:30:54.750 them to lie on their applications. Just say you're 00:30:54.750 --> 00:30:56.809 self -employed. Make up a number for your income. 00:30:56.910 --> 00:30:59.349 We don't check. This wasn't some hidden secret. 00:30:59.470 --> 00:31:01.690 It was standard operating procedure. And then 00:31:01.690 --> 00:31:04.509 here in the U .S., the FBI got involved, 2004. 00:31:05.369 --> 00:31:08.430 That seems to be a key date. It is. Chris Swecker, 00:31:08.609 --> 00:31:10.549 who was the assistant director of the FBI's Criminal 00:31:10.549 --> 00:31:12.609 Investigative Division at the time, went before 00:31:12.609 --> 00:31:15.200 Congress in September of 2004. He didn't use 00:31:15.200 --> 00:31:18.079 soft language. He warned of an epidemic of mortgage 00:31:18.079 --> 00:31:20.660 fraud. Epidemic. That's a very strong word to 00:31:20.660 --> 00:31:23.660 use in a congressional testimony. It is. And 00:31:23.660 --> 00:31:25.619 he explicitly said that if it wasn't brought 00:31:25.619 --> 00:31:28.359 under control, it had the potential to cause 00:31:28.359 --> 00:31:31.299 a financial crisis on the same scale as the savings 00:31:31.299 --> 00:31:34.440 and loan crisis of the 1980s. A massive financial 00:31:34.440 --> 00:31:38.039 collapse. He literally predicted the 2008 crisis 00:31:38.039 --> 00:31:41.240 with startling accuracy four years before it 00:31:41.240 --> 00:31:44.220 happened. Why didn't anyone listen? Why didn't 00:31:44.220 --> 00:31:46.400 they do something? I think the simple, cynical 00:31:46.400 --> 00:31:49.220 answer is that everyone was making too much money. 00:31:49.440 --> 00:31:51.740 The banks were making a fortune packaging and 00:31:51.740 --> 00:31:53.319 selling these loans. The brokers were making 00:31:53.319 --> 00:31:55.680 huge commissions. The homeowners were watching 00:31:55.680 --> 00:31:58.720 their property values skyrocket. Nobody wanted 00:31:58.720 --> 00:32:00.460 to be the one to turn off the music while the 00:32:00.460 --> 00:32:02.500 party was still going. Until the music stopped. 00:32:02.779 --> 00:32:05.279 And then we all got the hangover. Which brings 00:32:05.279 --> 00:32:07.839 us to the government finally striking back. The 00:32:07.839 --> 00:32:11.160 Fraud Enforcement and Recovery Act of 2009. For 00:32:11.160 --> 00:32:14.549 ERA. This was the cleanup crew legislation. The 00:32:14.549 --> 00:32:16.329 government finally realized that their existing 00:32:16.329 --> 00:32:18.569 laws and enforcement tools weren't sharp enough. 00:32:18.710 --> 00:32:20.829 And maybe more importantly, they just didn't 00:32:20.829 --> 00:32:22.869 have enough manpower to tackle a problem of this 00:32:22.869 --> 00:32:25.170 magnitude. It always comes down to budget and 00:32:25.170 --> 00:32:26.849 resources, doesn't it? You can have the best 00:32:26.849 --> 00:32:28.509 laws in the world, but if you don't have the 00:32:28.509 --> 00:32:30.970 prosecutors and agents to enforce them, nothing 00:32:30.970 --> 00:32:34.049 happens. Exactly. And Farrow was designed to 00:32:34.049 --> 00:32:36.869 pour gasoline on the enforcement fire. The Section 00:32:36.869 --> 00:32:41.130 3 authorization was just massive. $165 million 00:32:41.130 --> 00:32:43.529 went straight to the Department of Justice. What 00:32:43.529 --> 00:32:47.369 does $165 million buy you in the DOJ? It buys 00:32:47.369 --> 00:32:50.609 you a lot. It buys you dedicated teams of forensic 00:32:50.609 --> 00:32:53.369 accountants who can follow the money. It buys 00:32:53.369 --> 00:32:56.650 you dozens of new FBI field agents who do nothing 00:32:56.650 --> 00:32:59.720 but investigate mortgage files. And crucially, 00:32:59.799 --> 00:33:02.500 it buys you federal prosecutors who can afford 00:33:02.500 --> 00:33:04.799 to spend two or three years building a complex, 00:33:04.900 --> 00:33:07.980 airtight Ariko case against an entire fraud ring. 00:33:08.119 --> 00:33:10.359 And looking at the rest of the breakdown, $30 00:33:10.359 --> 00:33:12.720 million for the Postal Inspection Service. We 00:33:12.720 --> 00:33:14.579 mentioned them earlier. And they deserved it. 00:33:14.660 --> 00:33:17.740 Never, ever underestimate the postal inspectors. 00:33:17.799 --> 00:33:19.559 They are some of the best financial crime investigators 00:33:19.559 --> 00:33:22.059 in the entire world. And then there's $20 million 00:33:22.059 --> 00:33:24.420 for the Secret Service. Now, that's the one that 00:33:24.420 --> 00:33:28.029 jumped out at me. I think of them as the guys 00:33:28.029 --> 00:33:30.250 in sunglasses protecting the president. Why are 00:33:30.250 --> 00:33:32.670 they investigating mortgages in Ohio? It's a 00:33:32.670 --> 00:33:34.650 common misconception. People forget that the 00:33:34.650 --> 00:33:37.089 Secret Service was originally founded in 1865 00:33:37.089 --> 00:33:40.569 to fight counterfeiting. Their DNA, their core 00:33:40.569 --> 00:33:42.750 mission, is protecting the nation's financial 00:33:42.750 --> 00:33:46.940 integrity. So financial fraud, wire fraud, access 00:33:46.940 --> 00:33:49.619 device fraud, that is their absolute wheelhouse. 00:33:49.900 --> 00:33:52.680 FRA basically unleashed them to hunt down the 00:33:52.680 --> 00:33:55.019 money trails from the mortgage crisis. So we've 00:33:55.019 --> 00:33:57.339 really gone from a single person fudging a number 00:33:57.339 --> 00:34:00.940 on a W -2 form all the way up to a massive coordinated 00:34:00.940 --> 00:34:03.599 mobilization of federal law enforcement. It has 00:34:03.599 --> 00:34:06.119 been quite a journey through this stack of notes. 00:34:06.279 --> 00:34:07.920 It really has and highlights the connectivity 00:34:07.920 --> 00:34:10.260 of it all. Mortgage fraud isn't just about a 00:34:10.260 --> 00:34:13.800 house or a single loan. It's about trust. global 00:34:13.800 --> 00:34:16.340 financial system is ultimately built on the idea 00:34:16.340 --> 00:34:18.900 that if a piece of paper says this is a secure 00:34:18.900 --> 00:34:21.940 loan for $300 ,000, that that statement is actually 00:34:21.940 --> 00:34:24.440 true. When you start to erode that fundamental 00:34:24.440 --> 00:34:26.619 trust, the gears of the whole system just grind 00:34:26.619 --> 00:34:28.639 to a halt. And as we close out here, I want to 00:34:28.639 --> 00:34:30.360 leave our listeners with a final thought that 00:34:30.360 --> 00:34:31.880 came up when we were discussing that concept 00:34:31.880 --> 00:34:34.380 of working the gap. Right. We talked about how 00:34:34.380 --> 00:34:37.980 these fraudsters were so brilliant at exploiting 00:34:37.980 --> 00:34:40.380 the physical delay in the county recorder's office, 00:34:40.480 --> 00:34:42.719 the slow speed of bureaucracy. The latency in 00:34:42.719 --> 00:34:44.659 the system, yeah. So now we're entering this 00:34:44.659 --> 00:34:48.659 era of AI, of blockchain technology, of instant 00:34:48.659 --> 00:34:51.699 financial settlement. In theory, that technology. 00:34:52.010 --> 00:34:54.469 should close that gap forever. We should be able 00:34:54.469 --> 00:34:57.510 to have instant, immutable, perfectly verifiable 00:34:57.510 --> 00:35:00.489 property records. That's the dream, yes. A fraud 00:35:00.489 --> 00:35:02.989 -proof system. But then I think back to the evolution 00:35:02.989 --> 00:35:05.630 from the liar loan to the Photoshop forgeries. 00:35:05.809 --> 00:35:08.769 As the verification gets better, the fakes just 00:35:08.769 --> 00:35:11.510 get better too. And that is the terrifying new 00:35:11.510 --> 00:35:15.789 frontier. Imagine a deepfake video call. An underwriter 00:35:15.789 --> 00:35:17.909 thinks they're on a FaceTime call with a borrower. 00:35:18.320 --> 00:35:21.039 verifying their identity face -to -face, but 00:35:21.039 --> 00:35:24.000 it's not them. It's an AI avatar that looks and 00:35:24.000 --> 00:35:27.039 sounds exactly like them. Imagine an AI that 00:35:27.039 --> 00:35:30.019 doesn't just generate a fake W -2, but generates 00:35:30.019 --> 00:35:32.820 an entire fake digital footprint for a synthetic 00:35:32.820 --> 00:35:36.460 identity, a fake LinkedIn profile, a fake company 00:35:36.460 --> 00:35:40.610 website, years of fake email traffic. All of 00:35:40.610 --> 00:35:43.349 it generated in seconds to fool the bank's underwriting 00:35:43.349 --> 00:35:45.269 algorithm. So we might be moving from the era 00:35:45.269 --> 00:35:48.409 of shotgunning and exploiting paper delays to 00:35:48.409 --> 00:35:51.809 a new era of synthetic identity fraud that is 00:35:51.809 --> 00:35:55.269 almost impossible for a human or even another 00:35:55.269 --> 00:35:58.289 algorithm to detect. It's a perpetual arms race. 00:35:58.409 --> 00:36:01.219 The banks build a 10 -foot wall. And the fraudsters 00:36:01.219 --> 00:36:04.360 invent an 11 -foot ladder. It never truly ends. 00:36:04.619 --> 00:36:06.940 Well, on that slightly terrifying note, for everyone 00:36:06.940 --> 00:36:08.820 listening, I think the takeaway today is simple. 00:36:09.119 --> 00:36:12.139 Read what you sign. Always. Yeah. If a deal sounds 00:36:12.139 --> 00:36:14.179 too good to be true, like that passive income 00:36:14.179 --> 00:36:16.179 real estate club, it absolutely is. And if any 00:36:16.179 --> 00:36:18.400 professional ever tells you to just fudge the 00:36:18.400 --> 00:36:20.599 numbers a little, you need to remember that just 00:36:20.599 --> 00:36:23.280 fudging is a federal crime with a 30 -year cap. 00:36:23.460 --> 00:36:26.429 Trust but verify. And then verify it again. Thanks 00:36:26.429 --> 00:36:27.929 for diving into the dark side of the housing 00:36:27.929 --> 00:36:29.690 market with us. It was a pleasure. We'll see 00:36:29.690 --> 00:36:31.929 you on the next Deep Dive. And keep your paperwork 00:36:31.929 --> 00:36:32.590 clean, everyone.