1.0 INTRODUCTION

This paper addresses the growing problem of fraud and abuse within the Department of Housing and Urban Development's (HUD) single family mortgage insurance programs and the Veterans Administration's (VA) home loan guaranty program. In an effort to assist in the prosecution of such matters, it provides background information with respect to the home loan programs and outlines the necessary procedures and requirements for participation. Further, this paper provides a prosecutor with the common types of schemes utilized by most such offenders and suggests certain investigative and prosecutive techniques for effective case management and trial preparation.

2.0 BACKGROUND

HUD, VA and the Federal Bureau of Investigations (FBI) have recently joined together in a limited number of jurisdictions and created task forces to investigate fraud and abuse in the home loan insurance/guaranty programs. Because investigations have revealed this problem to be escalating throughout the country, the Economic Crime Council, an internal Department of Justice advisory group, has taken the problem under special consideration.

2.1 Overview and Purpose

The purpose of the VA home loan guaranty program and the HUD single family mortgage insurance programs is to facilitate the extension of mortgage credit on favorable terms by private lenders to eligible veterans and nonveterans, respectively.

The VA requires that the loans it guarantees be used for the purchase, construction, repair or refinancing of homes to be occupied by veterans and their families. In fact, the veteran is required to sign an "intent to occupy" certification as part of the loan application. A veteran can purchase a home without the requirement of a down payment. In the event of default, the VA guaranty protects lenders against losses up to a maximum of the lesser of 60% of the mortgage or $27,500. The VA's ability to pay claims is guaranteed by the United States government. VA mortgage loan guarantees assisted over 300,000 veterans to obtain home mortgages in Fiscal Year 1986.

In June 1934, Congress passed the National Housing Act, creating the Federal Housing Administration (FHA) which is an organizational unit within HUD, established for the purpose of administering HUD's home financing programs. HUD provides insurance protection guaranteed by the United States government to private lenders that finance mortgages to home buyers. The objects of the Act were to encourage improvements in housing standards and conditions, to provide an adequate home financing system by insurance of housing mortgage and credit, and to exert a stabilizing influence on the mortgage market. Congress further sought to make home ownership more accessible to families of modest incomes by by means of extensive mortgage insurance which would enable lenders to accept limited down payments, reduced interest rates, and longer maturities than might otherwise be available, thereby enabling persons who would not normally be able to qualify for a mortgage, to be able to purchase a home.

The Single-Family Home Mortgage Program established under Section 203(b) of the Act permits lenders that meet the requirements established by HUD to submit loans, for which they intend to issue, for insurance by FHA. To be eligible for such insurance, the home buyer and the property must also meet statutory and regulatory requirements. Section 203(b), the basic home

mortgage insurance program, provides for insurance on loans for single family residences of one-to-four family structures and is the section under which most FHA loans are insured. Other mortgage insurance programs fall under Sections 221(d)(2) and 235 of the Act. Section 221(d) (2) provides insured mortgage financing for the purchase or rehabilitation of one-to-four family dwellings by low or moderate income families displaced by governmental action. Under Section 235 HUD subsidizes mortgage payments for qualifying low-income mortgagors.

2.2 Mortgage Limits

The amount of the mortgage which HUD will insure depends upon whether the mortgagor intends to occupy or rent the property. Title 12 U.S.C. §§ 1709, 1715, provides for owner occupant and non-owner occupant mortgages, both of which require minimum cash investments by the mortgagor to qualify for the insured mortgage. Statutes and regulations specify that the maximum insurable mortgage on an owner-occupant loan may be no greater than 95-97% of the value of the property. If a mortgagor does not intend to reside on the property the maximum insurable loan is 85% of the property's appraised value.