What is Mortgage Fraud?
Mortgage fraud has mushroomed into one of the fastest growing white-collar crimes in the country. It is loosely defined as the “material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.” If fraud is identified in a real estate transaction, all participants (REALTOR®, lender, buyer, seller, title representative, etc.) could face stiff fines, penalties, or even imprisonment.
Don’t be a victim! It is important to recognize the warning signs of mortgage fraud and avoid the following situations:
BUY AND BAIL: The borrower is current on the mortgage, but the value of the home has fallen below the amount owed. The borrower continues to make payments on the home, while applying for a purchase money mortgage on another home that has been priced in alignment with today’s prices. After the new property has been obtained, the buy and bail borrower will allow the first home to go to foreclosure.
FORECLOSURE RESCUE SCHEME: The perpetrator identifies a homeowner who is at risk of defaulting on a mortgage or whose home is already in foreclosure. The perpetrator then misleads the owner into believing that the perpetrator can prevent the owner from losing the home. One variation of this scheme defrauds the homeowner without defrauding the lender. In this instance, the perpetrator convinces the homeowner to sign a form that supposedly authorizes the perpetrator to contact the lender on the owner’s behalf. In reality, the form is a deed transferring the property’s title to the perpetrator. The perpetrator then pays off the mortgage, evicts the owner, resells the home, and pockets the equity. A second variation defrauds both the homeowner and the lender. With this scheme, the perpetrator charges the homeowner an upfront fee that supposedly will pay for the perpetrator’s services. The perpetrator simply pockets this fee without doing anything, and the homeowner ultimately loses the home to foreclosure.
MORTGAGE STACKING SCHEME: A lender who is a victim of this fraud is intentionally kept unaware of previous mortgages or liens on a property, or is falsely promised that its loan monies will be used to pay off an existing loan(s). The lender is misled into believing it has priority against all other creditors if the owner/borrower defaults on its mortgage. To perpetrate such a scheme, the owner works in concert with a real estate closing agent and title agent who will assist in the fraud by not disclosing prior mortgages or liens to the lender or the title company on the necessary title commitment. A closing agent and title agent work with the owner by failing to pay off existing mortgages and diverting funds to the owner, without the lender’s knowledge. The lender and title company are unaware of this secret deal, and the loan is not only subordinate to prior liens but it is also at an increased risk of default since the owner is obligated to make mortgage payments on multiple loans which far exceed the value of the home. When the mortgage defaults, the lender attempts to foreclose on its mortgage, only to find that it is of no avail because a previous mortgage has first priority.
SHORT-SALE FRAUD: The borrower deliberately withholds mortgage payments, which forces the loan into default so that an accomplice can submit a “straw” short-sale offer at a purchase price that is less than the borrower’s loan balance. The borrower deceives the seller into believing that the straw short-sale offer is legitimate. Some red flags of a short-sale fraud are: The borrower had a strong payment history prior to the default and request for a short-sale; the borrower requests a short-sale before exploring other wo
rkout options; and the proposed buyer has commonalities with the borrower (the same surname, for example).
SHORT-SALE TRANSACTIONS INVOLVING THE UNDISCLOSED SALE OF PERSONAL PROPERTY: Transactions in which the Seller, upon completion of the closing, receives cash as a result of the purported sale of personal items by the Seller. These personal items and the terms of their purchase are often listed on a separate addendum, the existence of which is not disclosed to the lender who has approved the short sale on terms which do not include the Seller receiving cash for personal items. Further, the sale of the items and the Seller’s receipt of cash are not referenced on the HUD-1. The fair market value for these personal items rarely equals the amount paid for them. This practice is used either to provide cash to the Seller as part of the transaction or to provide additional compensation to a junior lienor in an amount not approved by the lender with the first priority in order to induce the junior lienor to discharge their lien.
OCCUPANCY FRAUD: A misrepresentation that the buyer intends to occupy the property in order to qualify for a reduced interest rate and lesser closing costs.
PROPERTY FLIPPING: It is acceptable to buy a property and sell it quickly for a profit. This practice can become illegal when a property is purchased for fair market value or less and, with the help of an inflated appraisal, is quickly sold to an unsuspecting buyer for an inflated price. In most instances, the perpetrators set up the “flip” transaction before having closed on the initial purchase, which means the flip can occur on the same day the perpetrator actually purchases the property.
PROPERTY FLOPPING: This practice typically involves a home which is listed and can only be sold via a short sale. An offer is obtained from an investor that is subject to the lender’s approval of a short sale. The offer is accepted by the seller and negotiations with the seller’s lender begin. A broker price opinion is presented to the lender supporting a claim that the market value of the property is equal to the first offer. In the meantime, the property continues to be marketed. Another offer is obtained from a buyer that is substantially higher than the offer submitted to the lender by the investor. The investor accepts the second offer, but convinces the lender to approve the sale under the terms of the first offer. The short sale closes with the lender and, thereafter, the investor completes the sale to the second buyer. The investor then pockets the difference between the first and second offers. The existence of the second offer is never disclosed to the lender.
DISAPPEARING SECOND MORTGAGE: The homebuyer allegedly borrows the down payment from the seller by means of a second mortgage; however, the seller releases the second mortgage immediately after the closing without the primary lender’s knowledge. The primary lender is often referred to as the underwriter of the loan. The information regarding the second mortgage does not appear on the HUD closing statement. This scheme requires an inflated appraisal and is utilized by a buyer who needs 100 percent financing without paying the additional costs normally associated with such loans.
SILENT SECOND MORTGAGE: The homebuyer borrows the down payment from the seller by way of a second mortgage, but this fact is not disclosed to the lender. The lender then approves the loan, believing that the buyer invested his/her own funds because the purchase agreement states that he/she has paid the amount of the second mortgage to the seller in full. In many instances, the second mortgage is not recorded so as to insure that the information is permanently concealed from the lender. In these situations, the buyer will make two monthly payments, one to the lender and one to the seller.
EQUITY SKIMMING: Equity skimming often begins with a straw buyer. A straw buyer is a financially qualified person who is convinced to purcha
se a property on someone else’s behalf, usually because the other person (the perpetrator) does not want his/her name to appear on the deed and mortgage. The perpetrator recruits the straw buyer by promising to pay him/her a fee and assume responsibility for the mortgage payments. After the closing, the straw buyer deeds the property to the perpetrator, but he/she does not record the deed. The perpetrator then rents the property and collects the rental payments, but does not make the mortgage payments. The property eventually goes into foreclosure. In another variation, the perpetrator steals an individual’s identity and applies for a mortgage in that person’s name. Once the loan has closed, the result is the same: the perpetrator rents the property and collects rental payments, but does not make the mortgage payments and the property ends up in foreclosure.
INFLATED APPRAISALS: An appraisal tells lenders, brokers, and buyers whether or not a home is a sound investment, and the estimates used to create the appraisal rely to some degree upon the appraiser’s subjective evaluation of the property and market conditions. Appraisal fraud occurs when, rather than conducting an independent estimate of a home’s value, the appraiser is asked to base their estimate on a predetermined value, which is typically the number needed to make the loan successful. Inflated appraisals have long-term consequences for the homeowner. Often, homeowners risk financial ruin because the inflated appraisal has caused them to borrow more than their home is actually worth. As a result, when they attempt to sell their home, they are forced to come up with the difference at the closing table.
Report Mortgage Fraud!
To submit allegations or suspicions of mortgage fraud to GRAR, please click on the link provided below and complete the online form. If the matter involves a REALTOR® member or one of our Service Partners, the matter will be considered by GRAR’s Grievance Committee. If the matter involves a non-member, the matter will be forwarded to an applicable third party authority. Anonymous reports will be accepted.