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How to save yourself from Mortgage Fraud--an exploding problem

Chicago Mortgage Fraud PropertyBelieve it or not this property in Chicago was the subject of a condo-conversion scheme. The suspect bought the apartment building to convert to six-unit condo and sold them for $100,000 each. The appraiser (now indicted) appraised them as if the renovations were finished. In fact, they were never done.

Financial crimes are one of the fastest growing areas of criminal activity in the United States and one of the fastest growing areas of financial crimes is mortgage fraud. Fraud involves two parties: one makes a false statement of fact material to the business involved and the other party relies on that statement to their detriment. In mortgage fraud false or inaccurate information in connection with a mortgage application is provided and that information causes a lender or another in the chain of approving and
funding that loan to make the loan or to make the loan on terms and conditions different than if the true facts were known.

The increased reliance by both financial institutions and non-financial institution lenders on third-party brokers has created opportunities for organized fraud groups, particularly where mortgage industry professionals are involved.

Each mortgage fraud scheme contains some type of "material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan." The Mortgage Bankers Association projects $2.5 trillion in mortgage loans will be made during 2005. The FBI compiles data on mortgage fraud through Suspicious Activity Reports (SARs) filed by federally-insured financial institutions, and Department of Housing and Urban Development Office of Inspector General (HUD-OIG) reports. The FBI also receives complaints from the mortgage industry at large.

A recent analysis of mortgage industry fraud surveys identified 26 different states as having significant mortgage fraud problems. Although every survey identified Georgia and Florida as having significant mortgage fraud related investigations, the survey also identified nine other states in the South and Southwest, seven states in the West and five states in the Midwest as having mortgage fraud problems.   

Mortgage Fraud Indicators

The indicators of mortgage fraud include:

Inflated Appraisals:  Exclusive use of one appraiser

Increased Commissions/Bonuses - Brokers and Appraisers

  • Bonuses paid (outside or at settlement) for fee-based services
  • Higher than customary fees

Falsifications on Loan Applications

  • Buyers told/explained how to falsify the mortgage application
  • Requested to sign blank application

Fake Supporting Loan Documentation

  • Requested to sign blank employee or bank forms
  • Requested to sign other types of blank forms

Purchase Loans Disguised as Refinance:  Purchase loans that are disguised as refinances requires less documentation/lender scrutiny

Investors-Short Term Investments with Guaranteed Re-Purchase

  • Investors used to flip property prices for fixed percentage
  • Multiple "Holding Companies" utilized to increase
    property values

Common Mortgage Fraud Schemes

Mortgage industry professionals and law enforcement divide mortgage fraud into two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and mortgage fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders. Fraud for Housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan.

Mortgage fraud includes a whole category of illegal business dealings. The different schemes that may be used include, but are certainly not limited to, property flipping, equity skimming, application fraud, credit or income misrepresentation or asset and down payment misrepresentation. Mortgage fraud is accomplished through the use of false documents, identity theft, straw buyers, and sometimes the witting or unwitting assistance of real estate professionals. Some common examples of mortgage fraud as described by the FBI include:

Property Flipping - Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.

Silent Second - The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.

Nominee Loans/Straw Buyers - The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee's name and credit history to apply for a loan.

Fictitious/Stolen Identity - A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant's name, personal identifying information and credit history are used without the true person's knowledge.

Inflated Appraisals - An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Foreclosure Schemes - The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner.

Equity Skimming - An investor may use a straw buyer, false income documents, and false credit reports, to obtain a mortgage loan in the straw buyer's name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.

Air Loans - This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.

As is demonstrated in each of the foregoing descriptions, a key element of the problem is the imbalance of information. One side, normally the borrower or someone working with the buyer, conceals information from or affirmatively misleads the lender.

Mortgage Fraud Prevention Measures

Mortgage Fraud is a growing problem throughout the United States. People want to believe their homes are worth more than they are, and with housing booms going on throughout the U.S., there are people who try to capitalize on the situation and make an easy profit.

Tips to protect you from becoming a victim of Mortgage Fraud

  • Get referral for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county, or city regulatory agencies.
  • If it sounds too good to be true, it probably is. An outrageous promise of extraordinary profit in a short period of time signals a problem. 
  • Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques. 
  • Look at written information to include recent comparable sales in the area, and other documents such as tax assessments to verify the value of the property.
  • Understand what you are signing and agreeing to--If you do not understand, re-read the documents, or seek assistance from an attorney.
  • Make sure the name on your application matches the name on your identification.
  • Review the title history to determine if the property has been sold multiple times within a short period--It could mean that this property has been "flipped" and the value falsely inflated. 
  • Know and understand the terms of your mortgage--Check your information against the information in the loan documents to ensure they are accurate and complete.
  • Never sign any loan documents that contain blanks--This leaves you vulnerable to fraud.
  • Check out the tips on the Mortgage Bankers Association's (MBA) website at http://www.StopMortgageFraud.com for additional advice on avoiding mortgage fraud.

Mortgage Debt Elimination Schemes

Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport.  There is no magic cure-all to relieve you of debts you incurred. Instead, borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.

via FBI Report

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