Mortgage Fraud - Don't be a Victim!
As promised, here's a follow-up post to my business partner's "Predatory Lending and Mortgage Fraud" article and if you're a buyer, seller, homeowner or a real estate agent, I recommend reading both posts.
Buyers, sellers, lenders, appraisers and even real estate agents can unknowingly participate in mortgage fraud in addition to being a victim. The personal and financial loss for victims can be devastating and involvement with mortgage fraud isn't always obvious. You can bookmark this page for reference if you have current or future concerns.
Easy to Understand Examples & Red Flags
I want to share some "easy to understand" examples of mortgage fraud, but also the red flags that are top indicators something isn't "above board". Along with red flags, some "do's and don'ts" that will help protect you and how to report it.
Mortgage fraud also contributes to higher costs associated with lending for everyone.
Common Mortgage Fraud & Real Estate Scams;
- Borrower Identity Theft
- Foreclosure Rescue Schemes
- Property Flipping
- Real Estate Investment Schemes
- Reverse Mortgage Scams
- Silent Seconds
- Straw Buyers
- How to Report Mortgage Fraud
Resources; Help for Buyers - Help for Sellers
Mortgage Fraud - Borrower Identity Theft
Many mortgage fraud schemes involve identity theft at some point or another; most commonly stealing an identity to use as a "Borrower Identity" for the purpose of obtaining a mortgage
- Perpetrator: Alex knows that because of his negative credit history, he'll likely be denied for a mortgage. Therefore, he provides his deceased father's personal information on the application and uses fake documentation to represent his income and job title.
- Victim: Sara begins receiving calls from a collection agency about a delinquent second mortgage. When Sara reviews her credit report, she learns that someone applied for and received a mortgage by fraudulently using her personal information.
- Your Social Security number isn't correct on the loan application, some or or all other loan documents.
- You are asked to let someone borrow or "lend" your Social Security Number to someone.
- Someone offers to sell you an Social Security number.
You are encouraged to use another person's Social Security number to apply for the mortgage.
Mortgage Fraud - Foreclosure Rescue Schemes
Foreclosure "rescue" schemes prey on people's desperation who are delinquent in their mortgage payments and in danger of foreclosure. The crook may contact the homeowner in the early stages of foreclosure, posing as an intermediary, offering to eliminate the debt and save the house for a fee. The crook collects the fee and disappears without providing any real assistance to the homeowner.
In another scheme, the homeowner is approached by a crook who offers to help refinance the loan. Homeowners are then asked to sign documents that they later learn transferred ownership of their home to the company that was supposedly going to "help them".
- Mary is behind on her mortgage payments. Worried about foreclosure, she contacts a company listed on a neighborhood flyer that advertises financial counseling to those who are having trouble paying their mortgage. A "counselor" offers to help her for an upfront fee of $300. The information provided by the company is insufficient and/or bogus and does not help Anna in any way. Now she is out $300 and even further behind on her mortgage payments.
- A long-term illness causes Alex to fall behind on his mortgage payments. Instead of contacting his lender to discuss his situation openly, he contacts a representative from a "foreclosure service company" that held a seminar in his neighborhood. The representative, Shane, offers Alex assistance by assuming his home's title and mortgage payments while allowing Alex to live there as a tenant until he is back on his feet and able to buy the house back. Once Alex tries to buy the house back, Shane inflates the price of the home far out of reach of what Alex can afford. Alex loses his home including any equity he had.
- Anna is approached by Doug who offers to save her property from foreclosure. Doug instructs Anna to sign the property over to his company using a Quit Claim deed and his company will assume all debts and liabilities, allowing Anna to walk away free and clear of mortgage payments. Doug's company rents the house to another party, but makes no mortgage payments on the home, leading to foreclosure. Unknown to Anna, even though her home was deeded to Doug's company, Anna's name remained on the mortgage. Doug's company and the renters walk away from the property while Anna is held responsible for a delinquent mortgage, further destroying her already damaged credit.
- Unsolicited offers of help from persons claiming to be "mortgage representatives," but are actually from "foreclosure service" or "counseling" companies. These companies target consumers whose homes are at risk of foreclosure, often advertising services through, handouts, leaflets or the Internet.
- Companies that require any upfront fees for their services.
- Companies that request distressed homeowners to make mortgage payments directly to the foreclosure service company rather than your mortgage company.
- Companies requesting you to execute a Quit Claim deed to transfer your interest in the property into their company.
Note: A Quit Claim deed is a legal document in which the seller only transfers whatever interest he or she has in the property, which may be only a partial interest in the property or no interest at all. Although the interest is transferred, no warranty is made on the rights which others may claim from the property.
Foreclosure Prevention - If you or someone you know is in danger of losing their home contact the lender first for assistance! Don't risk becoming a victim of mortgage fraud and compound an already difficult or devastating situation.
Consumers can also contact the Homeownership Preservation Foundation, a national non-profit organization that works to prevent foreclosures and provides free phone counseling by HUD-approved agencies and is available 24 hours a day, 7 days a week. The foundation provides the Homeowner's HOPE™ Hotline (888-995-HOPE) where specially-trained foreclosure prevention counselors listen to the homeowner's situation and then offer a customized, written action plan with budget analysis and recommendations. If more counseling or contact with the lender is needed, the counselors will link their callers to their lenders, to local NeighborWorks® organizations and to other non-profits for specific help. For more information, please visit www.HOPENOW.com.
Mortgage Fraud - Property Flipping
Ever watch popular TV shows where houses are acquired, improvements or all-out renovations are made and the properties are legitimately resold quickly for profit?
Property flipping fraud is quite different. This type of fraud is perpetrated when ownership of a property is transferred multiple times over a brief period and the mortgage for the subsequent sale(s) is obtained using appraisals that grossly overstate the property's fair market value and/or does not disclose these recent transfers. Usually, the borrower/buyer is not aware of the fraud. Typically, the property is in poor condition and was acquired through a distressed or foreclosure sale. If repairs are made, they are often "bare-bones" cosmetic and do not truly improve the property's state of distress.
- Joan is a real estate agent and her neighbor, Paul, is an appraiser. They learn of several properties in the city that are in foreclosure and purchase them for pennies on the dollar. Joan immediately lists the properties for three times the amount she just paid. Paul unscrupulously agrees to provide an appraisal for each property that would support this higher amount while Sarah finds naive buyers for the properties.
- David relocates from another state, seeking to purchase a single family home. A friend refers him to Ben, a real estate broker who pressures him to purchase a specific property that Ben claims to be the "perfect house" for David. When David closes on or attempts to refinance the home, he discovers the home's value is not only inflated far above the current fair market value, but the house has been sold three times in the past 60 days by the same real estate company. As a result, David's mortgage now far exceeds the value of the home.
- The appraisal is dated prior to the sales contract and/or application date. (Note: The appraisal should be made AFTER your offer has been accepted.)
- The seller identified on the sales contract doesn't own the home according to real estate tax assessment records.
- The seller recently acquired the property for a significantly lower price or the real estate tax assessment record indicates there have been several transfers of the home.
- The seller, who is not the owner of record when he contracts to sell the property, acquires ownership through a Quit Claim deed at closing.
- The seller's signature is inconsistent throughout the transaction documents.
- At closing, the HUD-1 Settlement Statement shows unusual and/or previously undisclosed fees.
- The real estate agent, broker, or loan originator advises against obtaining a property inspection or requires you to use a specific inspector.
Know what market values in the neighborhood are or should be. Consult your county tax assessor regarding recent sale prices and review the sales history of the property, or ask your Realtor to investigate as several sales within a short period of time could indicate inflated values and potential fraud.
Note: The HUD-1 Settlement Statement is a loan document which is signed at closing and itemizes expenses, disbursements, and adjustments relating to the purchase of real property.
Mortgage Fraud - Real Estate Investment Schemes
Real Estate investment schemes, sometimes referred to as "Chunking" involve consumers who are routinely targeted or even recruited to participate in investment property schemes.
Most prevalent, many of these scams start as "how to get rich" seminars, programs or advertisements. Acquiring real estate may be a smart investment with proper guidance from a tax professional and use of an ethical, trusted Realtor, consumers should practice due diligence and thoroughly research before joining an "investment club" or purchasing multiple properties simultaneously or in a short time period.
This type of wide-spread fraud is committed when the purchasers apply to multiple lenders for financing without disclosing that multiple properties are being acquired and/or financing is requested for owner occupied properties or second homes, when the properties are actually for investment purposes. Any buyer seeking to purchase an investment property with financing that tells the lender he or she will occupy it is guilty of fraud and carries substantial consequences. I personally refuse to work with a buyer who intends this.
Bob and Helen attend an energetic seminar on how to get rich through purchasing real estate. They are persuaded to purchase several rental properties in another state. Salesman "Ed" claims these rental properties already have paying tenants which will help cover the mortgage or even create a positive cash-flow. Additionally, he offers to pay them $12,000 for each home that they purchase and will personally take care of paperwork and details.
All Bob and Helen have to do is provide their personal information (SSN, address, employer name, etc.). After several months, the couple receives phone calls and letters from different mortgage companies notifying the couple that their mortgage loans are now in default and payments are necessary. Dave and Ellen are unable to contact salesman Ed and upon traveling to the rental properties, they discover all the rental properties are vacant and in distressed conditiproperties are lost to foreclosure and the couple's credit is destroyed.
- Newspaper or Internet solicitations intended to attract "investors."
- You have little, restricted or no interaction with the actual lender. Communication is only between you and the builder, real estate agent, or other third party.
- You are pressured to purchase properties "sight-unseen." (I actually raise an eyebrow when a a buyer I've never met wants to buy a property "sight-unseen".)
- You are offered payment or some form of compensation for the use of your personal/credit information.
- The seller or any other involved party to the transaction requests that pre-existing relationships between you, the appraiser, and/or the seller to not be disclosed to other parties to the transaction, such as the mortgage lender.
Be extremely cautious if you are encouraged to invest in multiple properties in a short period of time, especially if you are not required to put money down or if any party offers to compensate you for your participation in the transaction.
Mortgage Fraud - Reverse Mortgage Scams
Reverse mortgages can greatly benefit eligible senior citizens who have sizeable equity in their home. Qualified senior citizens can turn the value of their home into cash without having to move or make monthly mortgage payments. Regardless of how the loan is paid out, repayment is typically not required until the owner dies, sells, or moves out permanently. If any of these events occur, the property is relinquished to the mortgage lender who may sell it to recoup the loan balance, fees and interest.
There is nothing illegal about reverse mortgages, however, the process can be complex and homeowners must carefully review all terms and conditions (preferably with trusted family members and attorney) before signing anything. Elderly homeowners are often taken advantage of by unscrupulous estate planners who charge fees for information that is free from U.S. Departmentof Housing and Urban Development (HUD). Elderly homeowners are also high risk of fraud perpetrated by "mortgage consultants" insisting on unnecessary renovations "in order to qualify for the loan" even specifying what contractor should be used to make theserepairs who overcharge on unnecessary projects.
Those interested in obtaining a reverse mortgage should contact HUD at 1-800-569-4287 and will be referred to a HUD-approved housing counseling agency. Homeowners can request a list of HUD-approved reverse mortgage lenders and perhaps the safest way to pursue a reverse mortgage.
Seeking a reverse mortgage, senior citizen John hires a consultant, Paula, who was distributing leaflets around his neighborhood. Paula charged $500 as an initial consulting fee to review reverse mortgage process information for John as he was unsure and confused.
At Paula's recommendation, John hires a specific appraiser. After paying another $500 for the appraisal, John is then told his kitchen must be renovated in order to qualify for the loan. Paula now suggests John contact a local contractor (also in cahoots) that has done several local upgrades. Innocently trusting Paula, John calls the contractor who requires and obtains a $2,500 deposit.
Once paid, the contractor never returns, Paula and the appraiser have also disappeared. After learning that he was out $2,500 for the repairs that were never performed and another $1,000 for Paula's consulting fee and the appraisal fee, John learns the information Paula charged him $500 for was available at no cost from HUD. A $3,500 mistake.
- Unsolicited offers of reverse mortgages and anyone asking for "consultant fees". Leaflets and handouts are most certainly questionable.
- Consultants insisting you use specified appraisers to inspect your house and then recommend contractors to perform costly renovations in order for you to qualify for a loan.
- Any attempts by lenders or consultants to exclude your family or attorney from the information gathering, application, or closing process.
Read and understand all of the documents presented at the time of closing. Do not sign anything that contains blanks or provisions that you did not originally agree to. Ask questions about anything you do not understand. Seniors (and loved ones) may contact their local Attorney General's office to determine what free legal services and/or clinics may be available to them.
For more information, visit HUD online for reverse mortgage help or foreclosure avoidance guidance.
Mortgage Fraud - Silent Seconds
In this all-to-common type of fraud, buyers obtains the property with little or no money down. The primary lender believes the source of the down payment is from the borrower's own funds. However, in this scenario, the buyer borrows the down payment needed from the seller through an undisclosed second mortgage, the point of fraud occurring >when this information is not disclosed to the lender. It is illegal to engage in this practice and does constitute mortgage fraud.
Paul and Cathy have been living in an apartment for years and want to purchase a newly constructed home. They do not have enough money saved to pay the required down payment. The builder offers to increase the sales price enough to lend them the money they need for the down payment and advises them not to disclose this loan to their lender because he will be repaid with the loan proceeds. Although Paul and Cathy obtained their loan, now they owe more than the house is really worth.
- The difference between the sales price and the loan amount (i.e., the down payment) is more than you have on hand before closing and should have at the time of the offer. The seller or anyone else involved in the transaction offers to provide monetary assistance and knowledge of this is withheld from the lender.
- The seller, builder, real estate agent or other interested party offers to lend you the down payment amount and requires you sign a promissory note, the terms of which are not disclosed in the sales contract, again, being withheld from the lender's knowledge.
- The seller requests you to sign an addendum to the purchase agreement disclosing other financing terms, but the lender is not provided with a copy. Or you are asked to execute (sign) two different purchase agreements; one for the lender's eyes and the other to be kept from the lender as it reflects terms that the lender will not allow.
- Information disclosed on the HUD-1 or Settlement Statements don't accurately reflect the specific terms of the transaction ( incorrect down payment, sales price, closing funds).
Do not be pressured into and beware of signing documents changing any loan terms at or near the time of closing. Do not sign documents you don't understand or are inaccurate. Do not sign documents that contain blanks fields.
Mortgage Fraud - Straw Buyers
"Straw Buyers" are those who allow others to use their credit profile to obtain a mortgage they are unable to obtain on their own. In this real estate scheme, as the potential homeowner cannot qualify for a mortgage, the true identity of the actual borrower is kept secret to obtain loan approval. Often, the straw buyer is a paid participant in a much larger fraud scheme. The lender qualifies the straw buyer and the loan closes in the straw buyer's name, but the straw buyer does not intend to occupy the property or make the mortgage payments and an illegal practice.
Allen's son, Peter, would like to purchase a home but can't qualify for the loan. Allen agrees to help Peter by applying for the mortgage loan in his name with the understanding that Peter will live in the house and make the mortgage payments. At application, Allen leads the lender to believe that he will be the owner-occupant and make the mortgage payments on his own, lying to the lender. Shortly after closing, Allen completes a Quit Claim deed, assigning the property rights to Peter.
- A relative or friend with impeding credit issues asks you to apply for a mortgage on their behalf.
- Any party to the transaction asks you to sign a power of attorney to conduct business on your behalf.
- You have, restricted, little or no interaction with the lender. Communication is only between you and the builder, real estate agent or another third party.
- Names have been added to, deleted or omitted from the sales contract.
- The person identified as the seller on the sales contract is not the owner of record according to tax assessment records.
- A Quit Claim deed is executed immediately before or soon after the loan closes.
Reporting Mortgage Fraud
You can always contact your trusted lender for more information or to report suspected fraud, use this article's Red Flags as a general guideline. This article contains a lot of useful information about mortgage fraud but by no means includes the many other nuances and types of mortgage fraud. Be diligent and cautious always.
There are several other resources to learn more about and for reporting suspected mortgage fraud;
Fannie Mae - Beware of Scams
Federal Bureau of Investigation (FBI) - Mortgage Fraud Info, News & Stories
Federal Bureau of Investigation Local Offices - Report Mortgage Fraud
Federal Trade Commission - Consumer Information
Federal Trade Commission - Report Mortgage Fraud
Freddie Mac - Report Mortgage Fraud at 800-4 FRAUD-8 (800-437-2838)