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Mortgage Fraud
There’s been a lot of media attention lately focused on mortgage fraud and as the real estate market cools down more fraud will begin to surface. This problem affects the consumer in several ways. The first, and least damaging, is that as the industry addresses this issue they will be looking at application packages more closely. What this does is slow down the approval process as every document is checked and double-checked. As is always the case, the innocent are forced to pay the price to deter criminal activity. The price that’s being paid is more than just time, it's money. We are all paying for the overhead costs incurred by the industry and well as for its losses. At the current level of fraudulent activity this cost is nominal. It’s estimated that interest rates are no more than 0.125% higher because of mortgage fraud.
Criminals tend to focus their efforts in the direction that generates the most profit. The “profit potential” in mortgage fraud is many times greater than in credit card fraud. It only takes 10 fraudulent $100,000 mortgages for a person to become a millionaire! Criminals whose expertise is in identity theft are naturally drawn to the mortgage marketplace for this reason. If you are a victim of mortgage fraud the industry will work with you in straightening out the financial mess that you’ve found yourself in. Unfortunately, even with the help of the lender you will be faced with a long, agonizing process.
If your neighborhood becomes the target of these criminals the situation can get even worse. Their deception can lead to an artificially high value of your home as well as those owned by the other victims. That then leads to higher assessed values resulting in higher property taxes. Another repercussion of their focusing on one particular neighborhood is suddenly there is a high foreclosure rate in the community as well as the potential for a high number of abandoned homes. This leads to lower property values and higher homeowner’s insurance premiums.
The Federal Bureau of Investigation (FBI) recognizes the extent of this problem. Their official position is that, “Mortgage Fraud is one of the fastest growing white collar crimes in the United States.” Their definition of mortgage fraud is, “a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.”
The FBI identifies 2 different types of mortgage fraud; fraud for property and fraud for profit, with the following definitions:
Fraud for Property, also known as Fraud for Housing, usually involves the borrower as the perpetrator on a single loan. The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value or down payment problems. The borrower wants the property and intends to repay the loan. Sometimes industry professionals are involved in coaching the borrower so that they qualify. Fraud for Property/Housing accounts for 20 percent of all fraud.
Fraud for Profit involves industry professionals. There are generally multiple loan transactions with several financial institutions involved. These frauds include numerous gross misrepresentations including: income is overstated, assets are overstated, collateral is overstated, the length of employment is overstated or fictitious employment is reported, and employment is backstopped by co-conspirators. The borrower's debts are not fully disclosed, nor is the borrower's credit history, which is often altered. Often, the borrower assumes the identity of another person (straw buyer). The borrower states he intends to use the property for occupancy when he/she intends to use the property for rental income, or is purchasing the property for another party (nominee). Appraisals almost always list the property as owner-occupied. Down payments do not exist or are borrowed and disguised with a fraudulent gift letter. The property value is inflated (faulty
appraisal) to increase the sales value to make up for no down payment and to generate cash proceeds in fraud for profit.
The FBI has developed a list of typical mortgage fraud schemes. Although this is not a complete list of all the possibilities it does give a good cross section of the type of fraud that is currently taking place throughout the country:
Backward Applications: After identifying a property to purchase, a borrower customizes his/her income to meet the loan criteria.
Air Loans: These are non-existent property loans where there is usually no collateral. An example 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.
Silent Seconds: 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: 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.
Property Flips: Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is that the appraisal information is fraudulent. The schemes typically involve fraudulent appraisals, doctored loan documents, and inflation of the buyer’s income.
Foreclosure schemes: The subject identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Subjects mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The subject profits from these schemes by re-mortgaging the property or pocketing the 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.
What can you do to defend yourself from mortgage fraud? A good first step is to get in the habit of protecting your personal financial information. Don’t give your Social Security number to any one unless you know specifically why they need it and what they are going to do with it. Don’t respond to any e-mail messages, no matter how official they look, that requests any banking information. If you feel you’ve received a valid request for information from a bank or business you have a relationship with simply call them up. Is it more time consuming? Is it an inconvenience? Yes, no doubt about it. Being cautious is always time consuming and/or inconvenient but its well worth the investment. Take the same precaution when you’re contacted by phone. Don’t give out any information until the person that’s called you can prove to you that they are calling from
the business that they say they’re from.
Are you buying a home or refinancing your existing mortgage? Do your homework, ask questions and be on guard for that “this is too good to be true” feeling. Confirm the market value of the property, seek out all the details of that mortgage you are being told to take and trust your instincts. Don’t be rushed into any decisions. Surround yourself with professionals you can trust and be aware of any potential conflicts of interests.
There is no way to guarantee that you will never become a victim. All you can do is to make yourself as undesirable a target as possible. Criminals don’t want to work any harder at their job than any one else. Given the choice they will always target the person that appears to require the least amount of work. The more difficult you make their job, the less likely you will become a target.
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