The entire industry is battling foreclosure and mortgage
fraud schemes across the country in high volume. Mortgage
fraud is a growing problem due to the ongoing real estate market and interest by many of “getting rich quick.”
The IRS and FBI state that fraudulent transactions have more
than doubled in the past few years. The average prison term handed out by federal judges to defendants in real estate schemes in 2003 was 46 months. Based on existing FBI investigations and mortgage fraud reporting, 80% of all reported fraud losses involve collaboration or collusion by industry insiders. Realtytrac reported in their March U.S. Foreclosure Market Report that 45% of all foreclosures are in Florida, Utah, Georgia, Texas and Colorado. So what is the industry seeing? Property Flipping, Silent Seconds, Straw Buyers, Fictitious/Stolen Identities, Inflated Appraisals and Foreclosure Schemes.
Foreclosure Scams
“We Buy Homes.” These ads are all over the country and this is what happens: A Homeowner, who may be elderly,unemployed, disabled or just unsophisticated in real estate, is in foreclosure. They receive a solicitation from a “foreclosure
rescue” specialist telling them he will help them refinance their home at a lower rate of interest. The Hom- eowner will agree to pay the specialist from $650.00 to $5,000.00, or
more, to cover initial costs. As the process continues they are told “their credit is lousy and the only way to save their home is to deed to a third party with better credit.” The homeowner is then promised that they will be put back in on title within six months. The following occurs: The
“foreclosure rescue” team takes out a new loan in an amount which is $200,000.00 over the loan balance of the existing loan in foreclosure. The homeowner never sees any of the
loan proceeds, the upfront money was never paid to anyone and they can’t make the higher payments on the new loan. At this point they may or may not be in title to the property
or in title with fictitious people. The “foreclosure rescue” team is gone. This also is called “equity stripping.”
Equity Skimming or Stripping Equity Skimming or Stripping
can also look like this: An investor may use a straw buyer, false income documentation and an inflated appraisal to obtain a new loan in the straw buyer’s name. After close of
escrow, the straw buyer quit claims the property to the investor for a fee. The investor does not make any mortgage payments and rents out the property until foreclosure occurs.
Silent Seconds
Silent Seconds are becoming common where the mortgage broker
participates in actually hiding the loan from the first money lender. The mortgage broker many times will pressure on settlement agents to participate in the fraud. Property Flipping Property Flipping involves low price acquisitions or a short sale with a concurrent flip sale for a MUCH
higher price and may include straw buyers, identity theft, fraudulent appraisals, forged documentation, fake FICO scores, falsified HUD closing statements and unusual payments
to third parties through escrow. The third party payments can represent kickbacks to buyers, investors, property/loan brokers, appraisers and title company employees. The buy out escrow on a lease option should be looked at more closely than ever before. Again many times settlement
agents are asked to participate in the fraud.
What can the industry do to protect itself from the negative impact of these types of transactions? DISCLOSE AND EDUCATE.
Also a key segment in a flip transaction, is obtaining NEW lender approval, in writing, of the entire transaction
package. Many lenders are requiring a certified copy of seller’s closing statement looking for unusual dis- pursements. Overall effects of fraud have a huge impact because mortgage lending and the housing market have a
significant effect on the nation’s economy. When the dust settles on a fraudulent transaction who pays? Well just for starters, the seller may have loss of income due to an under the market sale, the buyer may have overpaid, the title and banking industries spend millions of dollars annually in attorney, litigation and foreclosure costs and the FBI has set up a special division to handle mortgage fraud. The growing trend for fraud in our industry will not lessen in the future. The industry needs to take responsibility for preparing our settlement agents to work in this environment by continually offering educational classes. Keeping them
informed of what scams are currently the fashion can be helpful for identification purposes. Settlement Agents should be cognizant of the mortgage broker or investor that are too pushy and always obtain that second opinion on an escrow file that keeps lurking in the back of the mind.
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