The red flags of mortgage fraud: Be on guard for these signs of potential fraud

The red flags of mortgage fraud: Be on guard for these signs of potential fraud

February 15, 2010

Mortgage fraud is a serious problem … still. Of course, credit standards are much higher today than a few years ago, and it is difficult for a borrower to obtain a mortgage by fibbing about their income or otherwise doctoring their loan application. But where there is a will to defraud, fraudsters will find a way.
Ironically, federal legislation enacted to stem the decline in the housing market has become a tool in the mortgage fraud racket. The $8,000 refundable tax credit to first-time homebuyers is a case in point. According to the Nov. 24, 2009 edition of the Wall Street Journal, “At least 19,000 filers who claimed $139 million in tax refunds under this credit did not actually buy a home, according to Treasury officials. In addition, 74,000 filers claiming a total of $500 million in refunds seem to already have owned a home.”
Not only is fraud prevalent, it is incredibly expensive to mortgage companies. On average, a fraudulent mortgage costs the lender 37 percent of the amount loaned. A $100,000 fraudulent mortgage results in a typical loss of $37,000, for example. Approximately 25 percent of all foreclosures are due to fraud.
For this reason, anyone involved in the mortgage industry needs to be alert to the red flags of possible mortgage fraud, and I’ll outline many of these red flags in this article. But first, let's have a clear idea of what mortgage fraud is. Stripping away all of the legalities, mortgage fraud boils down to this … “Mortgage fraud is intentionally getting a financial institution to make, buy or insure a loan when it would not have done so, or not done so on the same terms, if it had known correct information.”
Fraud is fraud, even if the borrower intends to repay the loan in full, and no fraud is intended. For example, let’s say that, in order to get better terms on a loan, a borrower tells the lender that they intend to live in a property that they are buying strictly as an investment … and, they pay off the loan. Is this really fraud? Who is hurt? Yes, this scenario is still fraud, and the borrower is still liable and may be criminally prosecuted because they obtained a loan under false pretenses. Loans are priced higher for investment properties for a reason—because lenders know that if times get tough, borrowers are more likely to stop paying the note on an investment property than they are to stop paying the mortgage on the home they occupy. By lying about one’s true intention, the borrower causes the mortgage company to take on more risk than it intended to take. The lender gave a loan on terms it would not have offered had it known correct information
As we deal with real world situations where people argue, often convincingly, that bending the rules won’t hurt anyone and that their intentions are pure, it’s good to keep in mind that the definition of fraud is really black and white: Providing any incorrect information or deliberately withholding any information to obtain a loan constitutes fraud, no matter how pure one’s intentions are.
Red flags of mortgage fraud
►Attorney-in-fact involved: When someone is acting on behalf of the owner, there is the potential for fraud. Make sure you are clear about the true motivations of the attorney-in-fact and that they coincide with those of the owner. If you have a doubt, contact the owner.
►Title held by virtue of an unrecorded deed: In some states, it can take up to six months for a recorded deed to show up on a title search. In this case, the seller might bring an unrecorded deed to the closing to speed things up. However, this is a red flag, as the seller might not actually be the owner, but a tenant who filled in a blank deed. When in doubt, call the previous owner listed on the deed to assure they actually sold the property.
►Loan secured by property recently paid off: Usually, when someone sells a house, they pay off any remaining debt with the proceeds from the sale. It’s odd for someone to pay off a loan a few months or weeks before the sale. Maybe they didn’t actually pay off the loan at all, and the quit claim/release deed is forged. To make sure all is aboveboard, call the lending company, and make sure the loan is paid off.
►Proposed sale within a year of obtaining title: On average, people own an owner-occupied home for at least seven years. If someone is selling their house within a year of buying it, something may be fishy. Perhaps, the current owner is in default to their lender. Call the lender to make sure. Perhaps, the current owner has gotten an appraiser friend to appraise the house for more than fair market value, defrauding both the buyer and new lender. In this case, an appraisal review through another appraiser may be in order.
►Contract provides for a large allowance: Let’s say the contract provides a $10,000 lighting allowance to the buyer. Well, what if the buyer spends $1,000 of this allowance on lights and uses the remaining $9,000 as a downpayment on the house? In this case, the allowance is actually a way for the seller to funnel downpayment funds to the buyer—in violation of the loan contract. To avoid this problem, ask for receipts and make sure the closing statement itemizes each allowance and to whom it was paid.
►Excessive commissions: In today’s market, when most real estate agents are willing to cut their commissions to get a listing or make a sale, a larger than normal commission is suspect. Maybe it’s a bribe from one of the parties to keep the real estate agent quiet about some fraud that is being perpetuated. Question the real estate agent about why the commission is so high. There may be a perfectly good reason. After all, it is not illegal to pay someone whatever you wish. But if you get a vague answer, slow down and investigate more thoroughly.
►Sales price exceeds fair market value: This is similar to excessive commissions. Why, especially in today’s market, would anyone deliberately pay more than market value for real estate? Maybe the buyer is paying more to make sure the seller goes along with fraudulent activity. Time to slow down and ask questions.
►Party request to pay debts not secured by the property or required by the lender: For instance, say the loan includes payments to an exterminating company. This could be perfectly legitimate. Or it could be a way to launder money though a shell company or maybe it’s a kickback to the buyer. To make sure, call the company receiving the payment and check with the secretary of state’s office to make sure it is a valid, registered company. Above all, obtain lender approval before paying debts it has not required.
►File contains more than one contract with significant differences in price: This is pretty clear evidence that fraud is underway. It has happened twice in the history of our real estate closing firm and we sent the records to law enforcement authorities both times.
►Buyer’s check indicates another to be remitter: In these cases, the buyer shows up with a certified check drawn on someone else’s account (for example, his mother’s account), and no accompanying gift letter is presented. Chances are it is probably a loan from mom which would affect the terms of the mortgage. Get a gift letter or change the terms of the loan to reflect this debt.
►Several closing deals referred from parties with whom you have had no past dealings: If it sounds too good to be true, it probably is, particularly if you don’t know the person referring the business. Slow down, check references, do your homework or you might find yourself knee deep in a major scam.
►No government-issued ID: A good rule of thumb for a closing attorney is, “If you can’t fly on an airplane, you can’t close on real estate.” With no ID, a borrower may not be who they say they are. They may walk out of the closing room with $100,000, and the closing agent may never be able to track them down. As a closing agent, always get a government-issued ID with a photo. If the person closing says their ID card is stuck in their wallet, tell them you’ll wait. In my own practice, I once had a purchaser go out to his car to get his ID and never return. If I had not asked for an ID, he would have left with the lender’s money and never returned.
►Anything that does not pass the “smell test:” If you see or sense anything unusual, slow things down, ask questions and make sure you are comfortable with the answers. If something does not smell right to you, trust your instincts. It’s better to be safe than sorry.
Howell Haunson has been practicing real estate law for more than 25 years and is partner in charge of education at Morris|Hardwick|Schneider. He has served as member of the board of directors of the Georgia Real Estate Closing Attorneys Association and is actively involved in presenting lectures and seminars relating to real estate issues throughout the country. 

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