In mortgage fraud,
watch out for scams -- and your own greed
methods run the gamut from simple to complex, seemingly innocent to downright
treacherous. But the outcome of mortgage fraud often is the same -- someone, somewhere
will end up on the street.
they realize it or not, home buyers and homeowners in this lending boom suffer
from fraud in many ways. In some areas, it has helped drive up interest rates.
it has taken away people's hard-earned dollars. Yet consumer advocates say borrowers
can protect themselves -- as long as they know the warning signs and resist the
temptation to bend the rules.
"They should find
out what it takes to qualify for the lowest available rates and if they don't
qualify, do whatever it takes to qualify later ... rather than go into these scams,"
says William Brennan, director of the Atlanta
Legal Aid Society's home defense program. The nonprofit group provides free
legal assistance to people victimized by housing and mortgage fraud.
you go into these scams, you're going to ruin your credit for sure, and you're
going to delay your ability to buy a house down the road."
scams are everywhere
Nobody seems to know exactly how
much fraud costs lenders or borrowers, though multi-billion dollar estimates are
the norm and it's easy to find tragic stories of scammers and the scammed alike.
New Jersey, unscrupulous brokers and lenders reportedly tricked people into buying
homes for much more than they were worth. In Minnesota, state officials accused
real estate agents and appraisers of participating in a similar scheme. On the
Gulf Coast of Florida, na´ve consumers lured by the dream of homeownership were
steered into more expensive houses than they could afford, causing them to default.
Since industry forecasters expect residential
mortgage volume to dip only slightly this year to $1.28 trillion from a record
$1.47 trillion in 1998, fraud likely will remain a significant problem during
the months ahead, too.
"With fraud for profit,
there's a number of schemes going on," says Bill Matthews, managing director of
Asset Research Institute Inc. The Reston, Va.-based company studies
fraud data collected from lenders and public records. An unscrupulous industry
professional can be a real estate agent, mortgage banker, mortgage broker, loan
officer or closing agent, he says.
"It can be anybody in the system that's
familiar with the process."
out for 'flipping'
For home buyers, scams involving first
mortgages pose the greatest threat. These tricks differ from some of the more
widely publicized home equity scams, which target people who already own property.
of the most common shady practices in today's market, according to real estate
experts, is called "flipping." In a standard fraud, a dealer might buy a property
for $50,000, do some cosmetic repairs and then attempt to convince a gullible
buyer that it's worth, say, $80,000 by getting a phony appraisal done, Matthews
The dealer would work with a compliant
mortgage broker, who would submit the false appraisal and possibly other fake
documentation to the lender as a completed loan package, or it might be the broker
himself who owns the property. In either case, the lender may very well just fund
the loan without re-verifying everything in the application.
the loan goes through, the dealer walks away with a sizable payoff check and the
mortgage broker gets a cut or takes his commission for making the loan. But the
borrower gets stuck with payments that are too high because they're based on the
inflated property appraisal. That often leads to default. The lender takes a hit,
too, because the foreclosure sale nets the home's true value rather than the inflated
"The problem with that is the underlying
economics of the transaction are not supported," Matthews says. "They have essentially
overpaid for a piece of property and if they were to sell it, they would not be
able to recover their money.
"A lot of times,
that is done with unsophisticated borrowers. It could be first-time home buyers
or ethnic minorities who don't know the language well, those types of things."
Other schemes that involve sellers tricking buyers
into unfavorable deals include "lease with an option to buy" and "contract for
a deed" plans, according to Brennan of Atlanta Legal Aid. While they once were
predominately legal deals aimed at getting people into homes, most are cons today,
The lease plan works like this: Say somebody
needs a down payment of $5,000 to buy a home but doesn't have that much money
available. The seller strikes an agreement with the buyer stating that he will
lease the property out for one year, with a portion of each monthly payment going
toward the required upfront charge.
But the agreement
only says the seller has to give the buyer the option to purchase at the end of
the lease term. If the buyer can't come up with the money -- a common occurrence
since most victims aren't much closer to qualifying for a mortgage after a year
than they were in the first place -- the seller usually keeps the down payment.
"I have so many lower-income people saying 'I
thought I owned the house,'" he says.
for a deed programs work like the "rent-to-own" plans appliance vendors offer.
A buyer agrees to make say, 20 years of $850 monthly payments to the seller and
expects to get the title to the home at the end of that time period. But language
in the contract usually says that if the buyer misses a payment, the relationship
reverts to a landlord/tenant one and the buyer can be evicted. That leaves the
buyer no better off than if she had rented in the first place.
all scammers target home buyers at the time of purchase. Today, lenders sell loans
back and forth to each other many times, and that presents a perfect opportunity
for fraud. With each transfer, a borrower has to start sending payments to a different
address. Creative thieves can get a list of people whose loans were sold recently
and send them statements telling them to start sending their checks to the scammer's
post office box, Matthews says.
sometimes not innocent
Other fraud schemes require at
least some cooperation from the borrower. So-called "straw buyer" transactions
fall into this category. Typically, a buyer with bad credit needs a stand-in with
a solid financial history to purchase a home, he says. She gets somebody to fill
out all the paperwork and obtain the property, then has him "quitclaim," or relinquish,
the deed to her. Unfortunately for the actual buyer, he remains on the hook for
the mortgage. So any problems the person with bad credit experiences end up on
his previously spotless record.
yourself to make those mortgage payments and you're relying on my good faith to
make those payments," Matthews says. "A lot of times, they've got bad credit and
there's a reason for that bad credit."
scams tend to get the most attention, experts say garden-variety lying and subversion
of the mortgage process takes place every day. Borrowers are sometimes willing
participants in this type of fraud, which involves everything from "massaging"
a few numbers to outright document forgery.
three pieces of advice I'll give you," says Alan Robbins, a residential lending
executive with MetroBank
of Miami who also serves as the vice president of the Mortgage
Bankers Association of Florida. "One, tell the truth on your application.
Two, read the application when it's finished and make the loan officer enter everything
as it should be. Three, make sure that the finished application that is done and
that the loan is approved by" is accurate.
lot of times, (the false information) is more of a difference than $100. We're
talking about thousands of dollars toward the down payment. We're talking about
doubling and tripling income," he adds. "There's a difference between an honest
mistake and somebody inflating a purchase price on a house or taking credit off
a recent report because it's bad."
to protect yourself
With all of
these pitfalls lying in wait, what can unsuspecting mortgage hunters do to protect
themselves? First, experts say, people need to remember an old piece of advice:
If it sounds too good to be true, it probably is.
times, for example, the lease-with-an-option and contract-for-a-deed scam operators
place newspaper advertisements promising "House for Sale -- Credit No Problem,"
Brennan says. In Florida, the massive flipping scam started when a handful of
yellow yard signs reading "For sale. No down payment" began appearing in low-income
neighborhoods, according to the St. Petersburg Times.
avoid these kind of tricks, people should avoid financing with a home's seller
unless they absolutely have to, Brennan says. Dealing with a well-known mortgage
lender or broker who has been recommended by a trusted friend or acquaintance
makes more sense. As for verifying a home's price, a local real estate agent can
help. They have data on "comps," or the value of comparable properties based on
recent sales in the neighborhood.
you don't find (fraud) in a conventional financing environment with large lenders,"
says Rick Snyder, a Realtor with Snyder Properties in San Diego. "That's very
regulated and they've got an ongoing interest in order to maintain confidence
in their lending environment."
A buyer who insists
on using non-traditional financing should at least consider hiring a closing attorney
to review the loan documents before signing them. It may cost a couple hundred
dollars, but it will guarantee that somebody representing the buyer's interest
rather than the seller's has a chance to review the deal.
nonprofit agencies also sponsor home buying seminars with the assistance of Department
of Housing and Urban Development grants. Uneducated purchasers can find solid
advice there. People can also get an education on the fundamentals of home-buying
from Bankrate.com's mortgage
a loan's sale
A borrower who receives a notice to start sending
his payments to a new address has it easier. By law, people must get "goodbye"
letters from their old lenders as well as "hello" letters from their new ones.
So someone who receives just the latter should call the old lender to verify that
the loan really has been transferred.
As for transactions
involving credit stand-ins or murky applications, it's buyer beware. Besides the
obvious fact that people who lie about their income or assets can end up with
more pricey housing than they can afford, Robbins says there are other problems.
Civil and criminal charges could ensue. The lender could call the mortgage due
if it later discovers the buyer obtained the loan based on fraudulent information.
Or, in a more complicated scenario, someone might even get into trouble with the
Internal Revenue Service.
Consider that the IRS
can access mortgage documents in an audit, Robbins says. If a borrower said he
made $20,000 a year on his tax forms, but claimed $60,000 in income in order to
qualify for his mortgage, the discrepancy would quickly become apparent. That
leaves somebody with two choices: confess to a federal agency that you committed
fraud or pay back taxes and penalties.
of this just is an ethical issue," Matthews says. "Do you want to be honest and
straightforward or are you going to try to cheat the system?"
recalls meeting the head of a large mortgage company at an industry conference
a few years back. Because she wanted to buy a new home before selling her old
one and closing out the mortgage, she was concerned she couldn't qualify for a
loan on the new property. The Realtor, however, had a novel solution: We'll draw
up a fake lease agreement saying you have a friend living in the old house and
making payments. That way, it'll look like you make more money.
just said, 'Do you know who I am and what I do?' I won't do that," Matthews recalls.
The Realtor, in response, said not to worry: "'It goes on all the time.'"