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In mortgage fraud, watch out for scams -- and your own greed

The 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.

Whether 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.

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In others, 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.

"When 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."

The 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.

In 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 Mortgage 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."

Watch 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.

One 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 says.

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.

If 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 one.

"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."

More trickery
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, he says.

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.

Contract 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.

Not 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.

Borrowers 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.

"You've obligated 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."

While grander 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.

"There's 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.

"A 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."

How to protect yourself
Wi
th 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.

Many 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.

To 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.

"Typically, 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.

Many 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 basics.

Confirm 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.

"A lot 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?"

He 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.

"She 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.'"

 

 
-- Posted: April 29, 1999
   

 

 
 

 

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