Mortgage Fraud 1

I read an article a week in the daily newspapers and in industry publications describing how one more group of crooks have been caught perpetrating mortgage fraud and are going to jail. The stories demonstrate one thing, that mortgage fraud is alive and well. It’s growing too, up 500% in the past few years according to the FBI.

The types of mortgage fraud that are written about typically involve lenders having been ripped off by desperados who defraud lenders of millions of dollars. Here's how a typical scheme works. The crooks come up with a property and sell it at an inflated price to a straw buyer. They get a loan based upon the inflated price and after the deal closed, they pocket the extra money. I'll demonstrate with a simple example.

Let's assume the crooks bought a home for $200,000 and that they paid cash for it. They sell it to the straw buyer and get a loan for 90 percent of $300,000, the sales price and inflated appraised value. That loan is $270,000. When the transaction is finished, they can walk away with $270,000 minus their initial investment of $200,000, leaving a $70,000 gain.

The lender gets exercised a few months later when no one makes the payments. They try to contact the new owner but it is a likely someone whose identity was stolen, someone whose name, social security number, and life were high-jacked in the process. The lender finally realizes that they have a $270,000 loan on a $200,000 property.

These almost always involve a ring of crooks because you need real estate agents, loan agents, an appraiser, and an escrow officer to make it work. It helps to have someone on the inside in a title company. These rings go into action and they may well sell dozens properties in a short period of time, collecting millions of dollars. I heard of one case where 500 properties were involved.

I was involved in one case as an expert witness. When I looked through the loan file, there were some fairly glaring inconsistencies that jumped out at me. The fraud was perpetrated at a time when the mortgage business was extremely busy. Lenders were farming loans out to "contract underwriters," people who were not actual employees of the firm. In this case, that underwriter just did a poor job and didn't see the warning flags I saw. It does make you wonder why a firm would farm out a $1,000,000 loan to an outsider. You'd think that they do the big ones "in house" and farm out the little ones. That mistake cost them a bundle, but the perps were caught and are now in prison.

Honestly, I don't know how people think that they can get away with this unless they plan on skipping the country and moving to Costa Rica . I once talked with a fellow who was planning on something like this but just on one unit. He justified it by saying, "Lenders are just like any other business and they win some and lose some." That's easy to say right up to the point where someone lies about material facts on an application. At that point it becomes defrauding the lender, a felony punishable by imprisonment.

The latest stories are from Chicago where, reportedly, drug lords have been expanding their business empires by engaging in loan fraud in the lower-income neighborhoods. Does that mean that mortgage fraud is more profitable than dealing drugs? Makes one wonder.

I am fully aware that my readers are not going to be victims of fraud because you are not likely candidates. You are smart enough to stay educated about things like this. But a block away from you there may be one such victim. And the more pervasive fraud becomes, the more likely it is to touch someone you know. Sadly, homeowners can be victimized too, where a lender acts as if they are helping the people but in the end, the homeowner loses his home and the crook skips with the bank's money.

So when you hear someone talking about some loan that seems too good to be true, help them by warning them about the risks. Whatever they want to do can be better accomplished by someone honest.

Be careful out there.