Industry Insiders Behind 80% of RE Fraud

"The FBI says 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders."

"Mortgage fraud is rampant in the United States and not only are the illegal activities an immediate threat to home owners and local communities, the scourge could ultimately cause the kind of economic conditions associated with so-called "housing bubbles."'

"Nationwide, mortgage fraud is estimated to have cost businesses nearly $48 billion and consumers about $5 billion in the past five years, according to a recent study by the Federal Trade Commission."

"The FBI's report says mortgage fraud can have a domino effect on the local housing market and the economy at large."

"Mortgage fraud also can spawn an insidious housing bubble-like effect that can ruin households and neighborhoods."

"Overvalued property can falsely inflate nearby home values while also raising property taxes. When the scam is uncovered or homeowners default or both, values can just as quickly plummet leaving other owners with over-valued homes and upside down mortgages -- conditions that simulate or exacerbate a so-called housing bubble."

"Methods vary, but the run up in home prices is attracting an underworld that often uses inflated appraisals on properties distant lending companies never see. Often a conspiring group of insiders -- lawyers, appraisers, mortgage lenders, title and escrow workers, mortgage brokers, and real estate agents -- get a mortgage for more than the actual value of the property and then walk off with the difference."

'"Each mortgage fraud scheme contains some type of 'material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan'," said FBI assistant director Chris Swecker, testifying before the U.S. House of Representative's Financial Services Subcommittee on Housing and Community Opportunity."

'"The FBI continues to be the primary law enforcement agency in protecting our nation's financial institutions and the investigation of major fraud is a high priority...Operation Continued Action. ...mortgage fraud in the secondary market is often under reported. Therefore, the true level of mortgage fraud is largely unknown."

"The mortgage industry itself does not provide estimates on total industry fraud. The industry provides incomplete or inconsistent fraud data. Based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing," Swecker testified."

"When loans sold in the secondary market default and have fraudulent or material misrepresentation, loans are repurchased by the lending financial institution based on a 'repurchase agreement.' As a result, these loans become a non-performing asset. In extreme fraud cases, the mortgage backed security is worthless. Mortgage fraud losses adversely affect loan loss reserves, profits, liquidity levels and capitalization ratios, ultimately affecting the soundness of the financial institution," Swecker testified.

More Information
"The FBI is currently cooperating with many local municipalities nationwide to stop what Assistant FBI Director Chris Swecker says “could become an epidemic.” Mortgage fraud encompasses a wide range of knowing and unknowing accomplices and is putting the mortgage industry in jeopardy. Should this fraud go unabated we could see another crisis similar to the $130 billion plus dollars that was spent to bail out the S&L failures of the 80’s."

"Mortgage fraud is most often found in areas with large scale neighborhood gentrification and mostly involves those people flipping homes."

"While there is nothing inherently illegal or unethical in purchasing a property at a discount and fixing it up over several months for resale, many criminal elements and even organized crime have entered what is a relatively unregulated activity in order to dupe banks out of millions of dollars."

"Some schemes involving mortgage fraud have snared unknowing, well meaning people who were duped into becoming a straw buyer or worse yet, duped into buying an overpriced home that they are now stuck with."

"Legal or illegal flipping aside, mortgage fraud comes in many shapes and forms. It can involve a single individual or an entire team of conspirators. From the buyer to the seller to the closing attorney and everyone in between, the perpetrators generally commit one simple act that turns a transaction into fraud: they fail to disclose some material fact about the transaction or the financial elements involved in the deal. In many cases, mortgage fraud can be simply defined as a lack of disclosure."

"If documents are altered from their true form, if appraisals have values that are “pushed” or downright wrong, or if answers are given in an effort to hide or alter the true facts, a crime has been committed. Full and honest disclosure has not been given and fraud has occurred."

"Some mortgage fraud goes even deeper than fudging an income number on a W2 form or failing to disclose a loan that was received in order to make a down-payment for the purchase of a new property. Stolen identities are used to make application for loans, properties are sold on forged titles where the seller is not the owner and helpless families in financial dire straits are convinced to give up titles to predators who then sell their homes leaving them with no home and a huge debt to repay."

Some Additional Caveats for the Emptor:

watch out for....

Complicity of the Realtor

"In the world of real estate there is an individual professional that will strive to get your business. They will do almost anything to obtain your loyalty and to get you, as a real estate investor, to do business with them on a regular basis. That person is a Realtor."

"In order to capture you and convince you of their worth, some Realtors will push the edges of ethical behavior in order to meet investors’ demands and prove they can be of value to an investor’s business. The problem is when the ethical and moral boundaries become blurred by money, rapid closings and the promise of quick riches."

"The entrepreneurial spirit that is imbued in the real estate investing profession drives those within the profession to get the deal done at all costs. This will lead many to justify unethical actions for the sake of closing. The problems caused by unethical behavior can be devastating to well meaning investors and harmful to the real estate investing community as a whole."

"Whether the situation is a Realtor in collusion with a loan officer and an investor or whether each acts independently to create fraudulent documents, when the fraud is discovered, everyone is injured. Even in what appear to be seemingly innocent acts, (such as recommending a ‘soft’ second or requesting value conclusions to be pushed to the top of the market even though it appears the market is declining) people and companies can sustain huge losses."

"In situations where Realtors have colluded with unethical investors, unscrupulous attorneys and scurrilous appraisers, unsuspecting mortgage companies and home buyers can lose tens of thousands of dollars in unserviceable loans or by owning properties that are worth less than the loan balances against them. To avoid fraud with these individuals, watch for these warning signs."

Warning Signs
1. The Realtor shows you an appraisal on a prospective property and encourages you to use the appraisal when you make application for a loan.

2. The Realtor encourages you to use lenders that have large application fees or insist that you use a ‘preferred’ lender in order to receive certain benefits, like closing costs paid by the seller or a discount on the purchase price. They are more concerned with receiving a commission than insuring you receive the best financing.

3. The Realtor states that the comps in the neighborhood are not really comparable to the home you are purchasing so the appraiser will have to go outside the neighborhood to find comparables to value the home. They will act as if this action is completely normal and an acceptable appraisal practice.

4. The Realtor does not disclose that they are a representative of the seller. In many states if you do not sign a specific agreement with the Realtor making them a buyer’s agent, they are required by law to represent the seller even if they are not the listing agent. This fact should be disclosed to you if you do not have a signed buyer’s agency agreement.

5. The Realtor suggests that the seller can hold a second mortgage, however, the seller doesn’t intend to collect on the debt and will not record the deed. This is sometimes referred to as a soft second and is done in an effort to dupe the first mortgage lien holder to accept a lower down payment under the guise that the rest of the risk investment required by the buyer is being met by taking out a second mortgage on the home.

"There are many other warning signs that you should look for when dealing with Realtors. Mostly you should look for disclosure. Any attempt to hide or alter facts is a lack of disclosure that could point to mortgage fraud. Realtors should be honest and forthright in their disclosures to you and in their disclosure of transaction details to the mortgage company that will fund your loan."

"Know your rights. Learn who represents you and how those you have dealings with represent others. Through agency representation and disclosure you should be able to steer clear of fraudulent deals put together by Realtors who choose to push the boundaries of moral and ethical behavior."

Lenders and Loan Officers

"Lenders and their loan officers want to do business with investors more than Realtors. Just look around any real estate investor’s association meeting and you will see mortgage companies clamoring for investors to do business with them. The claims and loan product offerings are mind boggling."

"Claims of quick cash, easy closings, no cost loans, 100% financing, all kinds of claims designed with one thing in mind, to develop you as a return client. As stated in previous articles in this series, in the world of real estate investing there is an entrepreneurial spirit that is in imbued in the profession which drives those within the business to get the deal done at all costs and often times, this drive will lead many to justify unethical actions."

"Of all the professions discussed thus far in this series, the ethical mortgage professional can be one of the most beneficial resources for the real estate investing professional. However an unethical lender can be extremely detrimental."

"Lending professionals that use bait and switch programs, who are willing to alter documents and that withhold important information in loan transaction can cost investors thousands of dollars at the table and leave them holding a mortgage on a property that is worth less than they owe on it. Watch for these tell, tell signs when dealing with loan officers and you may spot someone willing to commit fraud."

Warning Signs
1. The loan officer encourages you to sign documents that you know are false.

2. The loan officer has appraisal software on his computer.

3. The loan officer alters or encourages you to alter income or asset documents in order to receive loan approval.

4. The loan officer does not issue a Good Faith Estimate or, when he does, he will not guarantee the cost and rate will be the same at the closing table.

"Some mortgage professionals have found creative ways to cover their duplicity in fraudulent mortgages for the short term; however, in the long term, they and their cooperative cohorts are always discovered. More than any other professional in the real estate industry, the lending professional’s main focus should be on truthful and honest disclosure. Disclosure is what the lending process is all about."

"The disclosure process starts when the application is made and continues until the loan is closed and this entire process is designed to allow the lender to make a solid lending decision that mitigates their risk in the transaction. By making sure that your lender properly discloses information and by avoiding being enticed to provide false or partially true information, you can avoid mortgage fraud and stay clear of fraudulent lenders."