Report after report of mortgage fraud hits news wires on a regular basis, with stories of lenders and innocent sellers being cheated out of billions.
The more industry individuals become familiar with the crime, the better chance they have at helping prevent it.
The most common fraud scheme is the classic “flip,” recently used by a fraud ring in Los Angeles that was busted for stealing millions from lenders and the U.S. Department of Housing and Urban Development. It was also an Atlanta fraud operation’s scheme of choice, before federal authorities arrested its members earlier this month for swindling more than $100 million on hundreds of properties.
Georgia ranks fourth in mortgage fraud, behind Florida, California, and Maryland, said Ann Fulmer, assistant district attorney of DeKalb County, Georgia.
Mortgage fraud is a national phenomenon and the true scope is unknown because there are no systems in place to fully measure its occurrence, Fulmer said. It’s also under-reported because of financial penalties imposed on lenders and investors who discover it in their portfolios.
Several players weave the fraudulent web of a flip scam.
The main player, or orchestrator, puts down a deposit for a home and agrees to buy for near or at the asking price. The seller of the home is usually desperate to just get rid of the thing.
The scam begins either before setting the closing date with the seller or while continually pushing the date later and later. During this time, the orchestrator turns and enters into a contract with a “straw buyer” to sell the house — that the orchestrator doesn’t own yet — for an inflated price.
The straw buyer can be a crony-in-cahoots or even a homeless person co-conspiring with the orchestrator. Or, it can be a hapless, innocent buyer happy about getting a house for no money down.
A co-conspiring appraiser then gives the orchestrator an inflated appraisal. The orchestrator also prepares fraudulent documents that allow the straw buyer to be qualified for the inflated price.
The orchestrator sells the home he doesn’t own to the straw buyer. He gets the loan money, gives part of it to the desperate seller to pay for the house, and distributes the rest among the conspiring players. And of course, he keeps the lion’s share for himself.
The cooperation of the closing attorney, who’s either innocent or is a player in the scheme, is critical for the scheme to work. The attorney has not recorded the sale from the orchestrator to the straw buyer, or in some cases, the second sale is closed first. Deeds instead are prepared and filed, showing that the straw buyer purchased the property directly from the desperate seller.
And because the straw buyer usually never meant to keep the home in the first place, it goes into foreclosure.
These flips are often discovered only when a review appraiser, after foreclosure, discovered that the asking price on these properties was significantly lower than the sale price reported to the taxing authorities.
In addition to basic theft issues, this form of “flipping” can cause major tax problems for the innocent seller, Fulmer said.
The Georgia Real Estate Fraud Prevention and Awareness Coalition offers brokers tips they can use to stop scams:
- Report any colleagues who you know are participating in a scam.
- Maintain high ethical requirements, and transcend the urge to compromise them in order to produce more loans. If you uncover a situation or obtain knowledge that the loan won’t be repaid, don’t make the loan.
- Know the people with whom you do business. If you become privy to a scam when dealing with a lender, closing attorney, or settlement agent, report it.
- Because you’re the source closest to the borrower, pay attention to suspicious problems and transactions.
StopMortgageFraud.com, a service of the Mortgage Bankers Association of America (MBA), features an 11-point bill of rights for borrowers, which includes the right to receiving an identifiable benefit when charged a fee or a higher interest rate to refinance a loan. It explains the warning signs of abusive lending, and has a checklist for borrowers to make sure all disclosures are included in their file. It also features a point-and-click form for borrowers to fill out in order to report fraud to the MBA.
The site is aimed at helping borrowers, but it’s also a good source for becoming more familiar with how to prevent fraud where it sometimes starts — in the industry.