Mortgage fraud is not victimless

Mortgage fraud (infographic from

Since the foreclosure crisis, there have been many enhancements to the mortgage process to deter fraud.  Some of these changes include licensing of loan officers and indicating the license on government loans, choosing appraisers randomly, and limiting who can speak with appraisers.  Fraud detection before and after settlement has also been improved to thwart criminals.  But even with modern advancements, mortgage fraud has been trending upward.

Mortgage fraud schemes are increasingly sophisticated.  You may think that that those who are involved in mortgage fraud are career criminals operating in remote areas.  However, anyone can knowingly or unknowingly be involved, including real estate agents, attorneys, loan officers, appraisers, etc.  And it can happen anywhere, even in your neighborhood.  Where are is the most fraud trending? CoreLogic ( tracks fraud risk, and an interactive map can be found here.

Innocent consumers can get caught up in a mortgage fraud scheme too.  Historically, home flipping schemes were the traps where unwitting home buyers would get cheated.  However, since the foreclosure crises, distressed home owners have been a major target of mortgage modification scams.

The Federal Bureau of Investigation ( maintains that mortgage fraud is typically a material misstatement, misrepresentation, or omission in relation to getting a loan.  It is also considered fraud to lie to influence a bank’s decision to approve a loan and/or to get favorable loan terms.  The information you provide for your mortgage application should truthful.  Even indicating falsely that you will be occupying the property after settlement to get a better interest rate, when your intention is to use it as a rental property, is mortgage fraud.

After the mortgage crisis, the FBI (and other law enforcement agencies) broadened the scope of mortgage fraud to include frauds targeting distressed home owners.

A recent conviction of local fraudsters detailed such a scheme.  The co-conspirators claimed that they could help home owners modify mortgages and prevent foreclosure.  Evidence presented during their trial showed that the scammers charged their victims upfront and monthly fees that were to be used to pay down mortgages as part of a “principal reduction” plan.  Even though the victims received monthly invoices from the scammers showing their mortgage balances being paid down, there were no negotiations with lenders.  Many victims lost their homes.  The defendants will be sentenced later this year.

One of the most common tactics in mortgage fraud schemes is the use of a “straw buyer.”  A straw buyer is often used by con artists as part of their mortgage fraud scheme to make the transaction appear legitimate.  Although a straw buyer often knowingly consents to the use of their information to go along with the scheme, they are also sometimes the victim.  A Baltimore real estate agent was sentenced earlier this year to twenty-seven months in prison, ordered to pay $735,363.47 restitution, as well as forfeit $962,274.95 for his part of a mortgage fraud scheme.  The scheme used naïve and financially limited straw buyers to purchase renovated distressed properties at inflated prices, which the scammers profited.  To facilitate the loan process, the conspirators gave false information to loan officers including the intent of buyers to use the property as their primary residence.

Mortgage fraud is not a victimless crime.  Besides defrauding banks and their shareholders, mortgage fraud affects the neighborhood and community.  Unwitting consumers who have been caught in scams are usually left holding the bag and are foreclosed.  Residents of neighborhoods where mortgage fraud has occurred are affected by decreased home values and other effects of vacant and foreclosed homes.

Common mortgage fraud schemes listed by the FBI:

Foreclosure rescue schemes: The perpetrators identify homeowners who are in foreclosure or at risk of defaulting on their mortgage loan and then mislead them into believing they can save their homes by transferring the deed or putting the property in the name of an investor. The perpetrators profit by selling the property to an investor or straw borrower, creating equity using a fraudulent appraisal, and stealing the seller proceeds or fees paid by the homeowners. The homeowners are sometimes told they can pay rent for at least a year and repurchase the property once their credit has been reestablished. However, the perpetrators fail to make the mortgage payments and usually the property goes into foreclosure.

Loan modification schemes: Similar to foreclosure rescue scams, these schemes involve perpetrators purporting to assist homeowners who are delinquent in their mortgage payments and are on the verge of losing their home by offering to renegotiate the terms of the homeowners’ loan with the lender. The scammers, however, demand large fees up front and often negotiate unfavorable terms for the clients, or do not negotiate at all. Usually, the homeowners ultimately lose their homes.

Illegal property flipping: Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is the fraudulent appraisal information or false information provided during the transactions. The schemes typically involve one or more of the following: fraudulent appraisals; falsified loan documentation; inflated buyer income; or kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees.

Builder bailout/condo conversion: Builders facing rising inventory and declining demand for newly constructed homes employ bailout schemes to offset losses. Builders find buyers who obtain loans for the properties but who then allow the properties to go into foreclosure. In a condo conversion scheme, apartment complexes purchased by developers during a housing boom are converted into condos, and in a declining real estate market, developers often have excess inventory of units. So developers recruit straw buyers with cash-back incentives and inflate the value of the condos to obtain a larger sales price at closing. In addition to failing to disclose the cash-back incentives to the lender, the straw buyers’ income and asset information are often inflated in order for them to qualify for properties that they otherwise would be ineligible or unqualified to purchase.

Equity skimming: An investor may use a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed, which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.

Silent second: The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.

Home equity conversion mortgage (HECM): A HECM is a reverse mortgage loan product insured by the Federal Housing Administration to borrowers who are 62 years or older, own their own property (or have a small mortgage balance), occupy the property as their primary residence, and participate in HECM counseling. It provides homeowners access to equity in their homes, usually in a lump sum payment. Perpetrators taking advantage of the HECM program recruit seniors through local churches, investment seminars, and television, radio, billboard, and mailer advertisements. The scammers then obtain a HECM in the name of the recruited homeowner to convert equity in the homes into cash. The scammers keep the cash and pay a fee to the senior citizen or take the full amount unbeknownst to the senior citizen. No loan payment or repayment is required until the borrower no longer uses the house as a primary residence. In the scheme, the appraisals on the home are vastly inflated and the lender does not detect the fraud until the homeowner dies and the true value of the property is discovered.

Commercial real estate loans: Owners of distressed commercial real estate (or those acting on their behalf) obtain financing by manipulating the property’s appraised value. Bogus leases may be created to exaggerate the building’s profitability, thus inflating the value as determined using the ‘income method’ for property valuation. Fraudulent appraisals trick lenders into extending loans to the owner. As cash flows are lower than stated, the borrower struggles to maintain the property and repairs are neglected. By the time the commercial loans are in default, the lender is often left with dilapidated or difficult-to-rent commercial property. Many of the methods of committing mortgage fraud that are found in residential real estate are also present in commercial loan fraud.

Air loans: This is a nonexistent property loan where there is usually no collateral. Air loans involve brokers who invent borrowers and properties, establish accounts for payments, and maintain custodial accounts for escrows. They may establish an office with a bank of telephones, each one used as the fake employer, appraiser, credit agency, etc., to fraudulently deceive creditors who attempt to verify information on loan applications.

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Copyright© Dan Krell

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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Foreclosures and mortgage mod scam artists

by Dan Krell © 2010

Foreclosures continue to be a national issue; however, a tiny glimpse of light from the end of the tunnel may be peering through for the local market. According to the April 2010 report Property Foreclosures In Maryland First Quarter 2010 by the Maryland Department of Housing and Community Development (which can be viewed on, the number of national foreclosure filings (which includes notices of default, notices of foreclosure sales and lender purchases of foreclosed properties) increased the first quarter of 2010 (7.2% compared to the fourth quarter of 2009 and 16% compared to the first quarter of 2009). It is estimated that 1 in 138 households in the United Sates received a foreclosure filing during the first quarter of this year.

The news for Maryland, however, seems somewhat better. The report indicated a reduction of foreclosure filings in the first quarter of 2010 compared to the fourth quarter of 2009 (-11.5%) but increased compared to the first quarter of 2009 (+59.9%). Montgomery County fared much better such that the total number of foreclosure filings decreased in the first quarter of 2010 compared to the fourth quarter of 2009 (-24.2%) and the first quarter of 2009 (-14%).

Along with the ongoing problem of foreclosure come the continued attempts from home owners to save their homes. As the real estate market deteriorated, many home owners found themselves in a negative equity situation and unable to refinance their mortgages. Mortgage modification became the prevalent means of foreclosure relief as home values decreased during the market decline; home owners facing financial challenges seek to modify their mortgage terms to make their mortgage payments more affordable.

Since the beginning of the foreclosure crisis, foreclosure rescue scams have taken advantage of desperate home owners trying to save their homes. As the prevalence of mortgage modifications grew, so did mortgage modification scams. Although legitimate mortgage modification information is readily available from HUD, Fannie Mae, Freddie Mac, federal and local governments, non-profit organizations, etc. home owners continue to fall prey to scam artists.

Because scammers continue to confuse home owners searching for assistance by evolving their techniques to appear to be legitimate, the Loan Modification Scam Prevention Network was founded as a project of The Lawyers’ Committee for Civil Rights Under Law. The Loan Modification Scam Prevention Network ( is a coalition effort created to bolster ongoing government, law enforcement, and public education efforts to fight the scammers who are intent on defrauding distressed home owners.

To assist home owners, the website contains extensive information such as (but not limited to) housing counseling, tips for avoiding scams, state and local foreclosure resources, the means to report suspected scams, and a list of alleged scam artists! Additionally, the site lists state and local laws regulating businesses involved in foreclosure relief, as well as a statement about attorneys providing loan modifications.

If you are seeking a mortgage modification, the Loan Modification Prevention Network is one of the many resources available to you; the website has a comprehensive database. Additional resources are available through HUD certified counseling programs and the Maryland Hope Hotline (1-877-462-7555). Maryland home owners facing foreclosure have protections under the Protection of Homeowners in Foreclosure Act, such as prohibiting foreclosure consultants from collecting upfront fees. If you suspect you are being scammed, contact a local consumer protection agency and/or law enforcement.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 26, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

Relief from foreclosure relief scams

by Dan Krell © 2009.

Foreclosure relief is big business; so are foreclosure relief scams. Foreclosure relief scams have been a long standing national problem. In fact, in their 2005 report titled, “Dreams Foreclosed: The Rampant Theft of Americans’ Homes Through Equity-Stripping Foreclosure Rescue Scams,” the National Consumer Law Center described foreclosure relief scams as fitting into three categories: phantom help, bailout, and bait and switch (

Phantom help is described as the charging of fees (usually excessive), by a “consultant,” to make phone calls and complete paperwork that the home owner can typically complete on their own. In this type of scam, the home owner does not know that the “consultant” provided little (if any) assistance until it’s too late. The “consultant” usually disappears and the home owner is not only facing foreclosure, but has been scammed out of their hard earned money.

The bailout scam was popular among schemers in the earlier part of this decade when many home owners had equity in their homes. Although there are variations on this type of scam, typically the homeowner would arrange to buy their home back after the title of the home was conveyed to the “consultant.” Usually, the home equity is unknowingly stripped by the “consultant” and the home owner loses the home.

The bait and switch scam is what it is exactly what it sounds like. The home owner unknowingly conveys the title of their home to the “consultant,” while believing they are signing loan documents.

In response to the growing number of consumer complaints (as well as legitimate business inquiries), the Maryland Commissioner of Financial Regulation posted an advisory late last year to consumers as well as those in the business of loss mitigation, foreclosure prevention, and similar services ( The advisory is a reminder that the Protection of Homeowners in Foreclosure Act (PHIFA) is in force to protect home owners as well as pursuing predators. PHIFA describes who is protected, prohibited practices (including foreclosure rescue transactions), foreclosure consulting contract terms, mandatory disclosures, and the home owner’s right of rescission.

Under PHIFA, a “foreclosure consultant” is described as anyone who systematically solicits home owners to offer foreclosure consulting services, which includes (among other services) loan modifications, forbearance services or loan reinstatement services. To add credence to their services, some foreclosure consultants are or work with real estate agents, loan officers, or title companies.

PHIFA prohibits upfront fees of any kind to be collected by foreclosure consultants. A foreclosure consultant cannot receive any compensation until they have performed every service described in their contract. Additionally, foreclosure consultants cannot receive payment from third parties (real estate agents, loan officers, title companies, etc.) connected to the services provided to the home owner unless the payments are fully disclosed to the home owner, listed on the settlement sheet, and does not violate (other) law.

If you are in default or in foreclosure and have been contacted by someone promising foreclosure relief (by negotiating a loan forbearance, modifying the terms of your mortgage, or even facilitating a short sale) do your homework and make sure the consultant is legitimate. You can get more information about PHIFA by contacting the Commissioner of Financial Regulation; and of course, consult with an attorney.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 19, 2009. Copyright © 2009 Dan Krell.