The real estate industry, like other financial industries, has its issues with scammers and fraud. The appearance of new scams and new versions of old scams make mortgage fraud a continuing problem for the industry.
Mortgage pre approval
It’s not a victimless crime. You might think of those who are involved in a mortgage fraud scams as cheaters and criminals. However, it is not uncommon for innocent consumers to get caught up in a mortgage fraud scam. In the past, home flipping schemes ensnared unwitting consumers. During the great recession, mortgage modification and foreclosure rescue scams targeted unknowing homeowners.
The Federal Bureau of Investigation (fbi.gov) wants you to report mortgage fraud. The FBI describes mortgage fraud occurring “when someone lies to influence a bank’s mortgage decision or if a distressed homeowner is the victim of a fraud.” There are two types of mortgage fraud, fraud for profit (such as home flipping schemes), and fraud for housing (such as mortgage application fraud).
Application fraud is likely the most
common mortgage fraud, as it can occur by any material misstatement, misrepresentation,
or omission in relation to getting a loan.
“Occupancy fraud” is when a borrower lies to get a better interest rate
by stating they will occupy the property when it’s intended to be a rental
property. “Employment fraud” is when a
borrower lists an employer they don’t work for. “Income fraud” is when a
borrower misrepresents their income to improve their profile for
underwriters.
Among the many types of mortgage fraud, one takes advantage of seniors with home equity conversion mortgages (also known as reverse annuity mortgage). The FHA underwrites a HECM for borrowers who qualify when they become 62 years old. The HECM provides homeowners access to home equity without payment until the borrower moves or dies. Scammers obtain a HECM in the name of a recruited homeowner to convert equity in the homes into cash. The scammers keep the cash and pay a fee to the senior citizen or sometimes just take the full payout. Sometimes, appraisals are inflated. This type of fraud is more difficult to detect because the lender usually doesn’t discover something is wrong until the home owner dies.
The FBI works with partners to investigate mortgage and financial institution fraud cases. Report mortgage fraud to the FBI (https://www.fbi.gov/investigate/white-collar-crime).
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.
House flipping has been around as long as people have lived in houses. Flipping houses got a bad rap in the 1990’s, when scammers engaged in widespread fraud using mortgages, appraisals, and straw buyers. In some cases, some “renovated” houses were uninhabitable and sold to unsuspecting home buyers. But house flipping has regained its legitimacy because of its significant contribution in revitalizing the country’s housing stock after the Great Recession. As a result, many investors found their fortunes. Of course, reality TV glamorized house flipping and the prospect of real estate riches. And as more people wanted in, flipping instruction courses multiplied.
Many embarking in house flipping courses believe it’s their road to real estate riches . Unfortunately, what’s not understood by many consumers is that flipping houses is an incredibly risky business. For most, it’s a full-time job that offers a modest living. And, many real estate flippers lose money.
Last week, the Federal Trade Commission (FTC.gov) entered a temporary restraining order against a real estate investment seminar promoter. You may have seen ads for these seminars, as they were promoted with reality TV star endorsements. The FTC alleges that the seminars are misleading and make “deceptive promises of big profits to lure consumers into real estate seminars costing thousands of dollars.” According to the October 4th FTC press release, the promoter claims to offer consumers coaching and training on how to make large sums of money by flipping houses.
But it’s not so much about real estate riches through flipping houses. The FTC complaint alleged that seminar ads attracted consumers to free event that claimed they would learn how to make large profits “using other people’s money.” It is alleged that the free event was a sales presentation for a three-day workshop that cost $1,997, and was promoted as teaching everything needed to know “to make substantial income from real estate.” The three-day workshop was sometimes described as a “beginner’s course,” and attendees were “upsold” products and services that cost as much as $41,297.
The FTC action just didn’t pop up overnight. It resulted from years of investigation. An eye opening 2013 report highlighted complaints about these seminars (Some Buyers Call Classes By ‘Flip Or Flop’ Stars Misleading; Investors Business Daily; 10/28/2016, p43-43). The reality TV star who was supposed to be at the seminar, instead appeared in a video stating they were busy filming their show. An attendee who paid $1,997 for the three-day course, $1,000 for real estate software, and “thousands more” for additional classes, stated, “They weren’t really teaching at all.”
Real estate investing and flipping courses have been around for decades. However, not all advocate house flipping as the vehicle to make riches. There are many avenues to invest in real estate; some teach buy and hold strategies, others teach auction strategies, etc. Before spending any money on a real estate investment course, do your due diligence. Check with the Better Business Bureau and FTC for complaints.
Andrew Smith, director of the FTC’s Bureau of Consumer Protection stated, “From start to finish, these defendants used the promise of easy money and in-depth information to lure consumers down a path that could cost them thousands of dollars and put them in serious debt. When a company tells consumers they have the secret to get rich with little work, we encourage consumers to take a hard look at what’s really being offered.”
Original article is published at https://dankrell.com/blog/2019/11/05/real-estate-riches-promises/
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.
Home Buyer Sanpshot (infographic from nar.realtor)
Can your home be seized through civil asset forfeiture? Consider the ongoing and expanded effort to identify cash purchases of residential real estate to catch criminals.
An imminent Supreme Court decision on Timbs v. Indiana could have implications on your home and property. Although the case is about excessive fines brought on by a state, it highlights the issue of due process in civil asset forfeiture. To bring you up to speed, the case is about the seizure of an Indiana resident’s $42,000 Land Rover by the state of Indiana, although his drug related fine was only $10,000. The Land Rover was allegedly purchased from cash obtained from an insurance policy, instead of illicit monies.
Civil asset forfeit is a when the government (federal, state, or local) confiscates your property when you are suspected of a crime. You don’t necessarily have to be charged or convicted of the crime. Civil libertarians criticize governments and law enforcement agencies for abusing civil asset forfeiture for profit. Maryland is one of the many states that have recently passed legislation reforming civil asset forfeiture. However, Congress has yet to pass a civil asset forfeiture reform bill.
In their effort to fight money laundering and mortgage fraud, the Financial Crimes Enforcement Network (fincen.gov) recently stated that their Geographic Targeting Orders (GTOs) program has “provided valuable data on the purchase of residential real estate by persons implicated, or allegedly involved, in various illicit enterprises including foreign corruption, organized crime, fraud, narcotics trafficking, and other violations. Reissuing the GTOs will further assist in tracking illicit funds and other criminal or illicit activity…”
Previous GTO’s required title companies to report all-cash transactions that met specific criteria. The purpose was to track and identify individuals who mask their identity behind shell companies. FinCen found that the GTO program provided “valuable data on the purchase of residential real estate by persons implicated, or allegedly involved, in various illicit enterprises including foreign corruption, organized crime, fraud, narcotics trafficking, and other violations.” So much so, that A November 15th press release revealed expanded reporting criteria and metro coverage. FinCen believes that the “reissued GTO” will assist in “tracking illicit activity.”
FinCen’s targets were previously limited to suspected foreign entities purchasing luxury properties. However, FinCen is becoming increasingly aggressive to include more transactions and individuals in their reporting criteria.
Two years ago, I reported on the expansion of the FinCen’s interest in fighting mortgage fraud and money laundering through residential real estate transactions. A January 13th 2016 FinCen release stated their intention in expanding their anti-money-laundering efforts to cash purchases of luxury real estate. The GTO was supposed to help learn about the risk posed by “corrupt foreign officials, or transnational criminals” who were suspected of “secretly” buying of luxury real estate in certain metropolitan areas.
Previous GTO’s focused on the cash purchases of luxury homes (over $1 million) in limited metro areas. However, in their November 15th revision, FinCen lowers the reporting threshold of cash purchases to $300,000. Additionally, the metro areas of interest have been expanded to include certain counties Boston, Chicago, Dallas-Fort Worth, Honolulu, Las Vegas. Los Angeles, Miami, New York City, San Antonio, San Diego, San Francisco, and Seattle. Additionally, title companies in those metro areas are also to report “natural persons” behind shell companies used in all-cash purchases of residential real estate, as well as virtual currency purchases.
Original published at https://dankrell.com/blog/2018/12/07/civil-asset-forfeiture/(opens in a new tab)
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.
Title fraud and house stealing (infographic from fbi.gov)
In the wake of the largest consumer data breach in history, ads for credit monitoring and other related services are flooding the airwaves. One of these associated services is home title monitoring. These commercials claim that they will protect you from home stealing and title fraud. But what is home title monitoring and is it worthwhile?
According to a FBI report (fbi.gov) “House Stealing, the Latest Scam on the Block,” house stealing is a combination of two popular “rackets:” identity theft and mortgage fraud. The 2008 report described a couple of versions of how the scam is perpetrated. One form of this crime is committed by obtaining a cash-out mortgage posing as you to get a check at settlement. Another form is committed by fraudulently taking title to your home and then selling the home for the proceeds. Although fraudsters frequently target vacant homes, house stealing can also occur while you’re still occupying your home. The FBI describes how scammers perpetrate house stealing and title fraud:
Here’s how it generally works: -The con artists start by picking out a house to steal—say, YOURS. -Next, they assume your identity—getting a hold of your name and personal information (easy enough to do off the Internet) and using that to create fake IDs, social security cards, etc. -Then, they go to an office supply store and purchase forms that transfer property. -After forging your signature and using the fake IDs, they file these deeds with the proper authorities, and lo and behold, your house is now THEIRS* [*Since the paperwork is fraudulent, the house doesn’t legally belong to the con artists.] There are some variations on this theme… -Con artists look for a vacant house—say, a vacation home or rental property—and do a little research to find out who owns it. Then, they steal the owner’s identity, go through the same process of transferring the deed, put the empty house on the market, and pocket the profits. -Or, the fraudsters steal a house a family is still living in…find a buyer (someone, say, who is satisfied with a few online photos)…and sell the house without the family even knowing. In fact, the rightful owners continue right on paying the mortgage for a house they no longer own.
Both forms of house stealing (or title fraud) are typically intertwined with mortgage fraud. And because of the process, mortgage fraud usually has multiple conspirators carrying out the scam. An example of this is the 2013-2014 sentencing of at least five co-conspirators (including a title company manager and mortgage broker). These criminals perpetrated a complex multi-million-dollar mortgage fraud scheme that occurred in Maryland. One conspirator sold homes that did not belong to her.
According to the FBI report, house stealing is difficult to prevent. However, vigilance on your part is highly recommended. Red flags include receiving payment books and/or late notices for loans for which you did not apply. Additionally, it is recommended to routinely monitor your home’s title in the county’s land records. Any unrecognized paperwork or fraudulent looking signatures may be an indication of title fraud and should be looked into. Title fraud should be reported to the FBI.
Title fraud protection
You can visit Montgomery County’s land records office and get information on searching your home’s title from the very helpful staff. You can also search land records online. However, you should consult a title attorney for a detailed title search.
A problem with searching land records is that it is not always definitive. Of course, accuracy depends on those who prepare and file the documents with the county. Common issues that are found in title searches are misspelled names and aliases. Deeds and other related documents (such as quit claim deeds and mortgage satisfaction letters) are not always filed timely, or sometimes not at all.
After the Equifax breach, millions of consumers’ identifications are available to criminals to perpetrate house stealing/title fraud. Title monitoring services tout their ability to protect you from such scams. Before you decide to enroll, be aware of the fees, the limitations, and how it compares or differs from your owner’s title insurance policy (including cost).
Your title insurance policy may already protect you from title fraud. According to the Maryland Insurance Administration’s A Consumer Guide to Title Insurance (insurance.maryland.gov), “Title insurance protects real estate purchasers and/or lenders from losses that arise after a real estate settlement…A title insurance policy provides coverage for legal defense, as well as the coverage amount listed in the policy, which usually equals the purchase price of the real property.” Basic coverage typically protects you for fraud that occurred prior to settlement. However, enhanced coverage may provide protection for fraud that occurs after settlement.
You should consult with a title attorney about your title insurance coverage and how it protects you from title fraud.
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.
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 (corelogic.com) 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 (fbi.gov) 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.
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.
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.
