Mortgage Fraud: The New Crisis in Real EstateRead Time: 1 min
Mortgage fraud is one of the fastest growing areas of criminal activity in the United States today and the FBI has turned its attention to enforcement. The typical perception of this issue is limited to a single instance of an individual who fudges information on a loan application in order to obtain a loan. The last several years, however, have seen a rising trend of fraud for profit that has serious implications for both the victimized lenders as well as the neighborhoods where the properties are located. For example, United States Attorney for the Northern District of Texas recently indicted several parties as a result of an elaborate mortgage fraud scheme that took place in the Dallas area.
Although the schemes vary in their nuances, the common thread is a conspiracy of several parties to pull off the scam. Virtually all of these scams involve inflated appraisals. The following is a brief description of a typical mortgage fraud scam:
Straw Purchaser. In this version the lead conspirator (many times a mortgage broker) finds an individual whose credit history allows the individual to qualify for a residential real estate loan . The participating individual certifies that he or she will reside in the property, although they have no intention of doing so. The lead conspirator informs the straw purchaser that the property is an investment opportunity and that: 1) the participant will make a handsome return without using their own money and 2) not to worry about the representations on the loan application, including the intent to reside. The straw borrower is informed that, after they purchase the property, a renter will be found who will cover the mortgage until the property is sold at a substantial profit. Next, an appraiser is found who agrees to substantially inflate the value of the property. Many times the employment and income information on the loan application is falsified and an accountant in on the scam verifies the income. Sometimes the escrow agent may be involved such that two HUD-1’s are prepared with two different sales prices for the property. After closing no payments are made (or, at most, one or two) and the property ends up in foreclosure. The end result is that the lender extended a loan on a property that in reality is worth substantially less than the loan amount (usually there is a six figure deficiency) with the straw buyer deeply indebted on property they are unable to afford.
The danger of the straw purchase scams is that the lead conspirator replicates the process with a large number of purchasers, seemingly without end. So, instead of a single loss incurred by a one lender, which is containable, a number of lenders experience significant losses for which no or limited recovery is the only prospect. A future edition of the Texas Consumer & Commercial Law Update will address strategies for responding to and preventing this fast growing problem.