From the FBI: All You Need to Know About Mortgage Fraud

MORTGAGE FRAUD INDICATORS

Inflated Appraisals
• Exclusive use of one appraiser

Increased Commissions/Bonuses – Brokers and Appraisers
• Bonuses paid (outside or at settlement) for fee-based services
• Higher than customary fees

Falsifications on Loan Applications
• Buyers told/explained how to falsify the mortgage application
• Requested to sign blank application

Fake Supporting Loan Documentation
• Requested to sign blank employee or bank forms
• Requested to sign other types of blank forms

Purchase Loans Disguised as Refinance
• Purchase loans that are disguised as refinances
requires less documentation/lender scrutiny

Investors-Short Term Investments with Guaranteed Re-Purchase
• Investors used to flip property prices for fixed percentage
• Multiple “Holding Companies” utilized to increase
property values

COMMON MORTGAGE FRAUD SCHEMES

Property Flipping – Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property illegal is that the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, title company employees are common in this scheme. A home worth $20,000 may be appraised for $80,000 or higher in this type of scheme.

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.

Nominee Loans/Straw Buyers – The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan.

Fictitious/Stolen Identity – A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant’s name, personal identifying information and credit history are used without the true person’s knowledge.

Inflated Appraisals – An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Foreclosure Schemes – The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner.

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.

Air Loans – This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.

Mortgage Fraud Prevention Measures

General Fraud Tips

Mortgage Fraud is a growing problem throughout the United States. People want to believe their homes are worth more than they are, and with housing booms going on throughout the U.S., there are people who try to capitalize on the situation and make an easy profit.

Tips to protect you from becoming a victim of Mortgage Fraud

• Get referral for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county, or city regulatory agencies.
• If it sounds too good to be true, it probably is. An outrageous promise of extraordinary profit in a short period of time signals a problem.
• Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques.
• Look at written information to include recent comparable sales in the area, and other documents such as tax assessments to verify the value of the property.
• Understand what you are signing and agreeing to–If you do not understand,
re-read the documents, or seek assistance from an attorney.
• Make sure the name on your application matches the name on your identification.
• Review the title history to determine if the property has been sold multiple times within a short period–It could mean that this property has been “flipped” and the value falsely inflated.
• Know and understand the terms of your mortgage–Check your information against the information in the loan documents to ensure they are accurate and complete.
• Never sign any loan documents that contain blanks–This leaves you vulnerable to fraud.
• Check out the tips on the Mortgage Bankers Association’s (MBA) website at http://www.StopMortgageFraud.com for additional advice on avoiding mortgage fraud.

Mortgage Debt Elimination Schemes

• Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport.
• There is no magic cure-all to relieve you of debts you incurred.
• Borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.

Foreclosure Fraud Schemes

Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a Quit-Claim Deed, and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner without preventing the foreclosure. The victim suffers the loss of the property as well as the up-front fees.

• Be aware of offers to “save” homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure.
• Seek a qualified Credit Counselor or attorney to assist.
Predatory Lending Schemes

• Before purchasing a home, research information about prices of homes in the neighborhood.
• Shop for a lender and compare costs. Beware of lenders who tell you that they are your only chance of getting a loan or owning your own home.
• Beware of “No Money Down” loans–This is a gimmick used to entice consumers to purchase property that they likely cannot afford or are not qualified to purchase. Be wary of mortgage professional who falsely alter information to qualify the consumer for the loan.
• Do not let anyone convince you to borrow more money than you can afford to repay.
• Do not let anyone persuade you into making a false statement such as overstating your income, the source of your down payment, or the nature and length of your employment.
• Never sign a blank document or a document containing blanks.
• Read and carefully review all loan documents signed at closing or prior to closing for accuracy, completeness and omissions.
• Be aware of cost or loan terms at closing that are not what you have agreed to.
• Do not sign anything you do not understand.
• Be suspicious if the cost of a home improvement goes up if you accept the contractor’s financing.
• If it sounds too good to be true–it probably is!

Mortgage Debt Forgiveness? The IRS Will Want Its Share

(MCall.com):

For homeowners around the country who are seriously delinquent on their mortgages and hoping for relief, the IRS has bad news: If your lender agrees to modify your loan and forgive any part of your debt, you could owe federal income taxes on the amount forgiven.
Think of it as the tax code’s ”kick-em-while-they’re-down” rule. When personal debts are canceled by a creditor, the amount forgiven is treated as ordinary income under the Internal Revenue Code unless the taxpayer is insolvent or bankrupt. Worse yet, the lender is required by law to report the amount canceled to the IRS.
Ouch! This is especially bad news for the growing numbers of subprime, or credit-impaired, borrowers charged a higher rate of interest, who find themselves ”upside down” in the current real estate market: They owe more on their mortgage than the value of their house, thanks to noxious combinations of zero down payments, declining property values, and hefty payment increases they can’t afford.
Diane Thompson, an attorney with the Land of Lincoln Legal Assistance Foundation in East St. Louis , Mo. , tells of one client who learned about the tax code’s Catch-22 the hard way. After the homeowner negotiated a loan modification agreement with her lender, she assumed that she was done with the matter. But a year later, the IRS came after her demanding a large tax payment on the amount the lender forgave — a tax bill that was equal to her annual income. Her lender had dutifully submitted a Form 1099-C to the IRS, alerting the agency to the woman’s extra ”income” from the loan modification.The homeowner never had actually received that income in any tangible way; she couldn’t deposit it in her bank account. But under federal law, the IRS had every right to come after her for unpaid taxes.
Similar situations are likely to pop up around the country in the coming year as lenders bend over backward to modify thousands of troubled loans before they go to foreclosure. Proposed new, bipartisan legislation on Capitol Hill could soften some of the impact on financially stressed homeowners, however. The Mortgage Cancellation Tax Relief Act of 2007 (HR 1876) would amend the tax code to exclude debt forgiveness on principal home mortgages from treatment as income.

Introduced in mid-April by Reps. Robert E. Andrews, D-N.J., and Ron Lewis, R-Ky., the bill would allow lenders to restructure delinquent mortgages without worrying about income-tax hand grenades hitting their borrowers the following year. The legislation potentially could assist many other homeowners in financial trouble who negotiate pre-foreclosure ‘’short sales,” deeds-in-lieu-of-foreclosure or whose foreclosure proceeds are insufficient to pay off their mortgage debt.

Short sales are increasingly commonplace. Say you are seriously behind on your mortgage payments and a loan modification or rate reduction won’t solve the problem because you’ve just lost your job. As an alternative to foreclosure, your lender might suggest a quick sale of the house, often to an investor who’ll buy it as-is at a discounted price. If the short sale proceeds are $10,000 less than the outstanding mortgage balance, and your lender agrees to forgive that amount, the Andrews-Lewis bill would allow you to obtain that relief tax-free.
Under current law, by contrast, your lender would be required to report the $10,000 in phantom income to the IRS. Ditto if you went to foreclosure and the sale proceeds yielded $10,000 — or $50,000 — less than the outstanding debt owed to the lender.

Proponents of the debt-relief reform bill argue that short sales, mortgage delinquencies and foreclosures are painful situations for most homeowners, and there’s no public policy purpose served by smacking them with tax penalties that make things even worse. In the case of below-market short sales, for example, most homeowners have already suffered sizable capital losses that are not tax-deductible.

They’ve lost thousands of dollars in equity.

Why pile on?

The outlook for the bill: It’s currently before the House Ways and Means Committee, Congress’ primary tax legislative body. Since most of the majority Democratic housing and banking committee leaders have called upon banks and mortgage companies to work out solutions to keep troubled homeowners out of foreclosure, a bipartisan tax fairness bill like this one should have a reasonable chance of passage.

A Silent Second Can Kill You

(Jack Guttenberg for Inman News)

The term “silent second” is used to describe self-serving or perhaps fraudulent schemes where house sellers accept second mortgages as part of a sale transaction, without the full knowledge of the first mortgage lender. The “silence” refers to the absence of full disclosure to the first mortgage lender.

The smaller of the frauds arises when the second mortgage replaces part or all of a down payment. For example, the buyer and seller agree on a price of $200,000; the buyer has a commitment for a first mortgage loan of $180,000, but doesn’t have the $20,000 required for the down payment. To make the deal work, the seller agrees to accept a silent second mortgage for $15,000. As far as the first mortgage lender knows, the down payment is $20,000, but in fact, it is only $5,000.

The silent second increases risk to the first mortgage lender because it takes only a 5 percent decline in home value to eliminate the borrower’s equity — rather than the 20 percent decline that the lender counted on. When equity is depleted, some borrowers stop paying on their mortgages.

This silent second is also risky to the seller because it can’t be recorded at the time of the sale — that would give the game away. This means that the seller has an unsecured loan until the transaction is completed and the lien can be recorded. How long the seller must wait before recording the lien is negotiated between the parties. The longer the seller waits, the greater the risk that other liens will be placed on the property, which will endanger the silent second.

An even more serious deception of the first mortgage lender arises when the silent second is used to inflate the sale price beyond the true value of the house in order to increase the size of the first mortgage. Assume the same house as before with buyer and seller agreeing on a true price of $200,000, but in this case the buyer has no down payment. They collude to set a fictitious price of $222,200, on the basis of which the first mortgage lender agrees to lend $200,000. This is 90 percent of $222,200 but 100 percent of the true value of $200,000. The seller agrees to a second mortgage for $22,200.

In this case, the first mortgage lender knows about the second mortgage. What the lender doesn’t know — where the silence comes in — is that after the transaction is completed the seller will forgive the second mortgage. In this way, the lender is deceived into making a 100 percent loan, believing that it is a 90 percent loan.

Is Taxpayers Bail-Out Necessary?

(Riverside Press-Enterprise editorial, April 26, 2007)

Good intentions don’t justify state taxpayer subsidies for risky borrowing and poor financial choices. Cracking down on lending abuses would offer a far better correction to the state’s slipping mortgage market.

Legislators should reject AB 1538, which would create a fund to help first-time homebuyers refinance their mortgages. The bill by Assemblyman Ted Lieu, D-Torrance, would aid homeowners trapped in high-cost loans by tapping the $2.85 billion housing bond voters passed last year.

The bill targets high-risk loans known as subprime mortgages, which lenders offer to people who can’t qualify for standard mortgages. Such loans offer the chance of homeownership to people who otherwise couldn’t afford it, but they also invite abuse. The slumping real estate market has exposed the dangers of these mortgages, prompting a spike in home foreclosures. For the full article…