Gotcha Guide™: Mortgage Fraud Makes a Comeback

NOTE: This information is part of a forthcoming book, the Gotcha Guide™ to Buying and Investing in Real Estate.  
by DeeinAustin™

Keller Williams agents in the Northwest Market Center had a great class on how to spot mortgage fraud. As broker Linda Bartlett mentioned, mortgage fraud is one of those things that won't go away. It comes and goes in waves. I missed the class, but wanted to point out how to spot the mortgage fraud.

You'd be surprised at some of the clever ways that you can become involved in a fraudulent transaction without your knowledge. Knowledgeable or not, if you're involved in fraud, you may still pay for the wrongdoing.

EXAMPLES OF MORTGAGE FRAUD 

1. Fraudulent appraisals. The lender may be in cahoots with the appraiser, so ask sellers or buyers to sit back and let them inflate the price of the home. Sometimes selling agents are asked to increase the list price in MLS or buyers are asked to "go with the flow" on how much they will offer on the home.
2. Silent seconds. The buyer borrows the down payment from the seller through an undisclosed second mortgage. If it's not disclosed to a lender, you're committing fraud and the loan can be called due and/or you can be prosecuted. Let's not lie, hide, or deceive lenders. They don't like that.
3. Nominee loans/Straw Buyers. The identity of the true borrower is hidden by using another person for loan docs and credit. This isn't the same as mom buying a house and having her child live in it. This is when someone else's name is on everything, but you are the true borrower.
4. Equity Skimming. An investor uses a straw buyer, false income documents, and fake credit reports to obtain a mortgage. The straw buyer signs the property over to the investor using a quit claim deed, never makes mortgage payments, then rents the property until it's foreclosed.

RED FLAGS

1. Significant sales price adjustments that are not supported by comps.
2. Required use of a particular appraiser.
3. Down payment assistance programs that charge excessive fees.
4. Large seller contributions, possibly in the form of improvement allowances.

TIPS TO AVOID GETTING TAKEN (From HUD.gov)

• Shop around for a good inspector, lender, and real estate agent...even for NEW HOMES. Don't just automatically use the "preferred" professional.
• Do NOT let anyone persuade you to make a false statement on your loan application, such as overstating your income, the source of your down payment, failing to disclose the nature and amount of your debts, or even how long you have been employed. When you apply for a mortgage loan, every piece of information that you submit must be accurate and complete. Lying on a mortgage application is fraud and may result in criminal penalties.
• Do NOT let anyone convince you to borrow more money than you know you can afford to repay. If you get behind on your payments, you risk losing your house and all of the money you put into your property.
• Never sign a blank document or a document containing blanks. If information is inserted by someone else after you have signed, you may still be bound to the terms of the contract. Insert "N/A" (i.e., not applicable) or cross through any blanks.
• Be honest about your intention to occupy the house. Stating that you plan to live there when, in fact, you are not (because you intend to rent the house to someone else or fix it up and resell it) violates federal law and is a crime.

For more information, there's a great resource on Predatory Lending and Avoiding Fraud on HUD's website. There are also brochures available for REALTORS® at Realtor.org. Our team can also mail a full copy of the brochure via email or snail mail.

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Comments

[Lucy]

Ralph Roberts is quoted in the 2007 edition of the Swanepoel Trends Report by saying that more and more people are being sent to jail on charges of bank fraud and conspiracy to commit mortgage fraud. This is a major concern to me. What do you think?

[Lucy]

Ralph Roberts is quoted in the 2007 edition of the Swanepoel Trends Report by saying that more and more people are being sent to jail on charges of bank fraud and conspiracy to commit mortgage fraud. This is a major concern to me. What do you think?

[Dee Copeland]

Unfortunately, some buyers and sellers are going to jail even though they didn't mean to commit fraud. The mortgage paperwork is tough and doesn't really allow for "innocent" mistakes since anyone can say their mistake was not on purpose.

The best bet is to just watch out for the warning signs and protect yourself.