Obviously, mortgage fraud schemes are as varied as the people who create them. Some mortgage fraud is committed out of ignorance, such as when a buyer signs a mortgage application with blanks in it and allows a mortgage broker to complete a mortgage application, often using false information. Most mortgage fraud, however, is a result of collusion between many players, usually with industry insiders such as real estate or mortgage professionals. With variations, mortgage fraud typically includes elements of the following2:
Fraudulent Loan Applications. Frank Padilla was sentenced to 24 months in prison and ordered to pay $1.1 million in restitution for a mortgage fraud scheme in Tucson
Foreclosure Rescue Scams. Often a company will approach homeowners having trouble paying their mortgage. They offer to pay off the delinquent mortgage and allow the homeowner to remain in the property with an option to purchase the property when the economy improves. While this transaction sounds enticing, the homeowner is required to deed the property at an inflated price to a buyer who will obtain a loan to pay off the existing debt and give the buyer additional funds. The buyer will often simply take the funds, and the homeowner will be evicted once the lender forecloses on the house. In 2009, an attorney, Colin C. Connelly, was sentenced to 24 months in prison and ordered to pay $376,464 in restitution for being involved in such a scheme. Connelly assisted buyers in “rescuing” homeowners from foreclosure. The rescue involved falsifying documents used to skim money from the loans for the benefit of the buyers. Connelly admitted that he did not disclose the true nature of the transactions and that the loans would not have been approved if the true nature of the transactions had been disclosed.
Short Sale Fraud. A short sale involves a property owner selling property for less than the amount owed pursuant to an agreement with the lender. Fraud occurs when information is withheld from the lender to obtain its approval. In Atlanta
Flipping Scam. While flipping a property in itself is not illegal, doing so while hiding information is against the law. Flipping a property occurs when an investor purchases a property, often in need of repairs, and sells the property for a profit. The scam arises when the property is purchased, and a buyer submits an offer for a higher price. The inflated price may be attributed to repairs which were not made. In October 2009, Richard Garries was sentenced to 20 years in prison and ordered to pay more than $900,000 in restitution after being convicted of carrying out such a scheme. Garries made promises to buyers that “the properties had been renovated, renters had been arranged for the properties, buyers would not have to spend their own funds, and that buyers would be provided with cash back at closing.” Garries also provided false information to lenders regarding the buyers’ qualifications, such as income level or bank account balances and went so far as to transfer money to the buyers, making it appear that they were more qualified and had funds to close escrow. Garries also received a commission on the loans.
Builder/Condo Conversion Bailout. When faced with excessive inventory, a builder will try to sell properties by using incentives, some of which are not disclosed. Such incentives include cash back at close of escrow, payment for fees by the seller, tenant locating or property management services. While there is nothing wrong with a builder using such incentives, it becomes fraud when such payments are not disclosed to a lender. Additionally, when apartment buildings are converted to individually owned condominiums, claimed renovations may in fact not be completed or the same incentives described above may be used.
Government Efforts
The government has made efforts to combat the problem of mortgage fraud of all types. In response to the increase in such actions, the federal government created the Financial Fraud Enforcement Task Force to coordinate efforts among 20 federal agencies, 94 U.S. Attorney offices and state and local agencies. The stated purpose of the task force is “to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, recover proceeds for victims and address financial discrimination in the lending and financial markets.”
In addition, the IRS uses special agents who “are uniquely equipped to investigate… mortgage fraud and illegal real estate crimes because they are skilled financial investigators whose mission is to ‘follow the money.’” As described, the FBI also performs investigations, dividing mortgage fraud into two areas: “fraud for profit” and “fraud for housing.” Operation Stolen Dreams targets mortgage fraud perpetrators and has involved 1,215 defendants, 485 arrests, 191 civil enforcement actions and a total of more than $2.4 billion in losses. While the U.S. Treasury Department has “declared war” on con artists perpetrating the so-called rescue scams, those efforts have been compared to “fighting a forest fire with a garden hose.”3
In addition to its investigations, the federal government has also taken regulatory steps to alleviate the problem. Efforts to encourage lenders to modify mortgages have proven largely unsuccessful. Government-mandated scrutiny of mortgage loans has also been implemented but has done little to abate the flow of mortgage fraud. Arizona
What’s Next?
In reviewing the numerous efforts undertaken by the government to stem the tide of mortgage fraud, one gets the impression that only the surface has been scratched. The question remains whether the current regulatory efforts are sufficient to stem the tide of a problem that has entered the spotlight in the wake of the market collapse. If the mortgage fraud “epidemic,” as the FBI has termed it, has been caused by the declining real estate market, perhaps it will simply abate once the market adjusts.
There are signs that the real estate market in Arizona Phoenix
Bottom line: If mortgage fraud is caused by a poor real estate market, expect it to be around for a while. If you are involved in a real estate transaction, watch your back. Take the precautions listed in the accompanying sidebar (“What Can Consumers Do to Avoid Mortgage Fraud?”). If you are trying to take advantage of the real estate market to get property or money — both of which are fine goals — make sure you structure the deals in such a way as to be beyond reproach. Ask yourself, am I keeping any part of this transaction secret from any other party? If so, it may be best not to proceed. Investors should make sure that they would be comfortable having the transaction reviewed after the fact. Given the way the government is investigating real estate deals, your transaction may just get that review. Any secrets may make the review a little less pleasant.i
