How does mortgage fraud work?

G

garfangle_IHB

New member
With all this talk about houses defaulting shortly after a being bought, how exactly does mortgage fraud happen? Does it work like this:



A greedy home owner (Jack) conspires with a crooked appraiser (Tom) to bring in a desperate "sucker" (Rick) to buy his inflated house.



Details: Jack's (true value) $300K home is appraised by Tom for $500K. Jack finds Rick to be his home "buyer," who agrees to purchase the house at that inflated amount with a no-doc 80/20 loan. Stupid mortgage broker Knew Century finds nothing wrong with this and house is sold. A few months later Rick defaults on his house and "jingle" mails the key back to the bank. For his trouble (the credit ding), Jack pays Rick $50K. Tom is also paid $50K by Jack for his "helpful" expertise. Jack "earns" $100K on the transaction while the remaining $100K is to keep Tom and Rick's silence. The investor/holder of the junk mortgage is the party out at least $200K.



Correct?
 
Yep.



There are some variations; often the mtg broker is in on it. Sometimes

if there's been enough fraud in a high rise, the appraiser isn't because

there are a lot of very high comps.



And sometimes the buyer intends to buy and lives there, but just overstates

on a "stated loan".
 
This is also one of the reasons 100% financing is an invitation for fraud. When you can get 100% of the value of the appraisal, it is easy to get bailed out of a bad situation because the lender is cutting a large check. If you can only get 80% of the appraised value, fraud is much more difficult to accomplish.
 
<a href="http://www.calculatedriskblog.com/2009/07/fbi-us-mortgage-fraud-rampant-and.html">FBI: U.S. Mortgage Fraud "Rampant" and "Escalating"</a>



<strong>Builder-Bailout Schemes:</strong> Builders are employing builder-bailout schemes to offset losses, and circumvent excessive debt and potential bankruptcy, as home sales suffer from escalating foreclosures, rising inventory, and declining demand. Builder-bailout schemes are common in any distressed real estate market and typically consist of builders offering excessive incentives to buyers, which are not disclosed on the mortgage loan documents. Builder-bailout schemes often occur when a builder or developer experiences difficulty selling their inventory and uses fraudulent means to unload it. In a common scenario, the builder has difficulty selling property and offers an incentive of a mortgage with no down payment. For example, a builder wishes to sell a property for $200,000. He inflates the value of the property to $240,000 and finds a buyer. The lender funds a mortgage loan of $200,000 believing that $40,000 was paid to the builder, thus creating home equity. However, the lender is actually funding 100 percent of the home?s value. The builder acquires $200,000 from the sale of the home, pays off his building costs, forgives the buyer?s $40,000 down payment, and keeps any profits. If the home forecloses, the lender has no equity in the home and must pay foreclosure expenses.



<strong>Short-Sale Schemes:</strong> Short-sale schemes are desirable to mortgage fraud perpetrators because they do not have to competitively bid on the properties they purchase, as they do for foreclosure sales. Perpetrators also use short sales to recycle properties for future mortgage fraud schemes. Short-sale fraud schemes are difficult to detect since the lender agrees to the transaction, and the incident is not reported to internal bank investigators or the authorities. As such, the extent of short sale fraud nationwide is unknown. A real estate short sale is a type of pre-foreclosure sale in which the lender agrees to sell a property for less than the mortgage owed. In a typical short sale scheme, the perpetrator uses a straw buyer to purchase a home for the purpose of defaulting on the mortgage. The mortgage is secured with fraudulent documentation and information regarding the straw buyer. Payments are not made on the property loan causing the mortgage to default. Prior to the foreclosure sale, the perpetrator offers to purchase the property from the lender in a short-sale agreement. The lender agrees without knowing that the short sale was premeditated. The mortgage owed on the property often equals or exceeds 100 percent of the property?s equity.



<strong>Foreclosure Rescue Schemes: </strong>Foreclosure rescue schemes are often used in association with advance fee/loan modification program schemes. The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. This ?foreclosure rescue? often involves a manipulated deed process that results in the preparation of forged deeds. In extreme instances, perpetrators may sell the home or secure a second loan without the homeowners? knowledge, stripping the property?s equity for personal enrichment.
 
Everybody is in on the deal from escrow, title, RE Agents, buyer and seller. Of course when the light is shined on these cucarachas its the "not me" defense.



During the good old days (2002-2006) I often wondered if I could get a death row inmate a home loan just for shiats and giggles, what with zero down and low credit standards. Time did not permit me to try this experiment which is regrettable because it would make a great story today. With underwriting so tight it would be tough now. Note I'm not saying impossible.....



My .02c



Soylent Green Is People.
 
These can also happen with 10-20% dp's if "appreciation" was fast enough. From a new purchase of $1M to a bubbly $1.65M leaves plenty of room to squeeze a 10% dp. I posted an example to the blog where only one partial month payment was listed in the final judgement of foreclosure. What made me think fraud was the amount of back interest and the date it was listed back to. I guess with a terrible option-arm you could accumulate a lot of unpaid interest right from the start, so the little info does not slam-dunk indicate fraud.
 
thank you.....nice post.....

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