This page has not been updated since the housing crisis began, but since mortgage fraud is largely to blame for the state of the housing market in 2011, I am leaving the page up for informational purposes.     

According to the Mortgage Asset Research Institute, in 2007 Florida had the highest incidence of reported mortgage fraud cases, followed by Nevada,Michigan, California, Utah, and Georgia .  Georgia was Number 1 for several years.  The drop in number of cases in Georgia is attributed to the Georgia Residential Mortgage Fraud Act passed in 2004, and aggressive efforts on the state and local levels.  In late 2007 and early 2008, there were indictments in Georgia of at least one closing attorney, builder, and appraiser.

     It doesn't require a professional ring to commit mortgage fraud, but it almost always requires the cooperation of two or more parties in the transaction.   Who is being indicted for this federal crime?  Loan Officers, Bank Employees, Appraisers, Real Estate Attorneys, Title Examiners, Real Estate Agents, Builders, Developers, Buyers and Sellers. 


SOME TYPES OF LOAN FRAUD

     There are too many different kinds of mortgage loan fraud to list here.  This is just to sound the alarm and give you, the prospective buyer, seller, and homeowner, some of the red flags of loan fraud.  

     There are legal loan programs that allow a qualified buyer to use a HUD approved "Down payment Assistance" program (typically 3%-6% down payment).  FHA allows a GIFT down payment from a family member (not a loan) for qualified FHA buyers.  There are 100% and 20%-80% conventional loans available to qualified buyers.  However, no legitimate loan program allows the seller to give money directly to the buyer.

     For the average buyer or seller, loan fraud often appears as a "decorating allowance".     The buyer asks for a decorating allowance to replace carpet, paint, or make repairs on the home after closing.  At closing, a personal check  from the seller is made out to a contractor, often a "straw" company or a personal friend of the buyer (who just happens to have a "decorating" company).  If the work described is completed after closing, this might not be considered fraud.  However, if the buyer accepts the money and does not complete the work on the home, it is considered fraud.

     The only safe way to give an allowance for repairs or decorating is to reduce the purchase price or escrow funds at closing to be released when the work is certified to be complete.   In my experience, most lenders (not the loan originator, but the actual lender who is funding the loan) will not allow an escrow account for a conventional loan, and most closing attorneys are not interested in holding money in escrow for repairs.  If the lender allows an escrow, either real estate broker, if willing,  may hold money in escrow.

     A popular form of loan fraud which I encountered recently is a full price offer, an inflated appraisal, and a buyer who needs help with the down payment (usually 10%).    If every party is willing to cooperate, the seller typically is asked to hold a 10% second mortgage, and forgive the debt at closing (thus "giving" the buyer a 10% down payment to enable the buyer to obtain 100% financing).   This is loan fraud, and it requires the cooperation and participation of all parties, including the listing and selling agents, loan originator, appraiser, buyer, seller, and closing attorney.   If you are an "innocent" party in a transaction like this, you may still be indicted, or at least end up testifying in federal court, if this involves an active fraud ring.  Again, the seller is NEVER allowed to give the buyer money if there is a mortgage loan.

     It doesn't take a large fraud ring to commit fraud, but you'll see this scenario in many varieties and combinations:  Forged and falsified documents (loan documents, verification of deposit or employment, deeds, closing papers), fictitious "straw" buyers and sellers, and stolen identity.  Another common type of fraud is a buyer who obtains an "owner occupant" loan, but does not intend to occupy the property.  This is sometimes referred to as "occupancy fraud." 

     Another practice used in loan fraud is "flipping" properties.  This involves an investor who purchases a property (sometimes through fraud),  and quickly resells the property (usually to a straw buyer or straw company) at a greatly inflated market value.  If the property is sold to an innocent buyer at an inflated price, it requires the cooperation of the seller and the appraiser to make it work.  Unless the property was undervalued originally, or the value has increased through property improvement or changing circumstances (rezoning, etc.),  flipping may indicate loan fraud.

HOW CAN MORTGAGE LOAN FRAUD AFFECT YOU?

     Of course, if you participate in mortgage loan fraud, you could end up in federal prison.  However, loan fraud can affect you even if you never participate in any of the above scenarios.  How?  Loan fraud affects every neighborhood.  In fact, most fraud rings prefer upscale communities.  At the very least, it increases (or in some cases of "straw" buyers) insures foreclosure.   If it is a case of falsification of loan documents to get an unqualified buyer qualified for a loan, the buyer and the entire neighborhood loses if the property goes into foreclosure. 

     A fraud ring can target a community and wreak havoc with property values and property taxes.   In many fraud cases involving straw buyers, while the "buyer" never makes a mortgage payment, the property may be rented to other criminals.   Sometimes, the deed is transferred through "Quit Claim" to an out of state straw corporation, holding up foreclosure and eviction for years.  In the meantime, the property may be rented and  not properly maintained.

     Although the neighborhood may have foreclosed properties, "flipping" may make property taxes and insurance rates increase for the entire neighborhood.  Remember, the county tax office doesn't  know that the increased "value" is due to loan fraud.  Foreclosures and flipped properties affect not only the quality of a neighborhood, it may affect the pocket book  of the homeowner's association. 

     Finally, the ultimate result of loan fraud is that some lenders may stop lending in Georgia, or may charge a higher rate for Georgia.  Lenders already are scrutinizing transactions where the home sells for higher than the list price, so seller no longer will be able to agree to a down payment assistance program, and then add that cost to the price of the home.   Fewer marginal buyers will get loans. Fewer home will sell.   A legitimate appraiser and lender will have serious questions about a neighborhood with a wide range of selling prices.


PROTECT YOURSELF

     Even for seasoned real estate professionals, it's not always easy to anticipate or recognize attempted mortgage fraud.   If you are a buyer or seller, just keep this in mind:   IF THERE IS A MORTGAGE LOAN INVOLVED IN A TRANSACTION, THE SELLER IS NEVER ALLOWED TO GIVE MONEY DIRECTLY TO THE BUYER.  Only a  HUD approved down payment assistance program, or a family gift in an FHA transaction, allows for down payment assistance to a qualified buyer. Period.  (There are legitimate 100% loan programs available to qualified buyers).

     Use a reputable real estate agent and a large, reputable, direct lender.   This is still no guarantee that you will not encounter mortgage fraud, but it lessons the chance.

     If you encounter what you believe is an attempt at mortgage fraud, refuse to participate.  It is not worth the risk. 

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 Thanks to Greg Dunn, Columbus GA real estate broker, for his excellent class on "Mortgage Fraud" .  I recommend it for every real estate professional.

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