When the real estate bubble was making everyone rich, hardly anyone complained. Now that the rising tide has about spent itself, all of a sudden, people are starting to lose out and are looking for something or someone to blame. Well, one of those things that grew in popularity during the real estate heydey happens to be the same thing cited more often now as a factor in foreclosures and financial meltdowns today.
That happens to be mortgage fraud. There are two kinds: one involves scams that attempt to illegally acquire property, aptly called “fraud for property”, and one wherein scams are designed to squeeze money out of the transactions involved when a property exchanges hands, called “fraud for profit”. For profit schemes are typically recognized as the more blatantly fraudulent activity between the two.
From my readings, I’ve noted that there are also two types of mortgage fraud participants: those who know what they’re doing and choose to skirt the system, and those who don’t, such as unsophisticated borrowers or perhaps vulnerable first-time home buyers less comfortable with the business of real estate.
All this doesn’t change the fact that somebody loses, whether its a homeowner, a buyer or a bank. Still, questionable mortgage lending practices fall in such a gray zone that it is common for fraudsters to get away with things. Is it just my imagination or are these cases hardly ever heard of? It’s probably because white collar crime isn’t as sensational as its brethren, that it takes a Martha Stewart type scandal to get mentioned in the media. It’s also quite possible that victims perpetrate the fraud without knowing it, since they can be coached and coerced by sleazy agents to do things that aren’t ethical nor even legal. The details of a crime may be more muddled. Let’s check out some flavors of fraud out there to see why.
Types of Mortgage Fraud
Property Flipping
An investor buys a house, gets it appraised much higher than it is worth, then sells it off right away. This involves fraudulent appraisals, false loan documentation and exaggerated incomes in order to secure loans. Often, there are kickbacks across the board involving all the players in the transaction.
Nominee Loans/Straw Buyers
There are people who use stand-ins to do real estate transactions. The name and credit history of someone else is used or borrowed by another to borrow money and make big ticket purchases.
Fictitious/Stolen Identity
The applicant swipes the name, personal information and credit history of someone else and actually uses it to apply for loans. The crime may go beyond just mortgage fraud as it can also be compounded by cases of identity theft.
Foreclosure Schemes
This is a heartless case of preying on vulnerable people who are already at risk of losing their homes in foreclosure. Scamsters dupe the homeowners with the hope and promises of saving their homes if they cough up fees and payments or worse, deed transfers to the wrong hands.
Occupancy Fraud
When investors lie by claiming that they will live in an investment property as their primary residence or second home in order to acquire better terms for their loans, then they are breaking the law. I didn’t realize it but the reason for higher mortgage rates for investment properties is to protect lenders from the greater risks inherent in the business of lending to investors rather than primary home buyers.
More such types can be found here. Also, check FBI.gov for “Operation Quick Flip”, which discusses how the government is taking mortgage fraud more seriously. Straight from the FBI is this definition of mortgage fraud:
Mortgage Fraud is one of the fastest growing white collar crimes in the United States. Mortgage Fraud is defined as a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.
Now that I got you looking over your shoulder, how can you protect yourself from mortgage fraud? What are the tell-tale signs that you’re facing a scam in the making? Here’s where you can do your part to stop mortgage fraud, including a review of your rights as a borrower.
Tips To Protect Yourself From Mortgage Fraud
#1 If something is too good to be true, run away from it.
This piece of advice is applicable to any kind of scheme you may encounter. Whenever I hear about a new opportunity with amazing prospects, I always think: there’s got to be a catch here somewhere. And more often than not, there is. What else is bait and switch but a way to get you interested in a potentially losing proposition for you. Rare is the situation when something turns out as sweet and ideal as it first seems to be.
#2 Similarly, if it’s too complicated, get away from it.
Whenever I come across a business or investing opportunity that I don’t understand, I have to think twice before I proceed with the venture. It’s been my experience that simple plans and opportunities have yielded the best and most optimal results for me. So I stick with what I know best and what I’m clearly comfortable with.
#3 Choose your broker carefully.
With so many great brokers and agents out there to get guidance from, it should be straightforward to secure some strong expertise when treading into the world of real estate. I’d stick to the big names in real estate services or get agent recommendations from people if I were to enter into the biggest sale or purchase of my life.
#4 Don’t lie on your paperwork.
Beware of unscrupulous professionals who try to coerce you into fibbing on your documentation. If they paint an unbelievably rosy picture of your situation to you, try not to get lost in the optimism of the moment. This could be a ploy to get you involved in something shady and questionable, which you need to avoid like the plague. Are you willing to take a risk on your credit and track record for something that you can very well obtain through cleaner means and appropriate channels?
#5 Check your emotions: don’t be a victim of greed or false hope.
If you can’t afford something, don’t push it. In the end, getting ahead of yourself by purchasing something that is truly beyond reach can be a huge headache…and heartache thereafter. There are many stories out there of people who bit more than they could chew and ended up with money pits they had to unload not long after getting stuck in them. There will come a day when the right house will be there for you. Getting into real estate involves patience and understanding of one’s limits.
#6 Study the market and arm yourself with a minimum amount of knowledge.
This is extra important. By being knowledgeable, you protect yourself in so many levels. Arm yourself with mortgage basics, home sales comparisons and a trustworthy agent, and by doing so, it’ll be tough for dishonest individuals to take advantage of you and you’ll have more confidence in participating in the home buying process. Always remember that knowledge is power.
So bottom-line — watch out for these scams as they can ruin your credit and actually prevent you from getting the house you want.
Copyright © 2007 The Digerati Life. All Rights Reserved.
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Great information and very worty of its selection to the consumer-oriented rela estate blog carnival!
I think tip number #1 says it all really – there is no such thing as a free lunch and if you were to ask victims of fraud how they were scammed invariably the will say it “sounded to good to miss” or words to that effect!
When house-shopping with my grandmother, I learned that there’s always another house. It probably helped not to be the buyer or even someone living there.
Great Blog. Tip #5 is key. I believe that the nature of home buying is largely emotional and the feeling that there’s “no other house like this one” has led many to over-extend and contribute to where the market is currently.