Commercial Mortgage Fraud
When Fraudsters Bet the House and Win
It's a volatile combination: high volume of cash-out refinancing loans, declining performance of commercial properties, and relentless production pressures on internal loan officers. The resulting concoction often is fraud.
Economic conditions are prompting desperate fraudulent property owners to use several tricks to obtain commercial mortgage loans. Following are more schemes.
Misrepresented or Undisclosed Property Conditions
A lending institution's most important written policy should state that a neutral representative must make a field inspection of the property designated as collateral for the loan. At one bank, a newly hired chief appraiser found in a field inspection that a subdivision in the Sacramento, Calif., area that was represented as 80 percent complete by the appraiser (hired by a loan salesperson) and two loan salesmen had only been rough-graded and appeared to be only 15 percent complete at best.
Recently, a loan broker didn't disclose that the borrower's trailer park was an unremediated U.S. Superfund site (which can be ascertained at www.epa.gov/superfund).
The borrower can't be expected to disclose tax liens and special assessments, and many lenders today are lazy about providing preliminary title reports (which typically disclose such items) to appraisers. A bank recently took a $2 million loss on an incomplete subdivision in Utah when the appraiser didn't know about the special assessments and the loan officer had already taken his commission and left the bank. A bank should make it mandatory to provide a preliminary title report to the appraiser.
Some homebuilders are applying for refinancing on homes they have supposedly completed on the outskirts of many U.S. Western cities, such as Albuquerque , N.M. ; Phoenix , Ariz. ; Boise , Idaho ; Provo , Utah ; and Anchorage , Ala. Appraisers are sometimes even instructed by mortgage brokers to appraise the houses as complete even though they aren't. Considering that the main purpose of a builder is to sell homes, a refinance application from a builder indicates trouble in selling his or her product.
In situations like these, appraisers and lenders should throw away the comparable sales data and look at listings instead. An in-depth review of a builder refinance application in Provo , Utah , for instance, revealed 253 listings of similar new homes in the same Zip code, listed at or below the appraised value.
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