Commercial Mortgage Fraud: Cash Out, Fraud In (Part One)

There's no shortage of desperate or fraudulent property owners in today's market for commercial mortgage loans. "Cash-out refinancing" is one favorite way to bail out of a troubled property. This primer offers advice to fraud examiners, lenders, and appraisers on spotting and preventing these and other frauds.

Three men claiming to be physicians purchased a New York City walk-up apartment building on a residential street. They then applied at the nation's largest thrift institution for a much larger cash-out refinance loan, stating that they intended to convert the ground floor into a magnetic resonance imaging (MRI) facility. (A cash-out refinance loan provides money needed to repay the first mortgage and additional cash that can be used for any purpose.) MRI space would command a much higher rent than was currently being earned from the rent-controlled ground floor apartment tenants, and this was reflected in the appraisal done by an in-house appraiser. However, once funded, the loan went into immediate default and the borrowers disappeared.