Mortgage Fraud Trends

At age 35, "Roger Buckley" was ready to settle down to raise a family and get serious about financial planning for the future. His career was on track with a CPA firm. He made good money, drove a new car, lived in a nice home he had purchased, and had paid off the last of a student loan and other college-related debts. But he wanted more. 

 

Work colleagues steered him to a Web site that was seeking investors with good credit who wanted to enter into the lucrative real estate market. The site's promoters promised investors that if they purchased up to 10 investment properties with no money down they would receive back $20,000 back for each property. The investor's entire contribution was solely used to qualify for the loans, the site said. And by using the mortgage broker listed on the site, the investor would receive a discount on the closing costs. After closing, a predesignated property management company would handle all aspects of property ownership: finding the tenants, collecting rents, making the mortgage payments, and forwarding the monthly profit to the investor. 

 

Buckley thought, "What do I have to lose? I can use this extra passive income to finally buy my fiancÈe that engagement ring she's always wanted and plan a lavish wedding to her expectations! Besides, three of my colleagues just purchased properties through this company and now they're rolling in the dough. Sign me up!" 

 

But Buckley had a lot to lose. He didn't realize that the mortgage broker was in collusion with the promoters, and that they had falsified all of Buckley's qualifying information to gain the lender's approval. The appraisal inflated the sales price and misrepresented the property as "completely renovated." Buckley went to the local pizza place to sign the closing papers. The promoter, along with another person he didn't know, handled the execution of the documents; within 10 minutes, Buckley owned five properties and was $100,000 richer. 

 

But in his haste to deposit his new fortune, Buckley didn't review the closing documents. If he had, he would have discovered that his income was overstated and his employment was misrepresented. Buckley also would have realized that he had signed a document testifying that he was going to occupy each property as his primary residence, and that he brought a significant amount of closing funds for each purchase. He also didn't know that the expected rental rates in the market couldn't begin to cover the debt service he had just incurred. 

 

Shortly after the closing, Buckley started receiving late notices on his properties. He tried to contact the promoter, but the telephone number had been disconnected. Buckley inspected the properties for the first time and saw they weren't only vacant but inhabitable. Clearly no renovations had ever been made. Buckley cleaned out his hard-earned savings trying to keep the loans current until he could sell the properties but discovered that they weren't worth near the loan amount owed. Left with no other recourse, Buckley let the properties go into foreclosure. Bankruptcy was out of the question if he wanted to keep his position with the CPA firm. 

 

When Buckley thought nothing worse could happen, the FBI knocked on his door with an arrest warrant. Buckley was indicted as a co-conspirator because he had profited $100,000 from the transactions. But not all is lost; his new wife still visits him in jail. 

 

This actual case, according to Jenny Brawley, CFE, mortgage fraud investigation manager with Freddie Mac, is an example of the straw borrower/cash-out scheme, a trend in the volatile mortgage fraud scene. Mortgage fraudsters can fool middle-class buyers looking for property investments as well as lower-income homeowners who "qualified" for subprime loans. Thousands were fooled during the heady days of high-equity properties that have lead to the struggling days of devalued housing. 

 

In addition to the straw borrower/cash-out scheme, we'll also describe two other enduring frauds: foreclosure rescue; and illegal property flipping with cash-out purchases. 

 

STRAW-BORROWER/CASH-OUT SCHEME 

A fraudster will use a straw borrower's personal profile (like Buckley's) as a cover for a transaction. Straws can be willing participants in the transaction or they can be victims of identity theft. They can be the catalyst for loan approvals that would normally be declined. (Fraudsters often use straws in many mortgage fraud schemes.) 

 

"A lot of the borrowers who we see fall prey to this scheme are white-collar, highly educated people who are just getting duped or seduced into this too-good-to-be-true deal," said Brawley, who teaches the ACFE's mortgage fraud seminar. "Cash-out purchases work really well in a declining market especially with builders who have a stagnant inventory and are trying to get it moved," she said. "They have to pay off their debt and they're trying to get it moved so they're willing to sell at any cost. And so they're trying to find borrowers who will qualify. We're seeing advertisements on the Web that are promising these lavish incentives such as four years of guaranteed mortgage payments and no money down. The appraisals are inflated and the excess money is going back to the perpetrators, so they have the reserves to keep these loans current thereby avoiding detection." 

 

Most builders work in collusion with loan officers who will misrepresent the borrower's ability to qualify and ensure that the incentives and down-payment assistance aren't disclosed to the lenders. 

 

Here are some straw borrower red flags: 

• The investment property is represented as occupied by the owner. 
• Someone has signed on the borrower's behalf. 
• A power of attorney is used for the borrower. 
• Names have been added to the purchase contract. 
• The sale involves a relative or related party. 
• Default by the property seller is indicated. 
• The borrower has a high FICO credit score. 
• The borrower has good assets, but he's using a gift as a down payment. 
• The borrower has purchased multiple properties in a tight time frame in a geographic area to which he has no apparent tie. 
• Additional names suddenly appear on the title. 
• The borrower is purchasing a second home within 50 miles of his residence. 

 

In 2006, Michael D. Goodson, Nancy Booth (aka Nancy Campbell), and Leslie R. Tarrance Sr. were indicted for running a national $11 million straw borrower scheme. All three were convicted this year. Tarrance entered a plea bargain. Goodson and Booth were awaiting sentencing at publication. 

 

Goodson, who worked for Tarrance's Ultra Classic Custom Homes near Houston (named 1997 top custom homebuilder in Montgomery County), would recruit borrowers who wanted to invest in real estate. He would tell them that his property management company would ensure that the mortgage and taxes would be paid, according to the indictment. Tarrance would negotiate with Goodson to sell the properties to the unwitting straw buyers. Booth, a licensed loan officer, would complete the loan applications in the names of the borrowers. She and Goodson would provide false employment, income, rent, and mortgage verification to the lenders. 

 

In just one example, Tarrance and Goodson falsely indicated to a lender that the buyer of a home made a $10,000 down payment to Ultra Classic. The indictment alleged that Tarrance conspired with Booth to raise the sales price on the residential sales contact to $695,000 specifically to cover the $10,000 in earnest money that the borrower actually didn't pay. As a result, the lender funded a $569,000 loan and a $100,000 loan for the home, which Tarrance used to pay off $490,000 related to construction costs. He gave himself and Goodson the remaining balance of the loan. ("Sentencing Set for Former TCI Board Member," by Tiffany Williams, Nov. 2, 2008, The Villager) 

 

FORECLOSURE RESCUE SCHEME 

This fraud takes advantage of homeowners who have fallen behind on their mortgage payments, which includes many caught in the subprime loan mess. The fraudster approaches the homeowner with promises of paying off the delinquent mortgage and helping the homeowner stay in the property. 

 

Commonly, the victim will receive a solicitation in the mail (foreclosures are public record) promising short-term financing from a "private investor" offering to pay off a delinquent loan. The fraudster tells the homeowner that she can stay in her home and rent back from the "investor" and convinces her to transfer the home title to him as collateral. The fraudster promises that she can rent her home from him while rebuilding her credit to obtain long-term financing in two years. If the fraudster promises new financing, he will obtain the money from a straw borrower. But the fraudster pockets the equity and runs. The straw borrower defaults on the loan. The homeowner is evicted from her home that she unwittingly sold and loses all the equity. "We've been seeing this scheme since I came to Freddie Mac in 2002," Brawley said. "But it's definitely becoming more frequent." 

 

A variation of the foreclosure rescue scheme, Brawley said, is the phantom help scam. "The scammer promises to save the homeowner and give him some low monthly payments. And so for a fee the scammer agrees to handle the foreclosure but instead he just does nothing. The property goes into foreclosure," she said. 

 

"Another variation we're seeing is the scammer will file bankruptcy just to keep the scheme undetected so the homeowner thinks everything has been taken care of," Brawley said. "But, eventually, the house will still go into foreclosure. And the homeowner will lose their house and lose all these fees they've paid into this phantom rescue scheme." 

 

Identifying red flags can be difficult because the scheme often can't be identified until the fraudster is gone. But you can be suspicious about a borrower when two or more of the following red flags are present: 

• Purchasing a home with delinquent taxes or other indication the property has been posted for foreclosure
• Purchasing a home without the involvement of a realtor
• Purchasing a home but it already has a tenant
• The homeowner is promised a cash rebate  

In a recent foreclosure rescue scheme, hundreds of victims in 27 states sold their homes to an "investor," through the now-defunct FundingForeclosure.com. The fraudster said he would buy their properties, they would pay rent to him, and then they would buy back their houses within two years. The fraudster promised the straw buyers $5,000 to $40,000 a year for lending their names and good credit scores. But larger loans were taken out on the properties well above the mortgages they replaced -- all in the names of the straw buyers. In many instances, the loans were resold among mortgage companies and investment banks in the subprime markets. Scores have lost their homes and straw buyers have lost thousands of dollars. ("Victims of Scam Face Losing Homes," by Jason Method, Nov. 4, 2007, Asbury Park Press) 

 

ILLEGAL PROPERTY FLIPPING SCHEME  

A legal property flipping scheme looks like this: An investor purchases a home in July for $250,000, and renovates the kitchen and bathrooms and landscapes the yard for $50,000. He re-sells the house in September for a legitimate market-value price. 

 

The illegal flipper purchases a home and re-sells it within a short time at an artificially inflated value. The flip normally includes a fraudulent appraisal that might indicate renovations that were never completed. 

 

With a new cash-out wrinkle, often a real estate agent facilitates the scheme by approaching the seller of the property and making an offer considerably higher than the current list price. The offer will include a stipulation that the additional amount over the asking price will be given to the agent's straw buyer/borrower at closing. The stipulation for cash back to the buyer/borrower often will be documented in an addendum to the purchase contract that isn't made known to the seller, loan officer, or lender. An inflated value charged to non-existent home improvements will be used to support the inflated sales price. 

 

Here are some red flags: 

• The home might have been on the market for some time
• The sales contract might have been modified or might include an addendum about the payment to the borrower
• The appraisal might include symptoms of inflated value

 

Look for traditional flip red flags: straw buyer, false source of funds, and false occupancy. 

 

THREE SCHEMES OF MANY 

Mortgage fraud, which has always been prevalent in good and bad times, isn't confined to just three schemes. 

 

 

Dick Carozza is editor in chief of Fraud Magazine.