How Banks Are Committing Fraud, Part 1

Throughout the late 1990s and early 2000s, we experienced an unprecedented housing boom.  Easy credit flooded the marketplace and home ownership surged to unheard of levels.  Along with inflating an unsustainable bubble, the housing boom created a rich climate for mortgage fraud.

The bust that followed changed the nature of the crime, but it has also provided continued opportunities for mortgage fraud.  Fortunately for homeowners, there is a new wave of investigative agencies emerging that are trying to figure out just how widespread and insidious the mortgage fraud epidemic is.  Investigators hope the increased awareness will help to educate the general public about the threat that these crimes present.

The scary fact is that fraud continues at astounding levels.  The allure of mortgage fraud is clear – it can generate amazing profits with a relatively low risk of discovery.  After all, there is a byzantine mess of laws and regulations that govern the finance industry and keep all but the most ardent investigators from figuring out exactly what fraudsters are doing and how they can be prosecuted.

Mortgage fraud schemes are particularly resilient due to a lack of understanding of the mortgage process among the public.  There is risk coming from nearly every angle of a real estate transaction.  Common perpetrators include mortgage brokers, appraisers, builders, underwriters, lenders, accountants, real estate agents, attorneys, investors, trust account representatives, and title companies.

The common trait between all of these people is that they have a high level of access to the financial documents, systems, software, notary stamps, and professional licensure information necessary to commit mortgage fraud.  They can adapt to changes in legislation and mortgage lending regulations.  They are moving targets that keep investigators on their toes.

Forensic Audits have exposed a wide array of suspicious activities by financial institutions.  Thanks to an increase in media coverage of financial institutions, their activities are becoming more public.  We are now getting a clearer picture of how many involve loan origination schemes, and how many are settlement-related schemes.

Loan origination fraud is divided into two categories: fraud for property and fraud for profit.  Fraud for property usually involves a single loan secured as a result of misrepresentations by the applicant or lender.  Fraud for profit is much more complicated.  It often involves multiple loans and elaborate schemes designed to illegally profit from real estate sales.  Participants are usually paid for their roles in the fraud.

In many cases, loan origination schemes include false documents, property flips with phantom rehabilitation, fictitious investors, fabricated trusts, reassignment of loan documents, allonge endorsements and promissory notes. 

Illegal flipping is another popular form of mortgage fraud.  This involves purchasing a property in foreclosure at a large discount from the original note balance.  But why would a “Lender” sell the original note for less than face value?  The key to this scheme is that the “Lender” sold the note by entering into an undisclosed investment contract.  This is a blatant TILA violation. 

So what happens after the property is foreclosed?  Once a final judgment is awarded to the Plaintiff, the fraud is perpetrated when the Plaintiff sells the property or allows it to be purchased by accepting a low bid by a liquidation company. 

Many frauds involve the transfer of property without the homeowner’s knowledge or consent; intentional failure to record closing documents; transferring or recording of deeds without the homeowner’s knowledge; and filing of fraudulent foreclosures to deprive the homeowner of his or her property. 

The most common perpetrators of this type of fraud are real estate agents, attorneys, appraisers, loan officers, builders, developers, straw buyer investors, and title companies.

In next month’s article, I will explain the methods investigators use to find the fraud in real estate deals.  All of this fraud creates a huge opportunity for real estate investors.  Not only can we use this information to help underwater homeowners get out from under their homes but we can then pick up houses at incredibly low prices.

If you would like more information on how you can get involved in helping underwater homeowners while doing some awesome deals, give my office a call at 706-485-0162.