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Mortgage Lender Fraud - Consumers Not the Only Victims

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The Mortgage Bankers Association has just announced the establishment of a website, as a one-stop resource for the mortgage industry to gather the information and tools they need to combat financial institution fraud.

We have talked a lot about deceptive or predatory lending practices and other types of mortgage fraud aimed at homeowners. With the advent of MBA's website it is probably time to state that lenders themselves may be even bigger victims of mortgage fraud than the borrowers they serve.


In the four years ending last September, The Federal Bureau of Investigation's "Operation Continued Action" identified more than 245 subjects in 158 investigations of financial institution fraud. These investigations resulted in 11,466 indictments, 11,362 convictions, and $8.1 billion in restitution orders. While many of the instances of fraud against lenders are small in scope, financial institution fraud is a very big deal. The FBI recently tallied the results of some of the fraud it is investigating:

  • North Carolina: an undercover investigation of seven groups led to identification of fraudulent loans which exposed financial institutions and mortgage companies to potential losses of $130 million.
  • Denver, Colorado: five persons arraigned and changed with roles in obtaining loans employing stolen identities then using those loan proceeds to purchase substandard houses possibly to flip. Losses estimated at $19 million.
  • Kansas City, Missouri: three persons arraigned for their role in a ring which utilized straw purchasers of properties which were then foreclosed upon. They did this approximately 300 times resulting in losses in excess of $15 million.

And borrowers are often dragged along in the wake of such fraud.

Some mortgage fraud schemes are pretty bush-league (but they work) and others are very sophisticated. At the very low end of the scale is misrepresentation of fact on a mortgage application. If you say you are planning to live in a property when your intent is to rent it out that is financial institution fraud; not likely to be prosecuted or even noticed as long as your payments are made on time, but fraud all the same.

Another example of the amateur hour variety is identity theft. The instances I have encountered usually involved an innocent and totally clueless wife.

It is amazing how many married men have girl friends who look enough like their wives to pass muster at a mortgage closing. (And maybe a lot of married women have boyfriends that resemble hubby, but it doesn't often seem to work that way.) The husband needs money for business purposes, to cover urgent debt, or to finance a new life with the girlfriend. He applies for and receives a mortgage or home equity loan on the marital home and shows up with the girlfriend who has a false ID and a sharp pencil. Loan docs signed and proceeds received, hubby either takes off for Aruba, or hopes that he can maintain payments on the new loan so his wife never uncovers his duplicity. When or if the loan defaults, the lender is left with paper that gives them the right to foreclose, at most, on 1/2 of the property. There will also be a furious wife who may or may not be able to prove her victimization but can still create a public relations nightmare.

Moving up the sophistication scale; flipping involves repeatedly buying and selling or refinancing the same piece of property over a short period of time, always claiming a higher property value. Flipping may be a team effort or it may involve an innocent with good credit but a little greed in his soul.

For example, Buyer #1 buys a home for $60,000 and obtains a 95 percent mortgage from Lender #1 for $57,000 Immediately after obtaining the deed, he sells the property for $90,000 to either a collaborator or to an innocent who has been convinced he can buy the property for nothing down and cover his payments with rent from a tenant provided by the seller (and he may be offered a little commission on the deal.) Buyer #2 goes to a different lender and arranges for a mortgage of $85,500 on a property that was only worth $60,000 a few months before and probably is still worth $60,000. Naturally there has to be an appraisal, but an honest appraiser will probably have no trouble finding comps that, on the exterior, appear reasonably similar to the subject property and appraisers will admit and are now publicly complaining that they are often under pressure from lenders to produce appraisals that justify the purchase price. Then, of course, the appraiser might be in on the deal. Maybe a few weeks or months later Buyer #2 sells the property back to Buyer #1 for $110,000 and a third lender is approached or maybe Buyer #1 disappears with the cash from the previous two transactions leaving his other victim, Buyer #2 with a loan he cannot repay and ruined credit. In any case, the last lender is left with a house that is not worth the money it lent on its purchase.

Sometimes flipping is implemented without a deed even changing hands until the last round. Buyer #1 and his accomplice will "flip" the sales contract back and forth, inflating the sales price on paper until it reaches a desired level and then obtaining a mortgage on the final amount. This way the crook doesn't even need the cash for a down payment.

In areas undergoing revitalization flipping is random and some is completely legit. Many reputable investors and builders do buy property, quickly rehab it, and sell it again at an honest price for at a healthy profit. It is difficult for lending institutions to know what kind of sale they are dealing with.

Sometimes it is just the garden variety grifter who implements a fraud, but the FBI is seriously going after mortgage fraud that involves insiders; real estate agents, loan originators, appraisers, home builders, and closing attorneys.

Insiders are in a position to perpetrate more sophisticated types of fraud involving false or altered documentation. This can mean falsifying income, hiding debt, or inflating appraisal information to make a borrower or a property more credible candidates for a loan. Another scam is issuing a double set of settlement statements, one for the property seller reflecting the actual sales price and a second for the lender with a higher price reflecting the amount upon which the lender funded the loan. The loan amount is probably more than the property value and the crooks end up with the excess funds.

Many financial institutions are federally chartered and/or federally insured. Even the mortgage company in the strip mall on State Road 17 is tied into the federal system if it packages a fraudulent loan for sale to Freddie, Fannie or the VA.. Therefore, most lender fraud is a federal crime and the Feds don't mess around. In addition to the FBI, the IRS is now involved which puts an interesting twist on the subject. In February the tax guys announced that they were actively pursuing real estate tax fraud and that criminal prosecutions and prisons terms were sharply increasing. These prosecutions are not for the initial crimes, but for failing to declare and pay taxes on the ill-gotten gains. Therefore, if you are inclined to rip off the First National Bank of Coffee County, at least be sure you include the proceeds on your Form 1040, Schedule C. Sort of funny, but don't forget that the IRS is very good at this type of prosecution. They were, after all, the only ones who were able to nail Al Capone.

In addition to the Mortgage Bankers Association, other big players in the mortgage industry are taking steps to stamp out fraud against financial institutions and we will take a look at some of these programs and procedures at a later date.



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You have done exactly what you should have done. My advice would be to send a letter to the Commissioner of Banks in the state that you are in as well as the Attorney General, and also to the president of the mortgage servicer who has taken over your loan. Going to the top of the company is the only way to get someone's attention in my opinion. If you do not receive results from those actions, I would certainly contact a local television station and get in touch with their consumer advocate, who sometimes can cut through the red tape quicker than an individual. Good luck!

Above Posted By: Mortgage expert | Thu, 17 Apr 2008 08:01:59 EST

We have been with Option One mortgage for 3 years. Before the winter months, I have always paid my loan 4 -5 payments ahead so that if the winter was bad I would have my mortgage taken care of. I did this because we work in construction. I have done this since we have had our loan with them. In the winter of 2006-2007, I paid 5 months ahead. Option One put all of the payments in suspense that were made ahead, then in February last year, they sent me a foreclosure letter. We argued about this until May 2007, at which time they recommended doing a loan modification. We agreed to this and they charged us $27,000 to do the loan modification. In October 2007, I paid payments ahead again and they have done the same thing again. The funds went into suspense and I was told I would have to call them and let them know what I wanted done with the funds each month. My cancelled checks state which month the payment is for, so why should I have to call. Now my loan has been transferred to another servicer and Option One has notified them that my loan is in arrears since December, when I have cancelled checks that paid the loan thru February 2008 to Option One. The new company took over on 3/1/2008. When I contacted the state Department of Banking and Finance, after they tried to get a response from Option One for several months, they advised me to get an attorney.

Above Posted By: DaleC | Fri, 28 Mar 2008 10:30:52 EST

I canceled a commercial loan with a company. They have my processing fee, a good faith deposit, and 3rd party fees. I canceled over two weeks ago and still haven't seen anything from them. I sent my attorney after them, I don't know how much he can do. I was told I can send the FBI after them, how do I do this?

Above Posted By: Alex | Wed, 10 Oct 2007 13:31:51 EST

Most flips are genuine and what the media reports is blown out of proportion. The RE market is like the stock market, prices rise and fall in some areas quicker than others and in like all the other markets there is room for fraud. most of it is not. The government does not help either because their qualifying standards for lower credit scores are too high or require them to go through dumb and time consuming stuff to qualify. So you blame it on "predatory lending" I think not.

Above Posted By: dora | Sat, 23 Jun 2007 06:07:26 EST

I have a friend thats a victom of a rent to own scam. She rented for three years hoping to buy the home in this time period. She was given one call from the mortage company that told her to purchase the house in 30 days or she would have to move out. What can be done about this situation?

Above Posted By: Anonymous | Thu, 12 Apr 2007 19:38:13 EST

A mortgage company (NovaStar) refused to close my refinancing, based on a DTI ratio they claimed was too high. I advised them that they must have made a mistake in the calculation they made. They refused to disclose the basis of the calculation. It now has been determined they in fact manipulated the DTI ratio in order to renege on their refinancing agreement/commitment. Can you direct me to any federal or state (Pennsylvania) statutes that I can use to bring action against them.

Above Posted By: RFM | Sun, 1 Apr 2007 16:03:43 EST

WHY don't the mortgage bankers join with home buyer advocates, pressured appaisers, etc., to fight for legislation to STOP these fraudulent activities? Instead they honey up with the NAHB, NAR, etc. and seem to love this "creative" financing that has been going on for the last few years. There is no one out there who will do a thing to help the real victims of this fraud, the home owners. The Fed's only get involved due to the bank fraud. Families lose their home & credit.

Above Posted By: NS | Wed, 3 Jan 2007 00:05:26 EST

I am getting a divorce. My name is not on the loan but is on the deed and deed of trust. Am I still responible for payments?

Above Posted By: russ | Wed, 29 Nov 2006 21:59:33 EST

I can not help but laugh at the line "The Feds don't mess around!". They couldn't care less if their own mother was ripped by what is Institutionalised, Government Approved scams. You have to have been robbed of 50k before they will even answer your call for help. I have found that IRS, in keeping your money, will tell you that you can not write off those gifts HUD told you not to worry. If anyone has done anything to stop this kind of extortion, it was the IRS's pursuit of these nonprofits

Above Posted By: Danielle Von Tungeln | Sun, 29 Oct 2006 04:47:12 EST

I have been licensed twice as an appraiser in 12 years, and both times gave it up because I couldn't compete without committing fraud. Appraisal licensing is a fraud. It was developed by the real estate industry to oil their wheels.

Above Posted By: Stephen G. Bishop | Wed, 11 Oct 2006 12:27:17 EST

I used to work for Ameriquest.....if the appraiser came in too low with a value...they would drop them from their list like a hot potato..... It's companies like them...that give good honest mortgage companies a bad name.... I was told by management to schedule closings in the evening..not to give out my cell phone.....what a scam.... $12,000 in fees plus 2-3 points on a $150,000 loan

Above Posted By: tom | Fri, 8 Sep 2006 08:49:49 EST

Has anyone else been in a 'nightmare' situation with Option One? On the verge of losing home because of them.

Above Posted By: Anonymous | Tue, 29 Aug 2006 22:43:37 EST

My husband and I have been living in a house that is in my mothers name, the mortgage company has been drafting our bank account for the last two years, we are finally in a position to put the mortgage in our name however recently the mortgage company served my mother with forclusure papers indicating fraudulent loan. As of now we are going to close on our new mortgage next week, my question is, why does it matter who lives in the home as long as the note gets paid?

Above Posted By: Karen | Sun, 16 Jul 2006 03:11:09 EST

I was given an approval letter for a VA loan with no higher than 6.5%. When time came to close on new construction Mortgage company said I could not do VA loan and now I am stuck with 2 mortgages 80/20 with one 7.5% and one 10.5%. Is this misleading info called Fraud or Predatory Lending.

Above Posted By: Ann | Mon, 26 Jun 2006 17:06:56 EST

My Husband and I got married in July 2005 and the house was previously in his name as his residence. In November of '05 after the marriage he went behind my back and refinanced to pay off bills and I did not sign off on dowery rights. Upgrades were made to the house prior to the refinance and he used those upgrades to secure a new first mortgage. Do I have any recourse for this since he has now filed for divorce?

Above Posted By: Theresa | Wed, 10 May 2006 12:46:52 EST

We have been the victims of "The Dorean Group". We had filed a quit claim deed and filed an application to make them trustees of our home in 2/05. However, shortly after, we then heard the group was being investigated for fraud and that they were not trustworthy. How do we find out if the trust was processed? Also how do we remove their names "Scott Heineman" and "Kurt Johnson" from our deed as we tried to get some info on the internet and we think they are in jail? Please help!!!!

Above Posted By: Anonymous | Mon, 17 Apr 2006 15:20:44 EST

If a seller has a property on the market for 1M and it appraises for $1,250,000.00 can the seller's realtor increase the price in the MLS to the appraisal price and give a buyer back money for down payment assistance and renovation of the property for future resell? The money given back would be on the HUD 1 settlement statement. The money would be put in an LLC in the buyer's name. There will be no side agreements, everything is fully disclosed to the lender.

Above Posted By: Anonymous | Mon, 27 Feb 2006 13:04:47 EST

I know from personal experience that you can report fraud to this entire list of agencies you have posted here till your blue in the face, but not one will do a damn bit of good towards alleviating your devastation as a mortgage fraud victim, such as assistance in dealing with these credit bureaus to remove negative credit marks from your credit scores even after you have cooperated fully and supplied major evidence turning the criminals in. True story.

Above Posted By: Denise Warner | Sat, 11 Feb 2006 03:27:31 EST

I'm glad the tables are turning on greedy brokers who rob the eldery of their hard earned property. I wonder if they affect people's jobs, if they complain?

Above Posted By: karl daniels | Fri, 3 Feb 2006 09:59:23 EST

Really there is no one who cares about mortgage fraud who isn't commiting the act itself. I am trying to get in the business of investigating mortgage fraud but after conacting many I have not seen any interest in recouping or prosecution.

Above Posted By: anonymous | Sun, 22 Jan 2006 13:39:59 EST

Who can I contact to diclose a mortgage Lender's fraud activity? Please advise...

Editors Note: A good starting point would be our Mortgage Fraud Resources

Above Posted By: Anonymous | Tue, 17 Jan 2006 22:36:40 EST

I am the victim of mortgage fraud. I was attempting to re-finance my home in 12-04 and discovered the papers were doctored and sold the home to a straw buyer. I confronted the mortgage broker, and he gave me a Quit Claim Deed deeding the property back to me from the straw buyer. The property is recorded in my name with our clerk of courts, but the straw buyer took out a mortgage. Open investigation with police, what happens to my property? Still live there never moved.

Above Posted By: cyoung | Thu, 12 Jan 2006 09:39:08 EST

To find out more about the Household Beneficial case, contact the non-profit that has had a hand in exposing them- ACORN Housing.

Above Posted By: Sarah Lumbert | Thu, 5 Jan 2006 20:37:59 EST

My husband has taken out a 2nd mortage on our house as a unmarried man. We are getting a divorice am I responible for this 2nd mortage? original mortage is almost paid off. We were not even talking about divorice when he got the 2nd mortage.

Above Posted By: kim | Thu, 17 Nov 2005 13:25:03 EST

I'm a real estate appraiser. I do 3-8 appraisals on foreclosed ameriquest mortgage properties a week. Ameriquest is now dictating to an intermediary co. that sends me this work that appraised values are too low. They want us to increase our values so their losses are less. In essence they are again commiting mortgage fraud. Ameriquest has been shut down in 2-4 states but still finds ways to threaten Appraisers. Have written my state senators but nothing comes of it per usual.

Above Posted By: Fred | Tue, 18 Oct 2005 16:09:58 EST

I bought a house on July 15, the mortage started on July01, the realtor advised us to have the house from July to September as a Joint tenancy and then take possesion on September. The market price of the house in June was 214,000 ( the last owner bougth it for this price) the mortage was for 204,000 , I bought the house in July for 231,500. I will like to know if I was a victim of a fraud, and can you explain me why if it is the case.

Above Posted By: Victor Guardia | Tue, 27 Sep 2005 14:07:27 EST

My title is fogged from a mortgage scam, because i give them a quick claim deed. I found out about the scam and turned to investagators and now the two are in jail. How can I reverse or fix the deed back to me, they are sub trustees.

Above Posted By: doreen | Thu, 11 Aug 2005 10:56:18 EST

How do I find out about the class action lawsuit against Beneficial Mortgage?

Above Posted By: Jennifer Scarborough | Wed, 8 Jun 2005 12:33:27 EST

What can a victim of mortgage fraud do? Are the victims of mortgage fraud still responsable for the mortage? I have a close friend who was the victim of the First Beneficial Mortgage, mortage fraud out of Charlotte NC. Please give me a little advice on what to tell my friend. Thank you

Above Posted By: anonymous | Wed, 18 May 2005 11:48:21 EST

looking to buy or rent to own or lease to own or rent

Above Posted By: charles holmes | Fri, 15 Apr 2005 20:00:26 EST


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