Guide to Real Estate Fraud

Mortgage Fraud

There are 2 type of mortgage fraud.

• Fraud to get a property
• Fraud to make a profit

The first is were someone lies about facts to get a loan to buy a property.
The second is where someone lies about facts to make a profit.

Fraud is committed by falsifications in the following ways:

1. Loan application fraud. Where an applicant lies about their income or their job. Perhaps the down payment they are making was given to them by the person selling them the home and the value of the home inflated to cover it.

2. Exaggerated appraisals. Appraisal is an art, not a science. Who can really be sure just how much a better view, or a swimming pool (for example) adds to the value of the property? The buyer wants the house, the seller wants to sell the house, the real estate broker wants to make the commission, the mortgage broker wants to make a commission. There is a lot of pressure on that appraiser to massage the figures a little to create a value that makes all these people happy.

Not to mention the possibility that a crooked appraiser could be in league with a crooked seller or borrower to give appraisals that are grossly exaggerated.

3. Falsified or fake credit reports. It’s really not that hard to use modern technology to “clean up” a credit report by copying it and “losing” some bad stuff.

4. False income. Applications can give the phone number, not of the company where the person supposedly works, but of a friend. The answer, look up the phone number of the employer in the white pages. Listen out for tell tale sounds, like children in the background in a supposed office setting.

5. Forged tax returns. Easy enough to fake using products like TurboTax ® etc. The answer, ask the borrower to sign Form 4506 and get a copy direct from the IRS. Click here for a copy for form 4506.

6. Fake title insurance.

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FBI update on mortgage fraud

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Federal Bureau Investigation Director Robert S. Mueller III recently talked about the increase in corporate fraud. According to Mueller, FBI’s corporate fraud cases have reached a high mark of 80 % from 2003 to present. Last year alone, there were about 490 convicted corporate and securities fraud perpetrators.

Mueller claimed there will be more serious situations of frauds because of the “ripple effect of the sub-prime crisis and its impact on the credit market”. At the moment 19 companies had already been disclosed to be involved in corporate fraud activities connected to the sub-primed lending crisis. Worse, the FBI is currently looking into more than 1,300 mortgage fraud matters.

Appraisal fraud

Appraisal fraud. Appraisal fraud is a part of most mortgage fraud scams. A dishonest appraiser inflates the value of the property. When the seller gets the check at the closing for a bogus amount, he pays off the appraiser and anyone else involved in the scam. Usually, the borrower doesn’t make any payments and the house goes to foreclosure.

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Things to do To Stop Real Estate Fraud

Real Estate Fraud is occurring much more frequently now than ever before. It is very important as real estate professionals that do business the ethical way that this stops. Below are a few tips to protect yourself if you feel uncomfortable in a transaction.

Document the Situation: Prepare an Amendment to Contract to be signed by all parties.

Disclose Information: Disclose all changes to the funding lender and obtain their written approval.

Verify the HUD-1: Verify that the HUD-1 Settlement Statement accurately reflects the transaction and any rebates, allowances, discounts, etc.

Report: If you suspect fraud report it!

Withdraw: Before you become involved in illegal activity you can withdraw from representation.

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How To Avoid Real Estate Fraud (part 2)

How To Avoid Real Estate Fraud

Other Red Flags

While the above “red flags” are frequently used there are many other indicators that you need to be aware of:

“Rebates” on Sales Price
“Rebates” on Broker’s Fee
Overly Inflated Sales Prices

Land Flips
Commission Based on a Sales Rice
Amended Contract to lower Than What is in Contract
Reflect New Purchaser

Multiple Transactions Between Agreements to be Performed

A “Friendly” Appraiser Affiliated Parties “Outside or After Closing”

The use of Inappropriate Comparables (mixed use vs. commercial zoning, urban vs. rural)

Increased Value as a Result of renovations with High Dollar Soft Costs (architect fees, engineering fees, consulting fees, management fees) vs. Hard Costs

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Foreclosure schemes

Foreclosure schemes. These are particularly evil because they prey on people with big enough financial problems that they’re in danger of losing their home. A homeowner in the early stages of foreclosure may be contacted by a fraudster who says he can help the homeowner get rid of his debt and save his house for an upfront fee, which the fraudster takes and then disappears. In another scheme, a homeowner is approached by a con artist who offers to help them refinance the loan. “They sign all these documents and find out later that they actually sold the house — to the fraudster. Then they face eviction.

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Straw buyers

Straw buyers. One of the most frequent types of fraud occurs when “straw buyers” are used to hide the identity of the true borrower, who would not qualify for the mortgage. “The perpetrators use a straw buyer because they have good credit and can get the loan,” Fulmer says. Straw buyers may be duped into thinking that they’re investing in real estate that will be rented out, with the rental payments paying the mortgage. In fact, no payments are made and the lender forecloses on the loan. Or, sometimes, straw buyers are in on the scam and are getting a cut of the proceeds. “People may see this as a way to make a lot of money,” Fulmer says. “In one case, a number of straw buyers purchased numerous properties and received boatloads of money back.”

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Who Is Involved?

Almost everyone in the home-buying process is engaged in fraud -the original buyer, the brokers, the appraisers, the title company workers, the straw buyers.

Appraisers – The best line of defense to combat real estate fraud.

Lenders – Usually the injured party of real estate fraud cases.

“Straw Buyers” – are loan candidates who perpetrators use to get hold of home loans, but who usually don’t intend to occupy the properties they’re buying.

Real estate fraud exposed

Be a hero in the neighborhood: stop real estate fraud.
Stopping real estate fraud requires awareness, consciousness and guts to expose those you know to be fraudulent transactions.

A neighborhood association in North Minneapolis successfully abated the illegal practices of Jonathan Helgason, a licensed realtor and Thomas Balko, a licensed appraiser and owners of several companies.

The neighborhood association became suspicious of the sales conducted by said perpetrators. Soon enough, a member of the Minneappolis City Council reported the matter to federal, state and county investigators thus leading to the fall of the two real estate bad guys.

Be a hero too. Help stop real estate fraud. Don’t be afraid to report any shady deals to the authorities.

Caution to fraudsters

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In their desire to meet or surpass their sales quota, real estate agents help their unqualified clients to qualify for housing loans by manufacturing fake documents such as employment history and credit record.

Fraudsters run the risk of facing rigid punishments. In the above scenario, the buyer, seller and agent can be held equally guilty for collaborating in the execution of real estate fraud. Though the seller may seek remedy by invoking good faith, still his allegation is subject to burden of proof.

Sellers must therefore be cautious enough by making sure the agent and the buyer are not in any way trying to defraud the sale. He can do this by ascertaining the authenticity of documents and other pertinent requirements involved in the said real estate transaction.