Jonathan A. Goodman is a shareholder in the law firm of Frascona Joiner Goodman & Greenstein, P.C., in Boulder, Colo. His practice areas include real estate, real estate finance, and broker representation. He can be reached at firstname.lastname@example.org.
Mortgage Scams: Loan Fraud Alert
Loan fraud comes in many forms, but one of the most common—valuation loan fraud—occurs when any party to the transaction, including the real estate practitioner, misrepresents information about the transaction to the mortgage lender. In general, lenders make mortgage loans based upon the creditworthiness of the borrower and the value of the home or other property involved. Lenders estimate the value by having the property appraised and by examining the price the buyer is willing to pay for it. The true purchase price is material because appraising isn’t an exact science. Buyers don’t intentionally overpay for a property—unless they’re engaged in mortgage fraud.
Slow markets frustrate sellers and increase temptation to turn a blind eye to fraud. And without rapid appreciation, fraud becomes more apparent when loans are analyzed on the secondary market.
If fraud happens, how can you protect yourself from unwilling participation? The first step is to educate yourself about some common scenarios. Consider this situation: A buyer has entered into a contract to purchase a property for $200,000, but, after learning about a roof problem, asks for and gets a price concession of $10,000 from the seller. At a $190,000 sales price, the buyer might obtain a 90 percent loan-to-value mortgage for $171,000 and bring approximately $19,000 to close.
However, let’s say the buyer has only $10,000 in cash and needs to get a loan of $180,000 to buy the property. The seller proposes a rebate plan to get the deal closed. On the sales contract, the seller will keep the price at $200,000. In that way, the buyer will be able to borrow $180,000 with a 90 percent loan. At closing, the seller rebates $10,000 to the buyer. Aware that the lenders will probably treat the $10,000 rebate as a price concession, the deal participants agree not to tell the lender about the rebate. That’s fraud.
Even more subtle schemes have evolved in attempts to make deceptions seem less like fraud. For example, a mortgage broker might charge the borrower $10,000 in points and fees (the charges are a disguise for fraud). The seller agrees to pay for those loan charges, and discloses this payment to the lender. Unbeknownst to the lender, the mortgage broker then rebates the $10,000 to the buyer outside of the closing. Again, this is fraud.
Another example is that instead of the buyer bringing $20,000 in cash to the closing, the seller agrees to carry a second mortgage for $10,000. The seller discloses the second mortgage to the lender. However, the seller and buyer agree that the second mortgage will never be paid. Again, the buyer gets a loan based on an inflated price. Once more, it’s fraud.
More subtle still
One of the truisms about mortgage fraud is that if the seller’s concession is shown on the HUD-1 settlement statement, there’s no fraud. But that’s true only if the description on the HUD-1 is accurate.
Among the gimmicks used to create the illusion of disclosure is a debit from the seller’s proceeds suggesting a charitable contribution by the seller or the payment of a debt owed by the seller. If the deducted money is being used to satisfy real debt of the seller or make a real contribution, then it’s perfectly legal. But if the debit and payment to the third party are really a disguise to route money from the seller back to the buyer or other promoter of fraud, such as the mortgage broker, again, it’s fraud.
Routing the payment through a so-called charitable organization doesn’t avoid the fraud because the stated contract price exaggerates the true price received by the seller. In the worst cases, the scammers steal the identity of a creditworthy borrower, transferring it to the person who shows up at closing. In other instances, the buyer is simply a dupe, who doesn’t understand that fraud is taking place.
Being a dupe doesn’t protect you or anyone else in a transaction from liability. Make sure the true facts of a deal are reflected in the contract (with all its amendments) and on the HUD-1.
Fraud red flags
To decrease the likelihood that you’ll get caught up in something illegal, note some of the hallmarks of valuation loan fraud.
- Your instincts tell you something is fishy and rather than addressing the specifics of your concern, the proponents tell you “we do this all the time.”
- Someone asks the listing broker to raise the price of the property in the MLS after the contract has been signed.
- The property has been on the market a while but sells for significantly more than the original listing price.
- The buyer insists on using a specific appraiser.- In response to one of your questions, a mortgage broker tells you, “It’s fine with me, just don’t put it in writing.”
- In response to your need to amend the deal, in writing, the mortgage broker tells you, “If you need to put it into writing, do it in the closing instructions or inspection resolution—anything that you don’t send to me.”
- An offer is submitted to a listing broker together with an amendment calling for the seller to pay money to the buyer or third party to cover repairs. But the buyer has yet to bring in an inspector.
- Commissions are calculated based upon some amount less than the purchase price shown in the contract.
This list isn’t all-inclusive, nor is it determinative.
A deal with some of the above features may be perfectly legal. Each situation needs to be evaluated on its own.
More Online Fannie Mae information and advice on detecting and preventing mortgage fraud or search by “mortgage fraud” at http://www.efanniemae.com