Mortgage Fraud in Real Life

March 1, 2007

In a free market, anything can happen. But if something seems too good to be true, it may be fraud. Not recognizing the signs of fraud can kill a sale and embroil you and your client in legal action if a fraudulent sale closes.

The surface: Buyer Joe Pass offers your seller the full list price for a home that’s been on the market for four months. It seems weird in a slowing market where comps have been going down, but you congratulate yourself on your good luck. Shortly after the sale, Joe asks you and the sellers to write a second purchase agreement with a sales price $15,000 higher than the list price and change the MLS. At closing, Joe wants to receive a decorating credit of $15,000.

The real facts: Joe is probably also arranging a false appraisal and using this inflated price to increase the perceived value of the property to the lender so that he can receive a loan far in excess of the property’s value and pocket the difference at closing.

The surface: Gertrude Smith is a single, retired schoolteacher living on a small pension and some savings, but she’s just made an offer on an upscale, six-bedroom condo you’ve listed. It seems odd, but after all, it’s her life, and you stand to get a big commission on an easy sale.

The real facts: Gertrude is acting as a straw man. The actual buyer is using Gertrude’s good credit and respectability to get a loan. Then Gertrude gets a kickback for signing the property immediately over to another buyer, who will live in or rent the property without making any payments to the bank until foreclosure takes place.

The surface: After a year of trying to find a buyer for a home, you convince the sellers to take back a second mortgage for your buyer, who doesn’t have the money to make a down payment and couldn’t otherwise purchase the house. You don’t mention the second loan in the purchase agreement, and the buyer sort of “forgets” to tell the lender about the second mortgage, which also somehow doesn’t get recorded.

The real facts: The lender made a loan without a true picture of the buyer’s financial obligations, which creates fraud. It also increases the possibility of the seller’s losing money if the buyer can’t make all the payments.