The Frugal HomeOwner

Julie Garton-Good

Mortgage Scams a Nationwide Problem

QUESTION: A house in our neighborhood sold last year, but no one ever moved in. Now there's a foreclosure notice posted on the front door. I called the lender and a woman there said that the house was part of a loan fraud scam under investigation and that the house couldn't be sold at this time.

Is this a common occurrence? I've never heard of anything like this happening in our town.---PC

ANSWER: Not only are mortgage scams happening in nearly every city across America, it's the latest financial fall-out from the sub-prime mortgage mess. What you're describing is most likely the cash-back-at-closing type of mortgage fraud. It puts cash in the scammer's pocket and cost the mortgage industry more than one billion dollars last year.

Here's the anatomy of the swindle. Sam Scammer finds a straw buyer to apply for a mortgage and take title to the property when the loan is closed. The scammer then finds an appraiser who is willing to inflate the appraised value from say, $300,000 to $380,000. Even though the sub-prime borrower is a bit of a risk, the mortgage broker makes the loan, receiving a hefty fee for his efforts (often equal to five percent or more of the loan amount). At closing, the scammer receives $80,000 from the straw buyer whom he pays a fee as well as one to the appraiser. The buyer never moves in, no mortgage payments are made, and the house eventually falls to foreclosure. The lender/investor holding the mortgage paper is stuck with more debt against the house than it can be sold for. Add a housing market with little or no current appreciation and you have a recipe for disaster.

Although there's nothing illegal about a buyer getting cash back at closing when all of the details of the transaction are disclosed to the lender, fraud occurs when the sale is rigged to trick lenders into lending more than the house is worth. And it's not just the chronic bad guy that's the perpetrator. There are cases where scamming was orchestrated as an inside job by members of mortgage and financial companies. With fewer loans being generated resulting in less income, it became an illegal alternative to generate cash flow.

It stands to reason that the highest amount of mortgage fraud would be in the states where housing has been faltering and foreclosures are through the roof…Florida and California. But fraud doesn't just happen in high-priced markets. For example, a house is listed for $150,000, but it ends up selling at $175,000. Unless a wing was added to the house before it closed, it could be that someone rigged an inflated price and got cash back.

As the reality shows warn "don't try this at home", mortgage fraud is dangerous business and could result in a huge fine, time in federal prison, or both.