White Collar Crime News

Understanding Mortgage Fraud for Lawyers March 7, 2010

I have been involved in a number of mortgage fraud related cases. In some cases, my client was clearly guilty while in others, my client was innocent. As a lawyer, you need to evaluate your client’s criminal liability and the evidence against them right away in order to provide effective advice. This is especially important in white collar crimes for two reasons. First, your client may either be in denial about his guilt or may not be aware that his activity is really illegal. Second, clients under investigation for a white collar crime often come to you long before an arrest is made. A lawyer should use this time start preparing for trial. Unfortunately, many lawyers allow the file to collect dust while the Government continues to build their case.

The Players

A mortgage fraud case may involve dozens of people. It is important to trace the transaction from beginning to end to identify everyone involved and where your client fits into the picture. In very complex cases, the primary victim is the lender. A builder/seller may recruit realtors, who, in turn, recruit straw buyers. In order to defraud the lender, the mortgage broker, closing attorney, appraiser and title company may also be in on the scheme or may be willing to look the other way. In addition, there may be “specialists” who provide fake Ids, false pay stubs and false bank statements. If the straw buyers are unemployed, other people may provide a phone number to verify the fake employment. Once everyone associated with the case is identified, everyone should be interviewed to lock them into a story. Due to cost issues, this is rarely done; but it should be done as soon as possible.

The Records

At some point, there is a good chance that the Government is going to take every piece of paper in your client’s office and home. If your lucky, you may see some of it some day. So why risk that? Get copies of everything now and review it for red flags. In addition, get all of your client’s bank records and tax returns to look for evidence of kick backs, tax evasion and money laundering.

 The many faces of Mortgage Fraud

Mortgage fraud is really an umbrella term that covers a number of schemes.

Fraudulent Property Flipping – Fraudulent flipping often occurs when the suspect purchases property falsely appraised at a higher value and then quickly sells it, profiting from the false appraisal. In fact, sometimes the suspect may own the property for less than 48 hours.

Silent Second – Silent Second fraud occurs when a buyer borrows the down payment from the seller through the issuance of a non-disclosed second mortgage which leads the primary lender to believe that the borrower has invested his own money in the down payment. The second mortgage may not be recorded to further conceal it from the primary lender. Another variation of this involves the builder/seller fronting all closing costs including the down payment. This is made easier when the down payment is less than 20%. Again, this is not disclosed to the lender.

Nominee Loans/Straw Buyers – Straw buyer fraud occurs when a person conceals his identity through the use of a nominee with that nominee’s consent, often relying on the nominee’s better credit history, to apply for a loan the person otherwise could not have obtained.

Fictitious/Stolen Identity – the suspect uses a fictitious or stolen identity to apply for a loan or to co-sign for the loan. With these cases, the lender will attempt to go after the victim who may have an uphill battle to prove that their identity was stolen.

Foreclosure Rescue Schemes – In rescue scheme fraud, the suspect identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. He then misleads the homeowners into believing that they can save their homes if they transfer to the suspect the home’s deed and up-front fees or purchase loans through the suspect. The suspect profits by remortgaging the property or pocketing fees paid by the homeowner.

Equity Skimming – In equity-skimming fraud, the suspect may use a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. After closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and often rents the property for additional profit until the inevitable foreclosure on the property.

Air Loans – Perpetrators of Air Loan fraud obtain property loans for which there is no property or other collateral. The perpetrator may invent borrowers and properties, establish accounts for payments, and maintain custodial accounts for escrows. He may even set up telephone numbers for the “employer,” “appraiser,” etc., to provide the lender with “verification” of the false information. Ponzi Schemes – The suspect solicits money from investors, selling interest in the same property to multiple investors or simply pocketing money and providing false documentation for the transactions.

Combination of the above – Some complex fraud schemes may involve a combination of the above schemes for maximum profit.

Signs of Mortgage Fraud

When reviewing documents from your client, it is important that you carefully scrutinize everything to see if there are any problems that need to be handled at some point. Common issues to look out for include:

Kick backs – while bonuses may not be illegal, they may be a sign of mortgage fraud. Why is your client getting these payments, how they are paid and whether they are disclosed are important questions to ask.

Exclusive use of the same company – Use of the same appraiser, title company, etc by a real estate agent is not uncommon. However, the exclusive use of one company by a builder, mortgage company, etc may be a sign that there is a fraud occurring and that this other person/company is in on it.

Unexplained payments to third parties – “Specialists” often provide fake pay stubs, bank records, etc. Unexplained payments to the same person or consistent withdraws may be evidence that a specialist is involved in providing false information.

Higher than normal fees – In order to entice people to get involved in illegal activity, a higher payment or commission is offered. There is so much competition in the real estate market that there is rarely a need for higher than normal payments.

Non-local buyers – Straw buyers or buyers that have no intent on paying a mortgage may have to be recruited from hours away. The chances of one person consistently dealing with buyers who don’t live anywhere near the properties in question shows that they may have been recruited.

False information on applications – while false information is likely mortgage fraud itself, some false information on minor issues may not cause that much of an alarm. However, it is important to look for patterns of false information and to understand why that information is important.

Conclusion – A passive lawyer lets a file collect dust and relies upon hope that the Government’s investigation will not turn up evidence against the client. An aggressive lawyer starts to prep for trial from day one. This includes investigating other people and your client. Of course, this cannot be done if you don’t understand mortgage fraud. Hopefully, this article will allow you to better represent your client.