How to Spot Mortgage Fraud
One would have assumed that the housing bust and subsequent decline in mortgage lending would have been accompanies by a commensurate decline in fraud. Unfortunately, this isn’t the case, as scammers have simply devised new schemes to take advantage of desperate homeowners. Mortage-related “suspicious-activity reports referred to law enforcement increased 36 percent to 63,713 during fiscal 2008 from 46,717 the previous year. While the total dollar loss attributed to mortgage fraud is unknown, financial institutions reported losses of at least $1.4 billion, an increase of 83.4 percent from 2007.”
Perhaps some solace can be found in the notion that this time around, everyone is equally vulnerable: “The spike in fraud is likely due to the pressure put on lenders, brokers and homebuilders hurting for business in an ailing market, and on homeowners who are trying to sell properties that have collapsed in price. Fraudsters are using old mortgage standbys like fake short sales and foreclosure rescues but are also popularizing new schemes like reverse mortgage fraud, credit enhancements and loan modifications.”
Some of the specific foreclosure/loan modification scams to be on the lookout for include “phantom help,” lease buy-back, and the always popular equity stripping. Phantom help refers to a “type of foreclosure rescue scam in which a fraudster collects an upfront fee from homeowners trying to save their homes from foreclosure — and then disappears.” Lease buy-backs typically involve equity stripping, in which victims are convinced by 11th hour “rescue” firms to sign over the deeds to their respective homes. The homes are then leased back to them with unfavorable terms, such that when the inevitable foreclosure takes place, the borrowers find themselves with little equity left in their homes. Reverse Mortgage scams, meanwhile, don’t usually take the form of outright scams. Rather, “victims” are typically charged exorbitant fees and/or cajoled into buying annuity products in conjunction with reverse mortgages.
Disturbingly, scams are being increasingly complex, and hence, more difficult to discern. For example, I read about one recently indicted company that “would seek out homeowners in trouble with their mortgages, often by finding owners who had missed mortgage payments, and offer to take their homes off their hands. If the owners agreed, the defendants would recruit buyers with good credit histories who would apply for mortgages to buy the properties…Simultaneously, the defendants would use falsified documents to inflate the home’s value, to get the largest mortgage possible. Finally, at the closings the sellers’ lawyers…would essentially pocket the checks from the lenders. He said that the buyers, who were promised they could get out of the deal at some point, were stuck with mortgages they could not afford.” How’s that for a scam!
According to one source, the best way to prevent such scams is to “Be skeptical of people who make unsolicited contact,” especially if they make offers that sound too good to be true. Always ask for references and check credentials whenever possible. To be fair, I would be remiss if I didn’t point out that not all Lease buy-backs and reverse mortgages are scams. If sold genuinely, with full disclosure, it’s still possible for everyone to come out ahead under such arrangements. Ultimately, the best way to protect yourself by asking lots of questions and double checking everything.