How to Avoid Mortgage Loan Fraud – Keep Your House, Don’t Go to Jail!
November 22, 2016
The Federal Mortgage Fraud Task Force is looking for crooked mortgage brokers, dishonest real estate brokers and cheating home buyers and real estate investors. While most people play it on the straight and narrow, good deeds can be mistaken for bad. Stay out of the mortgage fraud spot light using a few simple techniques!
In the current home buying climate the deals are hot, the financing is hot and the buyers are in trouble. The buyers?
Yep. If they can get the loan they can take advantage of some fantastic deals. The question is, can they get the loan? Some buyers want the financing so badly they are willing to fudge numbers or cut corners to get there. Sometimes it does not even take that. In general, you have committed mortgage fraud if:
- You took cash out of the bank and paid off debt without telling the lender;
- You bought a car prior to closing on your loan and you didn’t tell the lender;
- You are getting any credit for anything at closing and did not tell the lender;
- You make any agreement the lender does not know about at closing, usually called a ‘side agreement’;
- An adjustment you make at closing is not reflected on the HUD-1 settlement statement;
- Part of your down payment or closing costs comes from work you will be doing on the property;
- For bond loans, if you get a substantial RAISE!
- Any part of the down payment is borrowed;
- You have had any significant job change, quit your job or started a new job without telling the lender;
- You don’t move into the property when you certify to the lender you will be an owner occupant;
The Real Estate Settlement Procedures Act (RESPA) is very specific about how a closing should proceed,
especially one that is subject to financing.
Mortgage fraud is easy to fall into and hard to get out of. Even judges have fallen into the trap. For example, in Tampa Florida, Judge Thomas E. Stringer plead guilty on August 6th 2009 to bank fraud. He was helping a young dancer “protect” her assets. In the process, he bought a house for her in Hawaii. Things went sour with the dancer of questionable repute and the deal was reported. Judge Stringer had not been completely candid in his loan application. He failed to disclose he had borrowed all or part of the down payment. That is a big “no, no!”
The Judge Stringer case stands for the proposition you don’t have to go into foreclosure to commit fraud. He was current with his loan payments. That was not the problem. His only mistake was not telling his lender he had borrowed the down payment. No losses were reported by the lender!
In the simplest of terms, any statement made to the lender which is not 100% accurate may be considered fraudulent. Any change in the borrower’s financial health, for example buying a car or incurring extra medical bills without advising the lender, may be fraudulent. Any decrease, and in some cases, any increase, in income without advising the lender may be fraudulent. For example, some loans are geared towards low income buyers. If the borrower makes too much money he won’t quality. What do you do if before closing you get big raise? You better disclose the fact.!
The HUD-1 settlement statement lists all of the charges and all of the credits in your sale. If money changes hands and it is not listed on the settlement statement then fraud has been likely committed. For example, what happens if the buyer discovers the picture window in the front room was broken out the night before closing. It is going to cost $600 to fix it. The seller agrees to pay. If he writes the buyer a check at closing to ‘keep things simple’ then fraud will likely be committed. The picture window repair must be on the settlement sheet, as must every cent spent.
Another easy fraud trap to fall into are representations made by the buyer in other loan documents. Do you plan to occupy the property? If you answer “yes” then you better have a pretty good excuse why you didn’t if you are not fat and sassy in the house a year later.
But what happens if you get a last minute job transfer or change in life circumstances? Must you live in the house just to solve the potential fraud accusation? Of course not! The question is what were your intentions when you signed the loan docs. If you said you were going to move into the property but you got a job transfer 2 days after closing then you have met the intent part of the law. You planned to live in the house when you bought it. As fate has it, a job transfer to another town 2 days later precludes living in the house. No fraud.
Proving your intent is not always as easy as it sounds. Let’s say you bought a house, closed on it, and then the house of your dreams comes on the market two blocks away. The price is too good to pass up. Can you ive in the new house or do you have to live in the old one?
This is a tougher argument to make to an investigator since it is difficult to prove your intentions. Should you buy the second house and risk it? Assuming you have documented your path why not buy the second house. However, if you do that 13 times over a few year period, as happened in Colorado recently, you are probably in hot water. As a general rule, if you are not living in the house after the first year, even though you certified you were going to live in the house, be sure you have your documentation ready! You could easily get called on the carpet as occupancy is checked for many loans.
Unfortunately, everyone in the chain of a real estate deal, from the loan originator to the closing agent and the brokers and lawyers in-between, are potential fraudulent actors. For example, if the figures at closing are significantly different from the fees you are being charged at time of settlement then you may be the victim of loan fraud. Be vigilant for fix and flips where sellers are making a huge profit on the house. In these cases, you will want to double check the com parables and maybe even hire another appraisal company to check true market value. One has to wonder how a house worth $400,000 a month ago is now worth the $550,000 you agreed to pay for it. There may be appraisal games going on with the property.
The easiest way to get caught by the Task Force http://www.mortgagefraudtaskforce.com/ is through foreclosure. Properties that go on the auction block are frequently examined to see if the underlying loan was legit. However, as in Judge Stinger’s case, you don’t have to belly flop to get free room and board in crime school. Let’s hope those who end up in prison for their illegal activities don’t come out with a new fraud scheme!