Mortgage Concepts is a recurring video series covering best practices aand compliance education for California mortgage loan originators. This video continues discussing common mortgage fraud schemes mortgage loan originators are likely to encounter in their business. For course credit toward renewing your NMLS license, visit firsttuesday.us. Continue on to Mortgage Concepts: Common mortgage fraud schemes, Part 3 here. 

Common mortgage fraud schemes, cont’d

Short sale fraud occurs when the owner conceals transactions or makes misrepresentations to lower the value of the property for the short sale approval. They then arrange the transaction so they can keep the property at the adjusted value. In other cases, a flip is involved wherein a related person purchases the property at the fraudulently low short sale price, and then immediately resells it for a profit, which is shared with the original owner. Other common features include:

  • sudden default with no negotiations, and an immediate offer at the short sale price;
  • unclear or inconsistent reasons given for default;
  • the mortgage delinquency is inconsistent with the borrower’s spending patterns;
  • the short sale offer is from someone related to the borrower;
  • the short sale offer is for less than current market value;
  • cash back at closing goes to the borrower;
  • disbursements are made at closing which were not approved or revealed to the servicer, sometimes masked as “repairs”;
  • the buyer and real estate agent may be related or the same person;
  • the purchaser has previous or current ownership of the property; and
  • the purchaser has a similar name to the current owner of the property.

Multi-lien home equity frauds involve multiple home equity mortgage applications within a short time period – before each lender can be aware of the existence of the other applications. The fraudster then extracts as much money as they can on the multiple lines.

Builder bailouts involve a cash-strapped developer who needs to meet their obligations on short-term construction loans. To do so, they manufacture sales to a straw or extremely unqualified buyer. They inflate the sales price by offering financial incentives to the buyer which are not disclosed or explained to the lender. These schemes often involve:

  • a distressed housing market;
  • excessive financial incentives to the buyer;
  • new construction or condo conversions;
  • marketing materials which advertise a rent credit or payment credit;
  • unexplained payouts or inflated commissions on the Closing Disclosure; and
  • all comparables being in the same development as the subject property.