A New Take on the Mortgage Fraud Scheme - Here Are Some Ways to Identify the Scheme and Avoid Getting Tricked
In the Real Estate Industry, the term “Mortgage Fraud” is a term you probably have come across. You might be wondering, what is “Mortgage Fraud?” According to Chen (2024), Mortgage Fraud is a type of scheme used by nefarious individuals who aim to receive a larger loan amount than would have been permitted if the application had been completed honestly. An example of this would be intentionally falsifying information on a mortgage application. Other techniques fitting under the umbrella of Mortgage Fraud include straw buying, double-sales, and air loans
Recently, a new Mortgage Fraud tactic has surfaced in some parts of New York, New Jersey, and other surrounding areas
This emerging scheme involves several actors; namely, a mortgage broker, an LLC (Limited Liability Company), and an unnamed New Jersey based settlement company. The operation works as follows:
First, the LLCs in question buy properties and record the deed transfers. These LLCs typically “purchase” 2 to 4 unit single-family investment properties located in New Jersey as well as neighbouring states like New York, Pennsylvania, and Maryland.
Second, approximately 60 to 180 days after the said purchase, an “associate” of the LLC applies for a limited cash-out refinance loan, even if this “associate” is not listed on the title. For reference, a limited cash-out refinance is a type of loan that replaces the original loan. The new loan comes with a lower interest rate than the old one. In addition, appraisals done to these properties are intentionally inflated above what the properties are actually worth. These processes enable the LLCs to earn more money through devious means compared to a mortgage application completed honestly.
Another important actor in this scheme is a New Jersey based settlement company. This company facilitates the “hard money loans” that these LLCs use to strike a deal and purchase the aforementioned properties. Such loans appear in the title commitment as they are supposed to, however, there are no public records of these loans available. It is this omission that enables the LLCs to apply for a limited cash-out refinance quickly, avoiding the more complex and honest requirements of entering a standard cash-out transaction.
You might be wondering, “Why should I care about this Mortgage Fraud scheme?” Well, the consequences of this type of scheme may be multi-faceted in nature. Not only are the brokers and real estate firms who engage in this scheme affected, but the honest clients are as well. If individuals are caught engaging in this scheme, they will be faced with far more than just the legal penalties. There is a huge possibility that getting caught participating in this behavior would lead to:
a. Damaged reputations, specifically of the involved brokers and real estate law firms.
b. The loss of professional licenses.
c. Additional financial burdens.
Furthermore, you might also ask yourself, “How would I know if I have come across transactions that relate to or directly contribute to the success of this scheme?” There are indeed some major red flags one can spot when determining if the transaction they are a party to is tied to a fraudulent undertaking. Such red flags include:
a. Transfers of deeds that occur 60-180 days before date of origination.
b. The same LLC appears as both buyer and seller of the deed.
c. Use of multiple leases at origination in order for the buyer to appear as more qualified.
d. The properties involved are mainly 2-4 single family investments.
e. Significant increases in property value between previous sale and current loan.
f. The refinance is paying off an unrecorded hard money loan.
g. Discrepancies in documentation dates between financing and the acquisition of the property.
h. There is a traceable relationship between the borrower and individuals that are connected to the lien holder.
i. Paid off loans cannot be traced in any public record.
How can you protect yourself from this scheme, you may ask? Here are some steps you can take to do so:
a. Know who the third party originators and brokers are.
b. Educate yourself and your team to better identify the signs of fraud.
c. Create safeguards in order to promote zero tolerance for fraudulent behavior.
d. Encourage transparency and information sharing among you and your team members.
e. Train yourself to have a “sixth sense” when it comes to identifying loans.
f. If things do not add up in general, DO NOT proceed.
g. If you happen to encounter any fraudulent activity, make sure you report these to the appropriate channels and departments as soon as possible.
If you suspect or encounter such a fraudulent mortgage scheme, you should immediately consult the Fannie Mae Selling Guide and file a SUSPECTED MORTGAGE FRAUD REPORT through the Mortgage Fraud Prevention Page.
Always remember, prevention is better than cure. Identifying the red flags in the earliest stages of a transaction is crucial in avoiding further damage and consequences for facilitating Mortgage Fraud transactions.
If you have questions and concerns regarding a real estate matter, never hesitate to reach out to our experienced team of professionals here at the Scolnick Law. Contact us at (718) 554-6445 to schedule your consultation.
References:
Chen, J. (2024, June 27). Mortgage Fraud: What it Means, How it Works. Investopedia. https://www.investopedia.com/terms/m/mortgagefraud.asp#:~:text=Mortgage%20fraud%20is%20a%20financial,relied%20upon%20by%2 0a%20lender.
Mortgage fraud & legal issues for consumers. (2024, October 18). Justia. https://www.justia.com/consumer/deceptive-practices-and-fraud/mortgage-fraud/
Selling Guide | Fannie Mae. (n.d.). https://selling-guide.fanniemae.com/
