The Many Faces of Mortgage Fraud and How to Avoid It

Over the last few years, almost all of us have heard a slew of buzzwords that describe the state of the real estate market. It was a bubble that burst. It was a meltdown. There were foreclosure mills and “robo-signers.” For all that, we lack a definitive explanation for the housing bust. Mortgage fraud may not tell the whole story when trouble strikes the real estate market, but it is almost always in the picture. Like the poor, fraud is always with us. In good times and bad, there is always someone willing to test the limits of the law.

One very recent case serves as a textbook example of the variety of fraudulent acts that can occur at almost any stage of the mortgage process. The case involved four New Jersey conspirators, one of them a closing agent, who recruited and controlled buyers and sellers for multiple transactions. Buyers submitted loan applications which overstated their incomes. Settlement statements lied about how the mortgage proceeds were disbursed. The closing papers failed to reveal that funds were going to a shell company owned by two of the conspirators. The closing agent, in turn, had her own shell company and used it to accept kickbacks that were paid from the illegally obtained assets of the first shell.

It was a complicated arrangement, and the fraud didn’t stop after the loan closed. The closing agent retained a portion of the loan proceeds and used that money to make payments on the new mortgages, a strategy designed to keep the lender in the dark for as long as possible.

On March 20, 2012, after three weeks of trial in federal court, a jury took only two hours to convict the closing agent on two counts of conspiracy. The other three conspirators, along with two associates, had already entered guilty pleas. Most of them are awaiting sentencing, but one has already learned that his future entails a 46-month sojou
in federal prison.

Cases that involve several people running elaborate schemes are the ones that tend to make headlines, but mortgage fraud can happen on a much smaller scale, and it does not have to involve people who work in the mortgage business.

For example, when an individual applies for a mortgage in order to purchase a property or to refinance an existing loan, the applicant is required to swear, under the pains and penalties of perjury, that the information provided is correct. A borrower might be tempted to increase his income or assets, or to decrease his liabilities, in order to qualify for the loan. That kind of knowing misstatement amounts to fraud.

In a real estate sale, the lender is always interested in the amount of money that the buyer is putting into the transaction, whether as an initial down payment or as a balance that is due at closing. The theory, of course, is that a buyer with more of his own money in the deal is more likely to make the monthly mortgage payments and that the lender is less likely to be hurt if the home is sold in foreclosure. Lenders take this seriously, but if a buyer needs help qualifying for the loan, the parties can be tempted to misstate things.

Sometimes the parties have help from people in the business. Real estate brokers, property developers, loan originators, mortgage brokers, closing agents, appraisers and atto
eys all have obligations under the law, and all have been prosecuted for mortgage fraud at one time or another. No field is immune.

The loan application is only the first opportunity for mortgage fraud. At several stages in the process, people are required to reaffirm the truth of what they have been saying. The very end of the process, the closing, is a prime opportunity for fraud, and investigators often examine that final step with special care.

At the closing, the parties put the final seal of approval on everything they have already signed. They also sign the settlement statement, a document that lists every financial detail of the transaction. It shows where the money has come from and where it is going. It shows all of the costs, including appraisal fees, origination fees, escrow amounts and closing costs, that anyone is paying. It lists the recipient of each fee and it shows the exact amount of the seller’s proceeds.

Almost any payment that is not shown on the settlement statement is a potential problem. If the seller is refunding part of the buyer’s purported down payment, that under-the-table refund is almost always an act of fraud. If a closing agent gets an undisclosed payment for referring business to an appraiser, that payment is probably illegal.

The settlement statement is such a focus of attention simply because the buyer, the seller and the closing agent must all sign, and each signature is a promise that the numbers are true and complete. Even those who are not required to sign can run afoul of the law if they know that things are being hidden.

All elements of a mortgage transaction are governed by lengthy and complicated laws, both state and federal, and fraud can have both civil and criminal consequences. On the civil side, a lender who has been misled can take steps to undo the transaction and get its money back. On the criminal side, mortgage fraud is often prosecuted by federal authorities because it implicates a number of federal statutes, even if those statutes do not directly govern mortgages. They apply, however, because of the way lenders do business. Wire fraud is a frequent charge, for example. Mortgage funds are often wired between banks, and the federal government regulates those electronic transactions.

The best way to avoid involvement in mortgage fraud is to submit a truthful application and to ask questions if anything is unclear. Since criminal fraud generally includes an element of knowledge, most cases involve people who knowingly submitted false information. The penalties, however, can be severe, and even people who are convinced they have nothing to hide should consult an atto
ey if questions of fraud arise.