Real Estate Fraud is on The Rise

Every day, in every city across the country, real estate industry professionals participate in fraudulent transactions. Many are fulfilling a carefully orchestrated scheme, while others are sincerely unaware that their actions could bring them fines, loss of licensure, or even jail time. They believe what they're doing is legal and condoned because "so many established people are doing the same thing." The key to preventing and detecting fraud is knowledge—by understanding what fraud is and how it works you can protect yourself, your business, and your customers.

No matter what your role is in a deal, you have the opportunity—simply by touching the application—to affect the validity of a homeowner's real estate transaction. Each one is an opportunity for an honest loan, and each person your customer works with has a responsibility to continue that transaction with the same integrity. As the borrower is handed off from REALTOR® to loan officer to processor to underwriter to lender to title and escrow, there are hundreds of occasions for fraud. When you know what to look for (and refrain from infringing on the law yourself), you can have a significant positive impact on the quality of your business.

In 2005 there were nearly 22,000 'suspicious activities' reports filed within the real estate industry, yet only three percent were ever investigated. Imagine if you only completed three percent of the items on your to-do list—you'd be frustrated, scrambling for resources, and in need of serious help. That's how the Financial Institution Fraud Unit of the FBI feels. Without adequate resources, or an agreed-upon way to fund all of these cases, the FBI and other law enforcement officials are left treading water.

So what can you do? Take action when you suspect fraud. Do your due diligence on every single real estate transaction that comes across your desk and catch false information before a loan closes, whatever the likelihood of fraud. You never know who else is involved in the deal, and what ulterior motives they may have. Check the property's background, look for recent sales, and get a second appraisal if you feel the numbers just don't add up. And always, always, always ask for back-up verification on questionable information.

If you know someone has committed fraud, report it. If you let it go, you can bet that person will go on to take advantage of another unsuspecting company.

Eliminate Your Mortgage in Less Than a Year?

Banks, mortgage companies, and other lenders offer plenty of legitimate ways to eliminate a mortgage. You can borrow less, refinance for a shorter-term loan at a lower interest rate, make payments every two weeks rather than every month, pay a little extra each month toward the principle, or sell the property.

Now, there's an even better way. Dozens of companies promise to help homeowners completely eliminate their 30-year mortgages in a matter of months for a flat fee of only a few thousand dollars up front!

What a deal! For three thousand bucks or so, all you have to do is kick back in your lounge chair twiddling your thumbs, and in less than a year, you can own your home free and clear, even if you're facing foreclosure! Even better, you may qualify to cash out tens of thousands of dollars in equity!

Here's how a typical mortgage elimination scam works:

First, the mortgage eliminators (a.k.a. con artists) post ads on websites, in Internet pop ups, in classifieds, and wherever else they can advertise offering mortgage elimination. Sometimes this is advertised as debt elimination, because the scheme can purportedly erase the balance on car loans, credit cards, and other debts.

The next step is to sell the theory that mortgage elimination is perfectly legal and it works. This is the fun part. Con artists have concocted all sorts of creative arguments to prove the legitimacy of mortgage elimination. According to one argument, banks don't really loan their money.

They loan money they borrowed, and if you trace that money back to its source, it's money that the government printed, so it has no real value — it's just paper and ink. As the borrower, you actually generated the money, because the government had to print more money to cover your loan. In essence, the bank made money off of your signature, so the mortgage note is meaningless, and you don't owe the money. In fact, the bank owes you money!

They toss a few extras into the argument to make it sound more convincing, often quoting politicians and Federal Reserve documents out of context to prove their point. They are also careful to point out that banks, mortgage companies, and the FBI will tell you that mortgage elimination is a scam, because the establishment is so afraid that if more people knew the truth, the big bad banks would no longer be able to cheat people out of their money.

Assuming you buy into the argument, you send three or four or five thousand dollars to the mortgage eliminator who promises to guide you through the process and represent you in court. With some con artists, that's the end of it. They pocket the money they receive up front, and then you never hear from them again.

Other mortgage eliminators take the scam even further. They advise the homeowner to march down to the county clerk's office and file a form stating that the original loan has been released; sometimes this is called a discharge of debt. Of course, the mortgage remains in place and the homeowner still owes the money to the bank, but if the county clerk records the discharge of debt, the deed makes it appear as though the homeowner owns the property free and clear.

Now that the homeowner appears to own the home free and clear, the homeowner applies for one or more additional loans on the property, with the generous assistance of the mortgage eliminator, of course. When the loan or loans are approved, the mortgage eliminator and the homeowner split the proceeds, often with the mortgage eliminator walking away with the lion's share.

Eventually, the county clerk, the bank that made the original loan, or the banks that made the subsequent loans spot the scam and confront the homeowner. By this time, the mortgage eliminator is long gone, leaving the homeowner with one or more unpaid mortgages, a legal morass, and possible criminal charges for conspiracy to commit fraud.

Mortgage elimination schemes are designed to hook susceptible homeowners, and they resonate most with the most vulnerable of them — homeowners who are facing bankruptcy or foreclosure. What these homeowners should do when facing foreclosure is to immediately contact the lender and ask what options are available. The lender may be willing to restructure the payments to make them more affordable or suggest other legitimate solutions to the problem. In almost ninety percent of foreclosures, homeowners can benefit most by selling the property and paying off the balance of the mortgage in order to salvage their credit and start fresh.

Instead, distressed homeowners commonly look for a more tempting solution and end up falling for deals that really are too good to be true. They pay money they already cannot afford to a con artist, they bury themselves deeper in debt, and they create conditions that make it even more likely they will lose their homes in foreclosure.

As real estate professionals, we're the first line of defense against all forms of real estate fraud, including mortgage elimination schemes. We need to educate ourselves in order to protect our clients and our industry against the persistent attacks and ever-changing tactics of real estate con artists. Only by becoming more vigilant and proactive, can we hope to gain the upper hand over those who threaten our livelihoods.

"Bonnie and Clyde" Mortgage Broker Caught In Texas

Chalk one up for the good guys. In case you haven't heard, federal authorities in Texas just arrested Rebecca Hauck, the alleged co-conspirator of real estate and mortgage fraud poster-child, Matthew Cox. In the world of real estate and mortgage fraud forensics, Cox and Hauck are akin to Bonnie & Clyde. Their dirty deeds are rumored to stretch from coast to coast, and now that one of them is in custody, we're perhaps only moments away from seeing the other one behind bars as well.

For the uninformed, according to various news sources and unsealed federal documents, Matthew Cox and Rebecca Hauck are alleged to have committed their first mortgage fraud schemes in the Tampa, Florida area in 2003. According to the St. Petersburg Times and MortgageFraudBlog.com, Cox started a Tampa-based mortgage company, was charged with fraud in Tampa, then masterminded a scheme to use phony identities and falsified records to make a fortune with fraudulent loans on broken-down properties.

Later, according to MortgageFraudBlog.com, Cox and Hauck showed up in Atlanta, Georgia, where they are alleged to have again engaged in a real estate fraud scheme but disappeared before being caught. In 2005, Matthew Cox—whose known aliases include Maxwell Price, David R. Freeman, Gerald Scott Cugno, Michael S. Shanahan, Michael J. Eckert, Gary L. Sullivan, and David White—was nearly caught in South Carolina, but once again managed to evade authorities and disappear, but not before securing over $1,000,000.00 in mortgage-related loans from fraudulent activities.

Now here's where the Matthew Cox story gets really interesting, and in part is what makes this guy so legendary when it comes to real estate forensics. Apparently, according to numerous sources including the St. Petersburg Times prior to embarking on his mortgage fraud spree, Cox is rumored to have penned a 300-page crime novel entitled The Associates, which details the same fraudulent activities for which he is now alleged to have committed.

According to the St. Petersburg Times, the fictional central character in Cox's novel is a former University of South Florida student who quits a low-paying job in insurance sales to strike it rich in the mortgage business, but finds himself in trouble with the FBI and puts into place an elaborate scheme to defraud lenders of millions of dollars before making his getaway. As it turns out, Cox himself is a former University of South Florida student who did indeed start his own mortgage company, and as we now know, was charged with fraud in Tampa, then, according to court records, masterminded a scheme to evade federal authorities.

Cox's accomplice in all of this is Rebecca Hauck, who federal authorities arrested late-last week in Texas. Hopefully, Hauck will reveal enough information about Cox and his nefarious ways that he too will be tracked down and put out of business for good.

Cash Back at Closing: Appealing Arrangement or Sinister Scam?

Cash back deals are stitched into the very fabric of the U.S. economy. Manufacturers promote their products with cash rebates. Credit card companies offer cash-back on purchases. Even banks dangle cash-back deals to attract new customers. Now, home buyers and con artists are jumping on the cash-back bandwagon, and plenty of our own people—real estate professionals—are tripping over themselves to cater to them.

On its surface, cash back at closing seems like a win-win situation. The buyer simply pays a little more for a property than it's worth, and the seller agrees to kick back the surplus cash to the buyer. For buyers, it can be a savvy financial move, allowing them to pay off outstanding credit card debt or use the extra cash for home repairs and renovations. The seller unloads his house at close to or better than his asking price. The real estate agent gets a bigger commission. The loan officer chalks up another successful loan. And the lender scores a larger loan and stands to earn more interest over the life of the loan. If anything seemed like a win-win situation, cash back at closing is it!

Unfortunately, as with most deals that seem too good to be true, cash back at closing schemes are just another way of scamming someone—in this case, the lender, who's fooled into making a risky loan. But lenders aren't the only losers. Buyers are often tricked into buying more house than they can afford. Housing values in the area are artificially inflated, making housing less affordable and raising property taxes. Honest real estate agents lose business to dishonest agents who offer cash back deals. And neighborhoods begin to buckle when homeowners default on the inflated loans and their properties end up in foreclosure. Perhaps that's why cash back at closing schemes are illegal.

Illegal???!!! Yep.

When I tell colleagues that cash back at closing schemes are illegal, a surprising number of them are incredulous. Agents frequently approach me and describe cash back deals that they were convinced were legitimate.

I was recently talking with a top selling agent in Florida who listed a house for $600,000. A broker who wasn't from the area had a buyer interested in purchasing the property. Although the broker and buyer had never seen the property, they submitted an offer of $695,000—$95,000 more than the asking price! The only hitch was that the buyer wanted the seller to kick back the extra $95,000 to the buyer at closing. The seller just wanted to sell the house, so he had no problem with it. When the agent asked what I thought, I immediately recognized the scam and informed her that the deal was illegal. She explained that the seller really needed to sell the house and that the seller's attorney had informed the seller that nothing was wrong with such a transaction. Unfortunately, the lawyer was under-informed.

The law that governs these transactions is referenced on the 1003, Uniform Residential Loan Application, that every buyer signs when he applies for a loan—Title 18, United States Code, Section 1001. It's part of the small print that lawyers always tell you to read closely before signing anything. To paraphrase Title 18, section 1001, you can't lie on a loan application or any other document related to the transaction. When a buyer, appraiser, agent, loan officer, or another party provides a false statement of the property's value on the 1003 or any other document, they're lying. They're breaking the law.

As real estate professionals, our job is to know the law, act in accordance with it, and abort any deals designed to dupe anyone involved in the transaction. That means we have to shut down cash back at closing scams before they close. The warning signs are readily evident:

The buyer places an offer on the property that's significantly more than the asking price on the condition that the seller kicks back all or some of the extra money.
The appraisal is obviously inflated.
Neither the buyer nor the buyer's agent has ever seen the property.
The buyer wants to use a different title company than the one that the seller's agent has chosen.
The buyer or buyer's agent claims that the extra money will be used for home repairs or renovations or paid to a contracting company to handle the repairs or renovations.

The logistics of cash back at closing scams vary, so the warning signs tend to morph over time, but the underlying law that's being broken remains the same. According to real estate lawyer, Rachel Dollar, "Whether it be through seller kickbacks, inflated purchase prices or 'repair' costs, the common thread in these deals is that the lender is not informed of the true nature of the transaction." Whenever the lender is not informed, in writing, of the true nature of the transaction, the transaction is illegal. And if you go along with the scheme, you become an accomplice, subject to prosecution.

So, what should you do when you smell something fishy? Put a stop to it! Inform all parties that cash back at closing schemes are illegal, and then call the lender immediately. The lender's phone number is on the closing papers, and, believe me, they'll be eager to hear of any pending deals that call for them to loan more money than a property is worth.

by Ralph Roberts