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How to Identify and Avoid Commercial Mortgage Scams
November 5, 2021

How to Identify and Avoid Commercial Mortgage Scams

by The CE Shop Team

What Are Common Commercial Mortgage Scams, and How Can You Avoid Them?

Though strictly regulated, the mortgage industry still experiences cases of fraud. In 2020 alone, the FBI’s Internet Crime Complaint Center reported 13,638 people falling victim to rental or real estate fraud, which in turn resulted in a total loss of $213,196,082. Many mortgage fraud cases are investigated by the FBI since they generally involve large sums of money, personal assets and information, and can compromise the stability of the U.S. banking system as a whole.

The FBI calls the class of criminal schemes that target retail banks, credit unions, and other federally insured financial institutions Financial Institution Fraud (FIF).

There are internal and external categories of FIF: 

Internal fraud occurs when a bank employee uses their access to accounts and systems to commit fraud, and external fraud occurs when the perpetrator has no ties to the victim. Common external fraud includes bank fraud, stolen or counterfeit checks, money laundering, and account holder impersonation.

While understanding the difference between internal and external fraud is important, it’s also crucial that you know the various red flags associated with common commercial mortgage cons overall so that you and your clients can stay safe.

Types of Mortgage Scams 

There are patterns involved when it comes to mortgage industry hustles, and each scam falls under one of these two categories:

  • Mortgage fraud for housing: Illegal actions taken by a borrower wanting to acquire or maintain ownership of a house. For example, manipulating income and asset information on a loan application or bribing appraisers to misinterpret a property’s appraised value are acts of mortgage fraud for housing. This is often the category under which residential mortgage fraud falls.
  • Mortgage fraud for profit: Illegal actions taken by a lender to increase profits. For example, an industry professional misstating, misrepresenting, or omitting personal or client information including income, debt, and credit, or property value in order to maximize profits on a loan transaction are acts of mortgage fraud for profit. This type of fraud is typically associated with commercial mortgage fraud.

While these two classifications allow us to understand the general scheme schema, it’s equally important for you to understand how these types of fraud play out in the real world and the various forms they can take. Here are some examples of mortgage fraud for profit:

Bank Fraud

When someone commits an illegal act involving deception to obtain money or property from a financial institution, it’s considered bank fraud.

From 2015-2018, Dennys Tapia and a slew of co-conspirators worked to fraudulently obtain mortgage loans from financial institutions in New Jersey. They enacted this scheme to finance the purchase of property by unqualified buyers. Tapia provided false documents to lenders, subsequently obtaining the loans. Based on misleading information provided by Tapia and a straw borrower, lenders lost thousands of dollars in profits.

On 9/10/2021, Tapia was sentenced to 15 months in federal prison. He was ordered to pay restitution in the amount of $182,508, and forfeit $176,532 for conspiracy to commit bank fraud.

Commercial Real Estate Loan Fraud

Commercial real estate loan fraud can occur when a commercial property’s value is quickly diminishing if the owner tries to obtain financing by changing the property’s appraised value. Fake leases can be created to show profitability, and the manipulated appraisal keeps lenders on the hook, thinking that the commercial property has a stable cash flow.

Barton Schack, a former chief investment officer of a medical property management company in New Jersey, used fraudulent representations of 13 medical office buildings to obtain a $91.5 million loan in April 2016. Acting U.S. Attorney Rachael Honig said, “He allegedly helped the company's founder, an unnamed co-conspirator, secure the massive loan by misrepresenting to the lender the true occupancy status of buildings the co-conspirator put up as collateral.”

Essentially Schack and his co-conspirators were stealing rent payments even after the mortgage loans had closed.

They continued to keep the financial status of the company and tenant occupancy secret through false financial statements given to the loan servicer. The money they obtained by collecting rent was meant to help pay off these debts, but it was used for personal expenses instead.

Schack faces up to 30 years in prison as well as a $1 million fine.

Builder Bailout (or Condo Conversion)

Commercial Scams

When builders face rising inventory and declining demand, the unscrupulous may resort to enacting a bailout scheme to offset the loss. In other words, they will find a buyer who obtains a loan for a property but then allows the property to go into foreclosure.

According to the FBI, “apartment complexes purchased by developers during a housing boom are converted into condos, and in a declining real estate market, developers often have excess inventory of units [in condo conversion schemes]. So developers recruit straw buyers with cash-back incentives and inflate the value of the condos to obtain a larger sales price at closing. In addition to failing to disclose the cash-back incentives to the lender, the straw buyers’ income and asset information are often inflated in order for them to qualify for properties that they otherwise would be ineligible or unqualified to purchase.”

Momoud Aref Abaji from Huntington Beach, California, participated in a scheme that resulted in the fraudulent purchase of over 100 condos from 2008 to 2013. 

Stephanie Abbot of Mortgage Fraud Blog, says, “During the course of the scheme, co-conspirators identified condominium developments around the country where the builders were struggling to sell units and arranged to purchase multiple units at a discount. The builders benefited by making it appear that their condos were selling and maintaining their value, while members of the conspiracy obtained the kickbacks.” 

Abaji and his co-conspirators received kickbacks from the condominium builders during the financial crisis of 2008 and hid this information in order to convince lenders to fund loans greater than the actual purchase prices. In order to obtain the loans, Abaji would create fake loan applications with false information about the straw buyers. This scheme resulted in mortgage lenders providing over $21 million in financing to buy more than 100 properties. These loans began to default, causing lenders to lose over $10 million, as well as costing Fannie Mae and Freddie Mac $1.3 million since some of these loans were purchased on the secondary mortgage market.

In 2018, Abaji was sentenced to 108 months in prison and was ordered to pay over $10 million in restitution to the impacted financial institutions.

How to Avoid Mortgage Scams

The U.S. has enacted various regulations and legislation to combat mortgage fraud at the local, state, and federal levels. Real estate, title, insurance, and mortgage agencies are licensed and monitored by government agencies, and anyone working within these industries is required to take approved education before providing services. Beyond the fact that there are educational barriers in place to reduce the number of industry fraudsters, there are several steps you and your clients can take to protect yourselves:

  • Only work with and refer out to trusted mortgage professionals
  • Verify all documents, whether you’re a lender, borrower, or MLO
  • Know your rights (and advocate for your clients’ rights)
  • Do not agree to unsolicited offers
  • Avoid any up-front fees
  • Remember that loan modifications can’t be guaranteed by legitimate companies
  • If something seems off, ask questions and request documentation
  • Don’t be afraid to turn down dubious deals — anything that sounds too good to be true may be criminal!

What You Can Do as an MLO

As an MLO, it’s your responsibility to guide your client through a safe and efficient mortgage purchase. You’re the trusted professional, so make sure you’re doing everything you can to keep your clients safe from mortgage scams. Stay up to date on new scams, keep your eyes peeled for red flags, educate your clients on identifying potential scams, and be sure to write down any new or updated information regarding scams in the mortgage industry when taking your Continuing Education courses every year.

MLOs are also tasked with reporting fraudulent activity. Here are multiple places you are able to report fraud:

Although there are several precautions you can take to combat fraud, being aware of popular mortgage scams greatly diminishes the chance of you or your clients becoming a victim. Don’t be afraid to reach out to other industry professionals if a situation or deal seems off, and be sure to report any suspicious activity to the resources above!

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