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

How to Identify and Avoid Residential Mortgage Scams

by The CE Shop Team

What Are Common Residential 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). Mortgage fraud is a subcategory of FIF, characterized by misrepresentation or omission of information with a mortgage loan that is relied upon by the lender, and it can be committed by the borrower or the lender.

Accordingly, 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.

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 mortgage cons overall so that you and your clients can stay safe.

Signs 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 often 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 housing:

Loan Modification Schemes

Loan modification schemes occur when a criminal finds a homeowner at risk of foreclosure and offers to assist them by renegotiating their loan terms. The scammer often demands large up-front fees while negotiating unfavorable terms (or not negotiating at all). Most of these homeowners end up losing their homes.

In a Connecticut loan modification scheme, ringleader Aria Maleki, from Santa Ana, California, acted as a representative of a financial institution, cold-calling homeowners who couldn’t keep up with their mortgage payments. He would present extremely favorable terms and have the necessary lender and government mortgage relief program documents to “prove” he was able to modify the homeowners’ loan. In each case, Maleki charged $2,500-$4,300 for the services he provided.

“This defendant presided over a scheme that preyed on struggling homeowners in Connecticut and across the United States, falsely offering mortgage relief in exchange for thousands of dollars that the victims clearly could not afford to spend,” said Deirdre M. Daly, U.S. Attorney for the District of Connecticut. “The investigation revealed that the participants in this scheme specifically targeted homeowners who were behind on their mortgage payments, whose homes were ‘under water,’ or who had recently experienced a financial hardship, such as a lost job.”

In March 2016, Maleki was charged with one count of conspiracy to commit mail and wire fraud, and he was sentenced to 112 months in federal prison with no parole.

Illegal Property Flipping

When a property is purchased but appraised at a value much higher than it’s worth, it’s an illegal property flipping scheme. These properties are quickly sold for profit.

Another form of illegal property flipping includes when a property owner repeatedly borrows money against the same properties. In March 2021, a Georgia man named Christopher Grooms was convicted of wire fraud using this illegal house flipping scheme. Grooms oversaw multiple investment companies that would acquire and resell real estate. He would have one of his companies purchase a property with borrowed funds while creating false documents to show the lien against the property was fulfilled. Grooms would then acquire additional loans against the property with fraudulent paperwork showing that the property was unencumbered by liens.

Grooms was successful in acquiring fraudulent loans at least 24 times for almost $3 million from various financial institutions. He pled guilty, was sentenced to 33 months in federal prison, and is required to repay and forfeit around $4.5 million.

Residential Scams

Equity Skimming

Equity skimming starts with an investor utilizing a straw buyer, or a person who purchases on behalf of another person, to purchase a property. Using a straw buyer is illegal when the transaction involves fraud or purchasing for someone legally unable to do so themselves.

The investor will use a straw buyer, erroneous credit reports, and even false income documents to acquire a loan in the straw buyer’s name. After closing, the straw buyer will sign the property over to the investor in a quitclaim deed, giving all the rights to the property to the investor. Once the investor has the property rights, they won’t make mortgage payments and will rent the property out until foreclosure takes place.

In October 2020, a married couple from South Carolina were found guilty of conspiracy to commit mail fraud and equity skimming. Dana and Michael Roush owned and operated Kingdom Connected Investments, LLC (KCI), an organization that sought out homeowners who owed more than their house was worth or who could not obtain a conventional mortgage. KCI would “buy” the home, propose a rent-to-own model to the new buyers, and promise to make all of the mortgage payments on the property as long as the buyers put in a down payment. KCI said they would take the sellers off of the mortgage.

The Roushes used the rent and down payment money for personal use, working to expand their real estate business. Sellers were misled, thinking they had been taken off the title and note, though that turned out to be false. These sellers started receiving foreclosure notices once KCI quit paying on the mortgage.

The Roushes were sentenced to 17 years in federal prison, and the couple was ordered to pay back more than $2.5 million.

How to Avoid Mortgage Scams

The U.S. has enacted various regulations and legislation to combat mortgage fraud at the local, state, and federal level. 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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