Protecting Yourself from Federal Mortgage Fraud

Exploring the real estate market? Looking to safeguard yourself from unfair deals and fraudulent loans?

If so, this article’s for you.

You see, the real estate market is a prime spot for rip-offs.

And it all comes down to inexperience. Because if you think about it, people don’t purchase property that often in their lifetimes.

It’s something that’s done once every decade or two. So inexperience is understandable, and this is what this guide’s for.

We’ll explain the different types of mortgage fraud. Explore them closely, protect yourself, and always have a lawyer to back you up!

What Counts as Mortgage Fraud?

On a federal level, mortgage fraud doesn’t have its own statues. Regardless, it’s still a serious federal crime.

There have been cases where the US government prosecuted individuals under the guise of mortgage fraud (such as Pasquantino v. United States).

In fact, mortgage fraud can lead to prison sentences of up to 30 years, and fines of up to $1 million.

Who are the Victims of Mortgage Fraud?

Mortgage fraud can be done against both institutions and individuals.

Thus, all buyer intentions apply to mortgage fraud. As a business, investor, or residential buyer, you can sue another party for fraudulent practices.

As a rule, mortgage fraud crimes involve someone receiving a loan they shouldn’t qualify for. They also include false promises of loans that are never fulfilled.

We’ll detail some common schemes below – and how you can safeguard yourself against each one!

Mortgage Fraud: With Buyers as Perpetrators

Fraudulent buyers are known for the following tactics:

Straw Purchases: Here, defrauders get mortgages without disclosing their true identities.

Straw buyers may do so by asking trusted ones to buy a loan on their behalf.

Alternatively, they may do so while hiding their loans behind a fictitious identity. That’ll mostly be a non-existent business, or at least a legal entity that’s hard to track.

As a rule, straw buying loans is illegal. We highly recommend distancing yourself from anyone that wants a loan using your name.

If you’re a business, don’t issue loans to people or institutions whose activities are hard to track.

Occupancy Fraud: Here, buyers purchase a home for the sake of investment (at first glance).

To qualify for the loan (or better interest rates), the buyer will list their rental proceeds in the loan application – thus misrepresenting their true income.

But that’s not all. Occupancy frauds are mainly done by home buyers wanting a residence. So they’re not actually renting out the location.

This type of fraud only happens when loaners offer reduced interest rates for owner-occupied homes.

If that’s not something you offer, then there’s nothing to worry about.

Commercial Real Estate Frauds: Done by failing real estate businesses.

Here, the buying business falsifies lease agreements to get the loans required – under the guise of renovations for their properties.

Obviously, the loans are never returned, and so the collateral (being property) is taken by the lending institutions.

The property left behind by commercial fraud is always in horrible shape – never justifying the loan value.

Plus, the renovations to restore such property are costly, possibly costing more than the loan given out.

Double Sales: Here, a buyer tries to get two mortgages for one property – while making it seem like the property only has a single mortgage.

This must involve straw buyers, where two people buy a loan for the same premises (obviously with falsified documents).

The result is, a lender ends up lending the property value twice (or more if perpetrators can get away with it).

Buy-and Bail: This is more of a jump-ship tactic followed by fraudulent buyers. Its goal is to avoid losses on property value.

What’ll happen is, if a buyer’s home value goes below their mortgage value, they’ll sign up for a mortgage to get another home.

Most institutions will avoid lending money to such individuals. However, buy-and-bail frauds often go for purchase-money mortgages to avoid the hassle.

After they secure the loan and property, they’ll allow the old property go into foreclosure – putting the first lender at a loss.

Mortgage Fraud: With Sellers as Perpetrators

Fraudulent sellers are much more prevalent than buyers. There’s only so much a buyer can do to rip-off a lender.

Sellers are in the opposite situation. Their targets are often victims inexperienced with the mortgage market.

That is, they prey on desperate homeowners and impressionable home buyers.

Fraudulent sellers are known for the following tactics:

Property Flipping: Both buyers and sellers can perpetuate this, but it is more common with sellers.

Often, a property owner will try to sell a home at an overly inflated price. They’ll acquire an appraisal to back them up (which is often inaccurate).

Being a property flipping scheme, you’ll find those sellers as recent owners of the property (possibly less than a year).

Build Bailouts. This scheme targets buyers looking for new property, like fresh construction or new condos.

Sellers will inflate the loan amount, under the guise that the sales price of the property is high. They’ll sometimes justify it as necessary.

That sales price obviously comes with a fraudulent appraisal.

Ponzi Investments: Probably the most popular of schemes. Ponzi schemes operate on a membership basis.

They promise members a chance at “catch investments” that are actually inflated in price.

This scheme often targets naïve investors, or first time landlords who do not understand how to research real estate prices.

Ponzi investment clubs try to hide as much critical info from buyers as they can get away with.

They’ll also act as stringent middlemen with regards to mortgages and the paperwork necessary.

It Doesn’t End There

Consider the previous schemes as the most common in the mortgage fraud world.

Fraudsters are crafty. And while the necessary precautions can drive them away, we always recommend knowing your rights.

That is, know what you’re responsible for financially, what other parties are obliged to inform you about, etc.

For the legal federal mortgage advice you need, you can always contact us!

Esfandi Law Group

Posted on May 15, 2021 in Federal Fraud

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