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Mortgage fraud cases

It was 30 years ago and I was a rookie investigator with the Mississippi Real Estate Commission when I received a call from a federal law enforcement officer who wanted to remain nameless and who wanted to talk about his real estate transaction. He wondered about the method his accountant had used in preparing his income tax return.

It seems that the agent — I won’t name the agency — had sold his residence in Mississippi after having been transferred to another state. He had given his paperwork to the accountant to prepare his income tax return, and the accountant had listed the sales price on the real estate contract and the closing documents as the amount that the seller received.

“But that’s not what I received,” he said. “I’ll have to pay more taxes.” He explained that the buyer had wanted to borrow more money, so a second contract was prepared for the mortgage company.

“You mean you represented to the mortgage company that you had received more for your property than was stated in the contract?” I asked.

“Oh no, of course not. That would be illegal. The mortgage company advised us to do it that way.”

Where’s the problem?

Our conversation continued until it became obvious to him that his problem was not with his accountant, but was with the parties involved in the real estate transaction. He decided that he did not want to name the mortgage company, the real estate agents, the appraiser or anybody involved with the transaction. He even decided that he should remain anonymous.

What he could not seem to understand was why this was so illegal if nobody had been harmed. If what he had done was a crime, then surely it was a victimless crime, he reasoned.

From his perspective, maybe that is a logical conclusion, but there are victims in these type cases and there are crimes committed.

One crime is misrepresentation. For the real estate agent(s) involved, it is considered “substantial misrepresentation,” and can result in loss of license. But wait, you ask, how can there be misrepresentation if everybody knew about it even though the paperwork stated otherwise? Who is the victim?

One victim is the buyer of the mortgage. The mortgage company in this case is really a mortgage broker. It is a business entity that processes mortgages and then sells those mortgages to someone else, usually as a package of mortgages, in what is known as the secondary market.

The problem is that these secondary buyers are relying on the documents submitted by the mortgage company. The originating mortgage company does not say to that buyer in the secondary market, “Oh, by the way, forget the paperwork, there was really a lower sales price.” So, the buyer in the secondary market is the first victim. He has been lied to.

Perhaps that is not a problem if the buyer makes those payments and the secondary buyer does not lose any money.

After all, who knows how many buyers are making payments right now on such mortgages? The big problem occurs when those buyers default and that secondary buyer no longer receives payments.

Another victim is the insurance company or guarantor of the mortgage. If the homeowner defaults, then the owner of the mortgage will file a claim with the insurance company, which may very well be a quasi-government agency, a private company or the government itself. Again, the insurance contract was based on the sales price as shown in the mortgage documents.

So who benefited from such a series of misrepresentations? Obviously, the buyer is first on the list because he or she has a new house. The seller benefits because the house was sold. The mortgage company and the real estate agents benefit because they received commissions.

Oops! Timeout! If the real estate agents and the mortgage company received commissions based on the contract price instead of the true and actual sales price, then the water suddenly gets awfully hotter.

Then there are other parties who provide ancillary services in real estate transaction, such as appraisers, home inspectors, closing attorneys, title companies, termite inspectors and more. A lot of folks have a stake in a real estate transaction taking place.

Back again

It is now 30 years later. Hopefully, those buyers paid off their loans and lived happily ever after. Unfortunately, mortgage fraud scams are proliferating again. According to a report issued by the Financial Crimes Enforcement Network (FinCEN), suspected mortgage loan fraud in the United States continues to rise, and has risen 35% in the past year.

For more information, I encourage you to check out an FBI press release entitled “THE RISE OF MORTGAGE FRAUD — And How It Impacts You.” It is on the Internet at www.fbi.gov/page2/dec05/mortgagefraud121405.htm.


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About Phil Hardwick

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