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Be aware of the risk of Mortgage Fraud

There are 2 type of mortgage fraud.

The first is were someone lies about facts to get a loan to buy a property.

The second is where someone lies about facts to make a profit.

Fraud is committed by falsifications in the following ways:

1. Loan application fraud. Where an applicant lies about their income or their job. Perhaps the down payment they are making was given to them by the person selling them the home and the value of the home inflated to cover it.
2. Exaggerated appraisals. Appraisal is an art, not a science. Who can really be sure just how much a better view, or a swimming pool (for example) adds to the value of the property? The buyer wants the house, the seller wants to sell the house, the real estate broker wants to make the commission, the mortgage broker wants to make a commission.  There is a lot of pressure on that appraiser to massage the figures a little to create a value that makes all these people happy. We estimate that some 75% of appraisals are too high by at least a little.
   Not to mention the possibility that a crooked appraiser could be in league with a crooked seller, mortgage broker or borrower to give appraisals that are grossly exaggerated.
3. Falsified or fake credit reports. It's really not that hard to use modern technology to "clean up" a credit report by copying it and "losing" some bad stuff.
4. False income. Applications can give the phone number, not of the company where the person supposedly works, but of a friend. The answer, look up the phone number of the employer in the white pages. Listen out for tell tale sounds, like children in the background in a supposed office setting.
5. Forged tax returns. Easy enough to fake using products like TurboTax ® etc. The answer, ask the borrower to sign Form 4506 and get a copy direct from the IRS. Click here for a copy for form 4506.
6. Fake title insurance.

The flipper fraud.

This occurs when someone buys a property in bad shape for a cheap price. Say $50,000. They make some cosmetic repairs spending say $1,000 and then sell it at an inflated price say $80,000 to a buyer who puts little or no money down.

The seller takes a mortgage back for a large amount, say $78,000, and gets a phony appraisal based on the inflated sales price.

You are then offered the mortgage at a discount at what looks like an attractive yield.

Soon afterwards the buyer stops making payments and moves out. Leaving you with a trashed house.

The key to this fraud is the inflated appraisal. Remember that appraising is an art not an exact science. Nonetheless an appraisal should be within 10% of the true value of the property.

This fraud can be hard to spot. Many legitimate investors DO buy properties for much less than their true value and are able to genuinely sell them for a higher price. 

Equity skim fraud

The real estate investor gets a high loan to value loan then doesn't make any payments on the house while renting it out and keeping the money, of course, during the collection and foreclosure action.

Pretend Homeowner loan fraud

The borrower is really a real estate investor who intends to rent out the property, but they pretend they are going to live in it to get the lower interest rate and higher loan to value. This might not concern you as long as the payments are being made. But remember that interest rates to home owners are lower than interest rates to investors for a reason; lower risk.

The are some special mortgage clauses we recommend you consider in your seller financed mortgage.

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