Heads up for you For Sale By Owners out there! It seems like every day we read bad news in some form or another about the Real Estate industry. House prices affordability, slow markets, mortgage changes and the list goes on… Well, here’s another one: Mortgage Fraud.
The amount of mortgage fraud that goes on in Canada is staggering, and the nature of the crime is always evolving. The current real estate market is a different animal since April 2014, when stricter mortgage regulations were invoked by the CMHC. Tighter high-ratio mortgage credit regulations, officially introduced in July 2014, have further softened consumer demand.
The key change was the reduction of the maximum amortization period for government-backed mortgage insurance. These changes involved a shortening of the amortization period for a mortgage from 30 years down to 25. This not only affects home buyers, it also affects the many mortgage companies and brokers that made their yearly income by helping those buyers who were turned down by traditional banks for mortgages. To clarify, brokers help hunt out long-term mortgages to satisfy the particular financial needs of clients.
Now, smaller mortgage companies and brokers can only sell the same products that the larger financial institutions are offering. This means that in some cases, there may be little to no financial advantage to using a broker than there would be if you used your regular bank. This portion of the mortgage market that has been eliminated amounts to a huge loss for the smaller mortgage companies.
The circumstances surrounding the economic changes in the housing industry have unfortunately opened the door for abusive people and scammers to exploit homeowners and buyers. Mortgage fraud has become more rampant and innovative these days. This problem has been abided by some mortgage industry insiders, home buyers and sellers themselves. Today, there are a wide variety of inventive concepts involving mortgage fraud.
Each mortgage scam contains some type of misleading statement, misrepresentation, or omission which is relied upon as truth by an underwriter, lender, or insurer of the loan. Mortgage scams are an easy undertaking, especially in cases where the mortgage industry professionals themselves are involved in the process. It is virtually unknown how large of an issue mortgage fraud is because a large portion of the mortgage industry is void of any mandatory fraud reporting. However, based on various industry reports and analysis, mortgage fraud is present and growing. Please keep in mind that we are talking about the worst of the worst here- not all lenders are involved in this type of dishonorable practice.
Two Divisions of Mortgage Fraud
1. Fraud for Profit Purposes
Otherwise referred to as “Industry Insider Fraud”, this type of fraud is devised to falsely inflate the value of a property. The strategy used is to create fictitious paperwork to present the property with a much higher value than it actually is worth. The same procedure is repeated to ‘create’ equity where there isn’t any, in truth.
Based on existing reports, approximately 80% of all reported mortgage scams have involved some form of collaboration or collusion of industry insiders. What’s the point of doing this? These people conspire to get mortgages at rates more than the actual value of the property in order to skim off the excess funds. This “fraud for profit” is targeted to deceive either the prospective buyer or mortgage lender. In some cases, a broker, loan processor, appraiser and seller may forge an alliance to file a false credit profile and make up ways to inflate the property value. Thus, the mortgage loan would come out higher than the amount originally indented. The excess would then be split among the involved parties. In other cases, the buyer or seller may be involved as a co-conspirator, joining in the overall profit gain.
2. Fraud for Housing Purposes
This type describes an illegal action perpetrated solely by the borrower. The borrower makes misrepresentations regarding his income, employment history or assets in order to qualify for a larger loan than his income would normally allow. The motive behind this scam is to acquire and maintain ownership of a house.
Fraud for housing purposes cannot be compared to the fraudulent acts done by mortgage professionals; however, both are illegal. The buyer may be desperate to buy a home and so stretched the truth to some degree; this is a concept which many homeownership hopefuls can understand. But the mortgage professional is expected to conduct business in an honorable and respectful manner. Given that he or she is the expert in the field of finance, their actions affect not only the borrowers, but other upstanding citizens in the mortgage industry as well.
Predatory lending is also a major concern. It is usually targeted towards senior citizens, lower-income families and challenged credit borrowers. In this case, mortgage representatives force borrowers (who are already under duress) to pay outrageous loan settlement fees, higher interest rates, and unreasonable service fees. This type of financial crisis usually results in the borrower defaulting on his mortgage payments and undergoing foreclosure or inevitably being forced to refinance.
How To Protect Yourself
In order to protect yourself against fraud, whether as buyer or seller, you must be able to recognize it. As a seller, ensure your lender is validated prior to signing or offering any personal information. Choosing a mortgage professional with a longstanding reputation in excellence is highly recommended. The internet is full of web sites designed to lure in borrowers looking to acquire home equity loans for renovations and upgrades. If a lender is not known to you, take the time to do some research on the company and its representatives.
If you are selling your home privately or using a For Sale By Owner [FSBO] program, carefully evaluate buyer offers and seek legal counsel, especially for those offers that are way above your asking price or have questionable financing clauses. There have been cases where the mortgage fraud is actually written into the contract under terms, stating that the offer has conditional terms. For example, the buyer’s offer could be written for a higher amount than the asking price, the term reads, and the seller is expected to refund the difference after closing!
As a buyer, your primary task is to ensure you have hired reputable people to assist you in the closing of the sale. Your lawyer can help protect you from unforeseen scams such as ensuring the seller you are dealing with is actually the registered owner of the home. Scammers sometimes impersonate sellers to collect cash deposits, as well as sell a house to more than one person. Fraud comes in many packages and the real estate industry is a great venue for all kinds of inventive scams. Buyers, be sure to use your own, hand-picked professionals; be leery of sellers who try to persuade you to use their mortgage provider in the sale of the property. This third-party lender may not have your best interests at heart… Ultimately, the most vital thing you need to do is to always be thorough. Make sure that you read and understand all the terms and conditions of any contract before you sign it. Never sign documents that contain inaccurate information or lack pertinent details; blank spaces are also an open invitation for fraud. You do have the right to seek legal counsel prior to signing any document, regardless of whether it’s an offer to purchase, listing to sell, or mortgage documents.
Common Scams & How To Identify Them
The availability of personal information on the web has really become a “scammer’s dream”. Facebook alone gives identity thieves most, if not all, the information needed to obtain a credit card in your name without your knowledge or consent. False or Stolen Identity is probably the number one scam out there today. With your identity, scammers can obtain credit, take a trip, go on a shopping spree, and even buy a house or obtain a loan for a new car. The stolen identity may be used on a loan application or sold to someone else. The resulting damage can be devastating to someone’s credit, and in most cases, you never find out until it’s too late. The debt can take years to get cleaned up, and the scammer is likely long gone… most are never caught. Below is a list of other inventive ways that scams are being conducted today:
1. Email Scams
Email scams are everywhere. Everyday people receive emails which imply that the recipient has already been approved for a loan or credit card by making a vague statement such as “you have been pre-approved “. Recipients may believe that they are actually being offered a loan or additional credit. These emails are poorly implemented tricks to get recipients to click on the link provided and fill out a form which, in turn, will defraud you in one way or another. If you provide enough information, the scammer may try to steal your identity. Most of these websites will last only a few days before they are taken down. But that’s more than enough time for hundreds of misguided, desperate people to sign in and disclose all the credit information needed to wipe out their bank accounts. Often, such websites consist of just one page containing a form. This is just one of hundreds of email scams that are out there.
2. Inflated Appraisals
With today’s rising house prices, appraisal scams are popping up fast. In this situation, an appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. This report inaccurately states an inflated property value. This is still a form of mortgage fraud.
3. Vendor Take-Back Mortgages
Some buyers may be desperate to get into a new house. The new lending rules have made it harder for buyers to qualify. If a buyer is short of qualifying for the full amount of the property, he or she may ‘borrow’ the down payment from the seller. This loan could turn out to be a non-disclosed second mortgage. In this case, the primary lender has issued the loan under the impression that the borrower has invested his own money as the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender. Once again, this constitutes mortgage fraud.
4. Inflated Property Flipping
What makes this action illegal is that the appraisal information provided for the ‘flipped property’ is fraudulent. Schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, and inflated buyer’s income. Kickbacks to buyers, investors, property and loan brokers, appraisers, and title company employees are common in this scheme. For example, a home may be appraised for $100,000 but is actually worth $30,000. That leaves a profit of $70,000 dollars up for division between all those involved.
Needless to say, this article has covered only the tip of the iceberg. Scams are everywhere and people are constantly working on new ways to put fraud into action. The web makes it easy to contact viable candidates, and misguided professionals are there to help along the way. Money, and how to obtain it, is the primary goal of each and every scam.
Protecting your identity and investments has become a major challenge. But there are things you can do to help prevent fraud from happening to you personally. Start with your credit report- ensure any activity recorded is your own doing and report any discrepancies. Or, put your name on ‘credit alert’; that way, creditors will contact you prior to opening new accounts or making large purchases. Finally, limit the amount of information you put on public sites like Facebook, social media and family tree/heritage sites. Be cautious with who you supply your personal information, whether in person or online. Protect your pin numbers and passwords at all times. And remember, just because you read it on the web… doesn’t mean it’s true!