FBI Identifies Newly Emerging Mortgage Frauds

Mortgage fraud is rising along with the slumping economy and real estate market. And the scam artists are coming up with new schemes to con homeowners, borrowers and lenders out of their money and property.

Cases of potential mortgage fraud referred to law enforcement by financial institutions increased by more than one-third last year, according the FBI's 2008 Mortgage Fraud Report, released this week. While it's not clear how much mortgage fraud cost consumers last year, banks and other financial institutions reported losses due to mortgage fraud of at least $1.4 billion, an increase of nearly 85 percent from 2007.

New mortgage frauds emerging

Along with traditional mortgage frauds such as foreclosure rescues, property flipping and bogus short-sales, the FBI reports that investigators are seeing a variety of new schemes out there, along with new twists on the old ones. Among these are loan modification scams, credit enhancements, condo conversions and bankruptcy schemes.

The top ten states for mortgage fraud in 2008 were California, Illinois, Texas, Georgia, Ohio, Colorado, Maryland, Florida, Missouri, and New York. In addition, Rhode Island, Massachusetts, Pennsylvania, and the District of Columbia were identified as having newly emerging mortgage fraud problems.

No data was available for the first months of 2009, but given the worsening economic and housing market conditions, it is expected that mortgage fraud continues to be a worsening problem. For consumers, it pays to be aware of some of these newly emerging frauds and new twists on old scams. Among them are:

Reverse Mortgage Fraud

Reverse mortgages, which provide a way for senior citizens to draw upon the equity built up in their home, can be a useful source of income, but scammers are finding ways to manipulate the process. They approach cash-strapped seniors to arrange a reverse mortgage, sometimes inflating the value of the home through bogus improvements, then arrange for fake loans and liens that enable them to siphon off some or all of the money at closing.

Builder bailout - condominium conversion

This is a fraud that targets investors, often senior citizens. Many apartment buildings that were converted to condominiums during the housing boom are now hurting for owner-occupants. Developers offer incentives to investors to buy the properties, which they developers offer to manage and collect rents. However, the property values are inflated to cover the cost of the incentives and possibly more.

Builder bailout - pump and pay

Builders conspire with appraisers and other accomplices to inflate the value of a property, then arrange to channel the extra value back to themselves through escrows for maintenance, insurance, taxes and other ongoing property expenses. This has particularly been a problem in Florida, North Carolina, California and Texas.

Modified Short Sale Scheme

The perpetrators identify homeowners facing foreclosure and offer to assist them in arranging a short sale of the property, i.e., selling it for less than the balance owed on the mortgage, to protect their credit.

The homeowner deeds the property to the perpetrator in a land trust, with the homeowner listed as the beneficiary and the perpetrator as trustee. The perpetrator negotiates a short sale with the lender, but then immediately re-sells the property at a higher price to an previously identified buyer without the knowledge of the former owner or lender, and pockets the difference.

Bankruptcy scheme

In this fraud, the schemers offer to help a homeowner avoid losing his or her home to foreclosure through bankruptcy. The homeowners are directed to cease communication with their lender and send their monthly payments to the schemers instead. The schemers arrange for a bankruptcy petition to be filed, often without the homeowner's knowledge, which halts the foreclosure process and the homeowner ceases to receive foreclosure notices for a time.

At this point, the homeowner may believe the perpetrators have delivered on their promise to avert the foreclosure. However, the schemers do not follow up on the bankruptcy filing and the foreclosure process eventually starts up again, and the perpetrators pocket the monthly mortgage payments they received.

Foreclosure rescue - loan modification

This is a fraud that has been a particular problem with the growing housing crisis. Perpetrators use various forms of advertisements and direct contacts to approach homeowners at risk of foreclosure and offer to help them renegotiate their mortgage for a fee. This typically requires an up-front payment of $1,500-$5,000. Unfortunately, the homeowner receives nothing for their money.

The U.S. Department of Housing and Urban Development (HUD) urges that homeowners do not pay anyone in advance for loan modification services, as that service is ably provided by numerous HUD-certified credit counseling agencies in each state for little or no fee.

For the full 2008 Mortgage Fraud Report, visit the FBI web site.