Lender Mortgage Frauds: Flipping, Skimming, Straw Buyers and More
Mortgage frauds generally fall into two broad categories - lender frauds and consumer frauds. Lender frauds seek to take advantage of the bank, credit union, mortgage company or other lender that provides the mortgage. This is commonly done by misrepresenting one's eligibility for a mortgage or attempting to illegally extract money from the mortgage/real estate transaction process.
Consumer frauds seek to take advantage of borrowers, often by targeting homeowners facing bankruptcy or otherwise in need of financial help. Foreclosure prevention or loan modifications are examples of these. Other scams may target real estate investors or simply seek to skim money out of seemingly normal mortgage transactions.
Lender frauds are more likely to occur in an active housing market, when rising prices make it easier to disguise a property's true value and may lead to reduced scrutiny of mortgage applications. Consumer frauds become more common in an economic downturn, as more people are faced with foreclosure and desperately look for ways to save their homes.
However, any type of fraud can occur at any time. Some frauds may also be combinations of several different schemes.
This chapter addresses lender frauds. Consumer frauds will be covered in the next chapter of this guide.
Fraud for profit vs. fraud for property
There are two main types of lender frauds. The first, commonly called "fraud for profit," aims to skim money off of the mortgage process itself, often through the use of inflated appraisals and bogus sales. The second, "fraud for property," involves deceptive practices by the borrower to either obtain a mortgage in the first place or obtain a mortgage they would not normally qualify for. Some consumers may regard the latter as minor "fudging," "stretching the truth" or "being creative" with their mortgage application, but in reality, it is still fraud and is still a felony under U.S. federal law.
Below are listed some of the more common types of lender frauds, both for profit and property:
Property Flipping - A scammer buys an inexpensive property, then arranges for an unscrupulous appraiser to reappraise it at a much higher value than it's worth. The scammer then resells the property, often to an associate recruited for the purpose. The associate, termed a "straw buyer," qualifies for a mortgage at the inflated appraised value, but has no intention of making the payments. The scammers then pocket the difference between the inflated mortgage value and what they originally paid for the property.
In another variation, the property is sold to an unwary investor, often with the expectation that the scammer runs a legitimate real estate investment and management service. For a more complete description, see "chunking" in the following chapter on consumer mortgage frauds.
Silent Second -This refers to schemes where the buyer and seller collaborate to arrange for a second mortgage as part of the transaction without the knowledge of the primary mortgage lender. In its most common variation, the seller lends the buyer the money for the down payment, in return for the two of them agreeing to an inflated sale price. The seller is then repaid at the time of sale in the form of the inflated price. The primary lender has therefore issued a mortgage for more than the property is worth.
Another variation is when the seller simply lends the buyer part or all of the money needed for the down payment, with the expectation it will be repaid over time. This is a risky proposition for the seller, since the second mortgage is unsecured, and may occur in transactions between family members. It is still illegal and considered fraud, however, because the primary lender is unaware of the fact that the purchaser is putting up little or no actual money of their own.
Nominee Loans/Straw Buyers -These are a common element in many types of mortgage fraud. The straw buyer is a person who applies for a mortgage and makes a home purchase on behalf of another. The actual buyer may be someone with bad credit who is unable to qualify for a mortgage themselves, or a scam artist looking to profit by manipulating the mortgage and real estate transaction process.
In the former case, the property is transferred to the actual buyer through a quitclaim deed; the actual buyer must then keep up on the mortgage payments to avoid foreclosure. It's considered fraudulent because the lender is not aware that the actual buyer is a dubious credit risk.
In the latter, the scam artist may simply be selling the property at an inflated price to the straw buyer, who has no intention of making payments. (see property flipping, above.)
Straw buyers are frequently people with clean credit but little money of their own. They are often willing to be paid to accept the risk that the actual buyer will default and ruin their credit, or are desperate for money and willing to ruin their credit in return for an immediate payoff.
Fictitious/Stolen Identity - Sometimes, a scammer may use false identity documents and credit information when applying for a mortgage. This may involve using someone's personal information without their knowledge or generating a new, fictitious identify using forged documents.
Inflated Appraisals -This is another common element in many mortgage frauds. An unscrupulous appraiser agrees to provide an inflated estimate of a property's value in order to qualify it for a bigger mortgage. This is a key feature of property flipping, silent second and chunking scams.
Equity Skimming- This term is used to refer to a variety of different scams, some of them quite different. In one, a scammer uses a straw buyer to purchase a property, then rents it out to an unsuspecting person. The scammer then collects rents for several months or even a year until the foreclosure process runs its course and the renter is evicted.
In another, the scammer pretends to act as a "white knight" to assist someone who has equity in their home, but faces foreclosure. The scammer arranges what is purported to be a new mortgage or rent-to-own agreement, but which actually ends up deeding the property to the scammer.(See Consumer Mortgage Frauds, next chapter).