Common Mortgage Loan Scams
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UPDATED: Jan 3, 2012
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While scams have been around since the birth of currency, they are a tool used to take advantage of vulnerable people or situations. When the economy dips, scammers emerge in order to capitalize on the plight of the less fortunate, or to compensate for money the scammers have lost themselves.
Since the housing market’s collapse, mortgage loan scams have been trampling across the country in an uncontrollable stampede. From misrepresentations to blatant contractual omissions, mortgage loan fraud preys upon the unsuspecting in an attempt to cheat private sellers or banks out of expensive property.
According to the FBI, the misrepresentations and omissions used in fraudulent activity include:
- Inflated appraisals
- Fake identities
- Straw buyers
- False mortgage loan applications
- Fraudulent loan documentation
In a 2009 Financial Crimes Report, the FBI claims mortgage fraud is committed for one of two reasons: profit or housing. Those seeking to commit mortgage loan fraud for profit are usually industry insiders who use their knowledge to pull a veil over the eyes of the less informed. Those who try commit fraud for the reason of housing do so in order to obtain the most amount of primary residence for the least amount of money.
The types of mortgage fraud that occur include the following:
- Illegal property flipping
- Foreclosure rescue and refinance schemes
- Straw buyers and equity skimming
- Neighborhood Stabilization Program (NSP) scams
- First-time homebuyer rebates
- Nigerian scams
Illegal Property Flipping
Property flipping is a practice performed by property investors who buy property at a low price then resell it, or flip it, for a higher price. Often times the flipper restores a rundown property in order to make it more appealing a valuable. But illegal property flipping is when an investor buys low, then has the property falsely appraised at a higher value. That false appraisal leads buyers to believe the property is worth more than it really is, and they give the investor more money than they otherwise would have.
Foreclosure Rescue and Refinance Schemes
Since so many are plagued by underwater properties, foreclosure rescue and mortgage loan refinance scammers have come out of the woodworks to prey on distressed homeowners.
These scammers promise homeowners that they can save the homeowner’s property through their secret foreclosure rescue methods and guaranteed refinance techniques. Their services always come with some sort of pre-payment method though, and that pre-payment usually consist of a hefty upfront fee. Then once the scammer has the downpayment, a homeowner usually loses contact with the scammer as their phone calls are routed to voicemail boxes or notifications that the phone number has been disconnected.
In the worst cases, the scammers promise to pay the property off if the homeowner transfers title to a third-party investor, then make the homeowners buy back the property at an inflated price reached by a fake appraisal.
Straw Buyers and Equity Skimming
When an investor promises a buyer a kickback in return for purchasing a property, he may be trying to find a straw buyer. Straw buyers are those who make a purchase on behalf of another, and are often used by unscrupulous investors trying to conceal their identity so they can partake in fraudulent activity.
Straw buyers are a necessity when it comes to equity skimming scams. Equity skimming consists of an investor having a straw buyer purchase property and transferring title to the investor through use of a quit-claim deed. The investor then refuses to make any payments on the home loan, but instead rents the property out and collects a monthly check up until the property is foreclosed upon. The investor’s identity is usually kept concealed, while the straw buyer’s credit is destroyed.
The Neighborhood Stabilization Program (NSP) is a program offered by HUD which awards state or city backed grants used to restore or redevelop rundown neighborhoods. Scammers have been cited establishing fake non-profit organizations promising to provide a service for an NSP neighborhood, but then take the grant money and run.
First-Time Homebuyer Rebates
The Stimulus Plan of 2009 awards first-time homebuyers with a tax credit of up to $8,000. Mortgage loan scammers use this to their advantage by creating a fake identity and submitting a fake credit claim in order to receive the $8,000 check.
In a similar act, scammers may pose as buyers and take a property into escrow in order to receive certain government-sponsored rebates. Then once they acquire the rebates, they allow the property to fall out of escrow and they disappear with the government’s money.
While it may sound like the oldest trick in the book, many people continue to fall for Nigerian email scams. Nigerian scammers are beginning to shy away from posing as multi-million dollar princes and princesses looking for a lucky American to transfer their wealth to, and instead are venturing into the world of home loans.
Nigerian scams are also not exclusive to Nigerian operators. Rather, this sort of fraudulent activity is best associated with Nigerians, hence the name, but can be performed by anybody from any country with access to the internet.
These scams begin with an unsolicited email or an advertisement of a third-party website promising to lend money at a very cheap rate with a small downpayment. The downpayment usually consists of a few hundred dollars, but is required before any money will be wired to the borrower. Once the downpayment is made, the scammer disappears, and the borrower is left without a home loan and with a bank account several hundred dollars lighter.