There's a daisy chain of people and firms involved in any real estate deal -- and each link provides an opportunity for someone to lie for profit. It's called mortgage fraud, and while you might be inclined to pin Big Blame on Big Banks, plenty of individuals are scamming the system, too.
Ed Gerding, Senior Fraud & Risk Consultant for CoreLogic in Irvine, knows a fair bit about it. He hosts a monthly mortgage fraud roundtable via telephone for everyone from loan officers to law enforcement professionals about what scams are hot and where. I talked to him recently for The California Report.
You don't have all day or I'd provide a comprehensive report. Here are some fascinating highlights instead:
Origination Fraud: One of the most common scams. The would-be borrower lies on the loan application – or the broker does it for her. It could be a lie of commission or omission about your income, assets and liabilities. A popular variation focuses on employment: whether you’re employed, who your employer is, and how much money you make. Or you could lie about all of those things. You’d think confirming such basic details would be easy enough for banks to catch, but CoreLogic estimates this kind of scam skims about $13 billion dollars from banks a year nationwide.
When you think about it, the primary incentive to overstate one’s assets and income when purchasing a home would be to buy more house than one can truly afford. That takes a little bit of moxie, but you don't have to do the legwork if you get in on a conspiracy operated by a mortgage industry professional.
“It may often involve multiple loans and elaborate schemes by a group of people who play multiple roles in the transactions,” Gerding says. If someone else has already set up a conspiracy, all you have to do is join in to get your cut. It's true that sometimes an alert bank employee catches the same names popping up on "funny" loan applications, but he'd have to have a strong intuition to go beyond a perfunctory inquiry.
For example, let's imagine that you and your real estate broker are in cahoots. Your loan application might feature an “employer” phone number that leads back to somebody on the broker’s take. “Rachael? Oh yes, she’s been here X years, making Y salary. Lovely gal. So reliable.”
Identity fraud: This is really an umbrella term that can apply to any situation where somebody else pretends to be you. Perhaps a con artist with a prior felony gives your social security number to a prospective employer, for instance. In the real estate world, the con artist might apply for a home with your name and financial particulars. Who knows? Right now, I may be the owner of a home in Miami I have no idea about… (This is yet another reason why it's important to check your credit reports on an annual basis.)
Suspicious Short Sales: Gerding says these scams are particularly hot right now. In a short sale, a bank agrees to sell a house for less than the paper value of the mortgage. It's a boon to a hard up homeowner - or someone pretending to be hard up who wants to stop paying for a house he's underwater on.
Flopping: In one widely publicized case, a homeowner spread possum urine around the house, turned up the heat and closed all the windows for a few days. Why? The seller wanted to convince a bank’s appraiser the house wasn’t worth as much as it actually was ahead of a short sale. The bank is already accepting a write-down of the property's value, but the fake evidence drops the price tag even lower.
The impression of reduced value can be gained with less aromatic strategies than urine, like ripping out ceiling fans or air conditioning. Think of it as “reverse staging.” The seller unloads the home for the discounted price to an accomplice, who can then clean it up and flip it for a quick gain. The real estate agent is typically in on this conspiracy, too. Average take: $55,000.
You may notice that this list highlights scams that victimize banks. That isn’t to say there aren’t frauds that victimize buyers -- or distressed homeowners. The most common scam involves fooling people into purchasing fake refinance relief, and you do see a fair number of legal cases brought against this type of operator. Still, at $1,500 or $2,500 a pop, the aggregate value of the fraud isn’t going to be that big.
Given that law enforcement resources are finite, Gerding explains the FBI and the IRS are likely to focus on fraud that clocks in above $1 million. Those tend to target banks.
U.S. attorney's offices throughout the country run mortgage fraud task forces, and California is no exception. The Eastern District, which covers a huge swath of territory including Sacramento, boasted on one recent press release: “Last year we indicted more mortgage fraud defendants than any other U.S. Attorney’s Office in the country, and we are not done yet.”
Some say mortgage fraud really peaked in 2011, and the cases we’re seeing in the courts now provide a rear view look at the worst.
Gerding doesn’t see it that way. Fraud “peaks and then it troughs,” he says. Mortgage fraud may have dropped some compared to 2005-2008, but did we mention origination fraud alone is estimated to cost banks about $13 billion annually? What changes over the years is the form of fraud that's used the most, and Gerding says it follows the path of least resistance.
Whereas origination frauds have been popular, scam artists are now breeding amidst the flurry of foreclosure activity.
The volume of foreclosures is not expected to last forever, but you can imagine that after that dust clears, there will be new ways found to skim a few grand off the top -- or bottom -- of a real estate deal.