CHICAGO (MarketWatch) — Fraudsters find a way to scam lenders and homeowners out of money no matter how the housing market is faring, but in recent years they’ve shifted their tactics to profit from the market’s downturn.
Today, there’s less identity fraud and misrepresentation of income or employment to obtain a mortgage, mainly because stricter validation criteria when a borrower applies for a loan makes that strategy much less successful, said David Johnson, vice president of fraud and consortium solutions for CoreLogic, a provider of financial, property and consumer information.
But other types of fraud are replacing those scams. Some schemes target distressed homeowners who are looking for a way to save their home from foreclosure. Another tactic: Profiting off of short sales at the expense of the lender.
Foreclosure rescue
Schemes that prey on struggling homeowners heading toward foreclosure are still prevalent, even years into the foreclosure crisis, said Yolanda McGill, senior counsel for the Fair Housing and Fair Lending Project of the Lawyers’ Committee for Civil Rights Under Law.
“It’s a crime of opportunity. A lot of people who are participating in this are probably long-term schemers and this is the cash cow right now,” McGill said. “They’re going to ride the train and milk it for all it’s worth. You have an enormous pool of distressed homeowners.”
Scammers use various pitches. Some say they can prepare your documents for you as you try for a loan modification; others claim to be an attorney or say they are working with an attorney. Often, these offers sound legitimate, echoing some of the same language used by big government programs and lenders to gain a homeowner’s trust.
They offer a service, take the homeowner’s money, then disappear, McGill said.
But the Mortgage Assistance Relief Services Rule, in effect since January, prohibits firms offering mortgage-modification or mortgage-relief assistance to accept up-front fees, McGill said, so homeowners should never pay before services are rendered. There’s an exception for attorneys, causing some scammers to pose as representatives of law offices, she said.
Other fraudsters get homeowners to sign a quit-claim deed, which transfers ownership of the home to
the homeowner a situation where he or she will be able to remain in the house, McGill said. In a newer scam, those who have already lost their homes are being approached to pay money to get the home back, she said.
“The scams are going to morph, but the message really needs to be: Don’t give anyone money to help you with this,” she said. Instead, seek out a U.S. Department of Housing and Urban Development-approved housing counselor and your servicer, she said.
Short-sale fraud
A short sale can be a lifeline for a distressed homeowner heading for foreclosure. That’s because in a short sale the lender accepts a lower mortgage payoff when the homeowner owes more than the home is currently worth.
But fraudsters have found ways to make a profit off these deals. CoreLogic estimates that suspicious short-sale transactions may cost lenders as much as $375 million a year.
One of the most common forms of short-sale fraud happens when a seller or someone representing a seller doesn’t submit the best offer to the lender. A middleman purchases the short-sale property at the lower price, then turns around and resells the property to a legitimate buyer at a higher price — often on the same day, according to a recent Federal Bureau of Investigation report on mortgage fraud.
The middleman pockets the difference, sometimes sharing it with an accomplice.
“It does require a pretty sound knowledge of how a conventional loan is closed and how a short sale is negotiated and approved,” said Robert Hagberg, lead fraud investigator at Freddie Mac. Some fraudsters are real-estate agents marketing themselves as “short-sale specialists.” Title companies and settlement agents may be in on the scam too, he said.
Sometimes fraudsters try to manipulate the price lower by encouraging the owner to make the house look worse than it is, referred to in the industry as “reverse staging.”
That means you “don’t weed the yard, don’t shovel the sidewalks, don’t do any continued maintenance of the property, don’t worry about putting a fresh coat of paint on it, or even keep it neat and clean,” said Becky Walzak, president of Looking Glass Group, which provides consulting services to the financial-services industry. That reduces the value of the property when the appraiser or broker comes to evaluate it.
Often, short-sale fraud and flips are between real-estate agents, Walzak said. But homeowners can get entangled in the mess as well. If you get wind of a fishy scheme — or if an agent offers a way for you to profit from the deal — run the other way, she said.
Other schemes
Another scam is when the title or closing agent doesn’t remit payoffs as he should, Hagberg said. An example: “You refi your mortgage, the refi closes, you go on your way and make payments to the mortgage company, but your title company hasn’t remitted payoffs to the old company.” Fraudsters take funds for their own use, and it can be a month or two before evidence of the scam is found in the public record.
There surely will be more scams emerging as fraudsters find other system weaknesses to exploit. Johnson, of CoreLogic, likens mortgage-fraud schemes to a water balloon.
“You squeeze it in one place, it pops up in another place,” he said.
Amy Hoak is a MarketWatch reporter based in Chicago.
