UPDATE: FBI in Town Investigating Mortgage Fraud

by Alex Stenback on November 22, 2005

FbiSources privy to franchiser/owners meetings at ReMax real estate report that the FBI is in town investigating mortgage and/or real estate fraud in the Twin Cities.

Though we’ve yet to corroborate these reports, and no specific companies were named, we thought we’d throw this out here (we check our facts in real-time here in blogland) Anyone heard anything? DeRusha, or anyone else with media credentials, you listening?

*Update: Commenter Duane has provided us a copy of the letter from the board of realtors which makes mention of a joint investigation involving the MN commerce dept and the FBI.  Details, excerpts, and the rest of the letter on the other side of the link below.

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*Click on graphic for larger Image

That’s, obviously, the letter’s opener, what follows are a few paragraphs of the particular types of transactions they are looking at, and how they decided to look into this in our market:

Fbi_letter_2_1
*Click graphic for larger image

They are looking at non-disclosed kickbacks.  Seller "kickbacks" are allowed only IF they are for closing costs, are mostly limited to a maximum of 3% of the purchase price, and MUST be disclosed on the settlement statement.  Under no circumstances can there be ANY cash transfer from a seller to a buyer, whether or not it is disclosed.

Here’s the most common ways these kickback scams are perpetrated, also from the same letter, click on the graphics to enlarge:

Fbi_letter_3_1
1. Grossly inflated value, with an undisclosed kickback from seller to buyer.

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2. Same hustle, different execution, still fraud – used mostly (we suspect) to save a deal that is getting ready to fall apart.

Fbi_letter_5
3. Now we have an undisclosed 2nd mortgage (subordinate financing.) Any subordinate financing must be disclosed when purchasing a home.

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4. And finally we have the mother of all scams – bogus seller "carryback" financing.  If anyone ever mentions sellers "carrying back" CD’s or any sort of financial instrument as part of a residential transaction, you can almost guarantee there is fraud going on.

Striking to us is how brazen these practices are – these are not obtuse or vague underwriting standards that are being violated, but core underwriting practices, that AT THE VERY LEAST require collusion on the part of the lender and appraiser, and a good deal of "look the other way" complicity on the part of all of the interested parties (title companies, agents, loan officers, etc.) Mostly the buyers and sellers, who are relying upon the "experts" to shepherd them through the transaction, are unaware that they are being involved in fraud – they are really the victims here.

{ 10 comments… read them below or add one }

duane November 21, 2005 at 6:47 pm

there was a letter sent out by the board of realtors last week specifically mentioning this, so perhaps they had a heads up?

Alexis November 22, 2005 at 11:37 am

Oh man, I gotta make some calls!

mr.xxxX XxxxXX November 22, 2005 at 1:05 pm

Ah. Damn mortgage flippers. They always cause problems. Prbblem here is both the buyer and seller probably do not even know there is fraud occuring. The fraud is typically conducted by the sleezy mortgage broker (who are always broke) who then gets a large commission for brokering the deal. Obviously, some banks must be getting back some bad properties that are way under water.

As for the seller carry back being a good sign of fraud. BS! This article sucks.

Editor November 22, 2005 at 1:25 pm

Note that not all seller carrybacks include fraud – there are ways to legally allow sellers to carry back financing for the buyer -though it is uncommon.

What the letter references are carrybacks that are never repaid, and never intended to be repaid. Of course, the only way to incent a seller to “forgive” carryback financing is to inflate the value of the property. It’s basically just a form of money laundering in those instances.

The big question regarding seller carrybacks is, why, in one of the best real estate markets in history, would anyone do this?

If a property is being sold at a fair market price, there are certainly plenty of well qualified buyers that do not need secondary, non-bank financing in order to qualify for a mortgage, (the primary reason for most, but NOT all, carryback’s is that the buyers cannot qualify for a traditional financing package – unless someone can point me to sellers that are willing to carry paper on a buyer at below market rates out of the goodness of their hearts, any claims otherwise remain dubious)

Again – most carryback scenarios on residential, owner occupied homes (investment properties and multi-unit properties are another matter) I have seen are suggested because there is a major flaw (home overpriced, buyers qualify poorly/have credit issues, or both) somewhere in the deal.

I’m all for creative financing solutions – up to the point where they become fraud.

Mr.XXXxXXXxX November 22, 2005 at 2:11 pm

Carry backs are great. If Johnny Hammer cannot qualify for a 200K loan, but can get a 150K and Im selling the home for 200K, I can carry back a 50K with a juicy interest rate of 10%. Best part, because Im doing seller financing in part, I probably can find a buyer in the paper and will not have to pay 5%+ to list the property for sale. (I jus saved 10K right there). Also, because Im carrying back a mortgage I can get a little better than market price (5%). (I just made another 10K). If the buyer defaults, I foreclose and find someone else. If he pays, I make a great return. The carry back simply balloons in a short-term, say 3 years or so the cash is not out for that long. Of course, there are tax perks here too.
I love carry backs. Nothing fradulent about them. IF banks did better jobs checking their comps (i.e. use independant appraisers, etc), fraud via mortgage flipping would nearly cease.
This is the banks fault and nobody else’s in my humble opinon. Of course people will cheat the numbers to buy real estate with no money down and thats really what this is all about. Exchanging good credit for borrowed cash to buy real property with none of your own money.

Editor November 22, 2005 at 2:21 pm

OK – In that specific scenario, I can see why carrying back financing would make sense for you, and even be an advantage, especially if buying and selling real estate is how you are making a living.

Of course, you are a very rare exception, most sellers would just as soon take the cash and wash their hands of the deal rather than risk default and the potential of having to go through all of the hassle of prosecuting a foreclosure.

And I would agree with you that flipping could all but be eliminated if the banks would do better due diligence on the appraisals – some of them actually do, but they are exceptions.

Zapiens January 17, 2006 at 1:59 pm

Mr. XXX:

I understand that in your scenario the buyer will obtain a first mortgage AND you will carry a note for the remainder (minus down payment, if any) – 50k in this case. What if the buyer defaults on the FIRST mortgage – your paper is subordinate to it, and the entire principal MAY be wiped out.

D'Anne Burley March 28, 2006 at 2:09 pm

There is a major corruption issue in Illinois whereby the Politicians are involved in the theft of Properties owned by the Elderly, disabled and those who seek out renting homes all are being defrauded by those who use the proceeds to fund they’re policial agendas and those who are involved with them in one of the largest issues of RICCO TO HIT THE NATION!

I am a radio talk show host and I am investigating this issues and also placing on media all over the nation.

Please help with investigate this there are numerous lawsuits filed by all but they are being denied the rights of due process of law.

In Wheaton Illinois and also within the Federal Court system please review my website.

Mike September 21, 2006 at 6:44 pm

Can anybody comment on a deal where the buyer wants to buy the house for 500k (List price) but wants to include $200k for improvements but insists that the $200k be included in the sales price(thus$700 sale price) and indicates that it will be included in the HUD statement as money for improvements. Is this fraud? Is the seller liable for anything.

courtney March 2, 2008 at 6:27 pm

IF A LOAN OFFICER KNOWS A CLIENT HAS NO INCOME OR VERY LITTLE,BUT HAS EQUITY TO PULL FROM HER HOME,AND THIS LOAN OFFICER COMES UP WITH A POTENTIAL INCOME OF $40,500 FROM A HOME BUSINESS THAT DOES NOT EXIST YET,
HAS A 1040 MADE UP,BUT EXPLAINS IT DOESNT HAVE TO BE SUBMITTED..IT’S ONLY
PURPOSE IS FOR THE MORTGAGE COMPANY..IS THIS FRAUD..BY THE WAY THE CUSTOMER LOST HER HOME.AND THIS SAME LOAN OFFICER REMAINS DOING BUSINESS,EVEN AFTER BEING SENTENCED TO THE HOUSE OF CORRECTIONS ON ANOTHER CIVIL SUIT..

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