From time to time I'm going to revisit the topic of mortgage fraud because it has grown into a national epidemic, and the legal backlash is going to be severe. A number of high profile attorneys, appraisers, investors, builders, real estate and mortgage brokers are already serving time for mortgage fraud, and the net is being expanded as I speak.
The mortgage fraud scenario takes several forms, all of which are well known to investigators, who include the FBI, the IRS, and local and State watchdogs. First, the price of the mortgaged property is inflated with the cooperation of sellers, brokers, buyers, appraisers, and mortgage lenders. Next, the down payment is faked with the collusion of the escrow or title company; or it is actually paid, but soon returned to the person who supplies it along with a profit for participating in the fraud.
Next, the buyer buys the house at the inflated price and obtains financing by putting a high percentage down payment down. This inflated price serves as the basis for higher property taxes, higher insurance costs, higher depreciable basis for rental property, and higher commissions and fees all around. Then the buyer disappears and the loan is foreclosed for a fraction of the loan balance, or the lender takes the property back at the loan balance. That scenario is being played out right now in markets all over the USA.
At a recent symposium called to address the mortgage loan fraud problem, the FBI supplied a case study where a house was bought by a re-habber for $250,000. Minimum cosmetics were done to the house, it was marked up to $499,000 and a fraudulent appraisal was obtained to support that price. A willing buyer paid $100,000 down, and an eager mortgage broker found a lender who was only too willing to lend $400,000 at an interest rate that was about .25% higher than market.
Out of the $500,000 in sale proceeds, the buyer was refunded his $100,000 down payment plus another $50,000 for his trouble. He never made a single payment, nor ever occupied the house. He simply dropped out of sight. The seller walked away with about $100,000 profit. He had repeated this little ploy several times in a single year. He always used the same appraiser, lender, closing attorney, and Title Company. Now, all of them are contemplating their futures as guests of Club Fed.
The bottom line is this: Buying, Fixing, Selling Financing and Leasing houses is a very lucrative business that can produce huge profits legally. When a person resorts to fraud to make a profit, there's little difference in this and robbing a 7/11 store except that it requires less courage. Don't kid yourself; it boils down to theft no matter how tempting it is. If know of anybody who is now sweating bullets because of their past sins, let this be a lesson for you. Don't do it.
