Last month, as reported by Florida Trend, it was confirmed that Florida is one of the top three states in the country for mortgage application fraud. The report is based upon findings released in the CoreLogic Mortgage Fraud Report published on September 2018.
Read the full National Mortgage Fraud Report here (pdf format).
Buying a Florida Home or Condo? Be Careful of Mortgage Application Fraud
Researchers believe the growing amount of mortgage fraud is happening in residential home loans, where the buyer is wanting to qualify for a mortgage in order to purchase a home or condo. If the buyer is not careful, according the 2018 Mortgage Fraud Report, he most likely will be accused of failing to do one of more of the following:
- Failure to include other real estate loans on the home loan application;
- Failure to explain sources of down payment funds; or
- Fudging on income available to pay for the monthly mortgage payment.
These were the three most common issues in mortgage loan applications discovered by researchers in making their report.
Mortgage Fraud: Growing Problem Since the Mid 2000s
Mortgage Application Process Can Be Complicated and Confusing
Particularly for first time home buyers, financing is necessary in order to buy a home or condo. However, the process of applying for a mortgage can be incomprehensibly overwhelming.
For instance, Bank of America describes the following ten steps for getting a residential mortgage:
- Submit your application to the lender. This will require supporting documentation for your income, debts and assets;
- Order a home inspection;
- Be prepared to provide additional documentation to the lender after you have been given conditional approval;
- Purchase homeowner’s insurance;
- Wait while other things happen, like the lender gets an appraisal of the property and runs a title search;
- No new debt (don’t get any new credit cards);
- Lock in your interest rate;
- Review closing documents (including appraisal and title search);
- Arrange for payment of down payment and closing costs (cashier’s check; wire transfer); and
- Attend Closing.
Sounds simple enough, doesn’t it? However, qualifying for a mortgage can become a huge, complex headache for many people. The steps highlighted in bold above can cause all sorts of headaches for potential borrowers, as lenders come back again and again for more information.
Stress of Closing
For buyers, things can become extremely stressful very fast. Most Florida buyers have active lives already, trying to juggle their jobs, their kids, etc. Once the home-buying process begins to move, sudden “crises” can emerge overnight: things like figuring out if they need flood insurance, or what to do when an issue pops up in the home inspection or title run.
Mortgage application fraud does not necessarily mean someone intentionally trying to get money out of the bank without any intention on repaying the loan. Many times, allegations of mortgage application fraud involve a purchaser who applied for a home loan intending to pay off the mortgage (and with the ability to do so).
Anxious Real Estate Agents or Eager Mortgage Lenders
Many home buyers are good people who trust professionals to be knowledgeable and acting with integrity. As many Florida real estate lawyers practicing in the past decade can attest, sadly this has not been the case in our state. Fraud runs rampant in the Florida residential real estate industry and all too often borrowers and buyers are victimized.
For more, read:
- Fraud by a Florida Real Estate Agent: Are You a Victim?
- FBI 2010 Mortgage Fraud Report Finds Florida Top Mortgage Fraud State in the Nation, Tampa and Miami Top for Mortgage Fraud in the USA
Accordingly, anyone interested in getting a mortgage loan to buy a home or condo here in Florida should carefully consider with whom they are dealing. No matter how friendly or helpful the mortgage broker may be, or the real estate agent (they often work together on these deals), buyers should be careful of anyone who offers to bolster their documentation in order to help the buyer qualify for the home loan.
If an agent or broker suggests they can “juggle” the debt information or “support” the income information, then the buyer needs to be wary. This may be a red flag of mortgage application fraud and as they are the applicant, they will be responsible for whatever is presented in the documentation.
Another issue where innocent borrowers may be victimized by real estate agents or mortgage lenders is where they are presented with documents to sign that are not fully completed. Blanks in the document that the professional will “fill in later” to make things easier on the borrower is another red flag for mortgage application fraud.
Fannie Mae Red Flags List for Mortgage Application Fraud
The federal mortgage loan program Fannie Mae has published an online list of “red flags” suggesting mortgage fraud. The list is intended to help lenders ferret out false home loan applications presented to them.
Many of these items apply to allegations of mortgage application fraud by the borrower. Here are some things the federal government suggests are hints that the mortgage application may be fraudulent:
- Significant or contradictory changes from handwritten to typed application;
- Unsigned or undated application;
- Employer’s address shown as a post office box, the property’s address, or the applicant’s current residence;
- Buyer currently resides in subject property;
- Same telephone number for applicant and employer;
- Extreme payment shock (may signal straw buyer and/or or inflated income);
- Year-to-date or past-year earnings are even dollar amounts;
- Withholding not calculated correctly (check FICA tables);
- Withholding totals vary significantly from pay period to pay period;
- Pay period dates overlap and/or do not correspond with other documentation;
- Abnormalities in paycheck numbering;
- Handwritten VOE, pay stubs, or W-2 forms;
- W-2 form presented is not the employee’s copy;
- Employer’s identification number has a format other than 12-3456789;
- Income appears to be out of line with type of employment;
- Self-employed applicant does not make estimated tax payments;
- Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed;
- Tax returns not signed or dated;
- High-income applicant without paid preparer;
- Paid preparer signs taxpayer’s copy of tax returns;
- Interest and dividend income do not align with assets;
- Applicant reports substantial income but has no cash in bank;
- Large increase in housing expense;
- Down payment source is other than deposits (gift, sale of personal property);
- Applicant’s salary does not support savings on deposit;
- Applicant does not use traditional banking institutions;
- Pattern of loyalty to financial institutions other than the subject lender;
- Balances are greater than the FDIC or SIPC insured limits;
- High-asset applicant’s investments are not diversified;
- Excessive balance maintained in checking account;
- Dates of bank statements are unusual or out of sequence;
- Recently deposited funds without a plausible paper-trail or explanation;
- Bank account ownership includes unknown parties;
- Balances verified as even dollar amounts;
- Two-month average balance is equal to present balance;
- Source of earnest money is not apparent;
- Earnest money is not reflected in account withdrawals;
- Earnest money is from a bank or account with no relationship to the applicant;
- Bank statements do not reflect deposits consistent with income;
- Reasonableness test: income and/or assets appear to be out of line with type of employment, applicant age, education, and/or lifestyle.
Buyers Can Be Victims of Mortgage Fraud
There also scenarios presented by Fannie Mae to financial institutions where the potential borrower and home buyer is the victim of a mortgage fraud scheme. These include the following:
1. Illegal Property Flip
Here, the Florida home or condo is purchased and then resold quickly at an artificially inflated price, using a fraudulently inflated appraisal, and often sold to naïve purchasers.
2. Ponzi/Investment Club/Chunking
Ponzi, investment club, or chunking schemes involve the sale of residential properties at artificially inflated prices, pitched as “investment opportunities” to naïve buyers seeking to invest in Florida residential real estate. More sophisticated investors will recognize the deal offers illogically high returns and unrealistically low risks.
3. Builder Bailout/Excessive Sales Incentive
A builder bailout happens when the buyer is paid “incentives” by the seller and helps the buyer get an inflated home loan amount by increasing the sales price, concealing the incentive already paid out to the buyer. Often there will be an false and fraudulent appraisal to boost the loan application amount.
4. Buy and Bail
These are underwater mortgage situations, where the homeowner is current on a mortgage but the home’s market value is less than the amount owed on the home loan. Here, the homeowner may be swayed by unscrupulous agents and brokers to go out and buy another home and once that is finalized, the “buy and bail” borrower defaults on the underwater property.
5. Foreclosure Rescue
A foreclosure rescue scheme can involve a foreclosure “specialist” who promises to help the borrower avoid foreclosure. The borrower pays for services he never receives, and may go so far as to quitclaim title to the “specialist” as well as sending mortgage payment to the them instead of the lender.
6. Reverse Mortgage Fraud
In reverse mortgage fraud, the senior citizen is conned into obtaining a reverse mortgage loan, and then the broker or agent keeps the reverse mortgage loan proceeds. These scenarios may include:
- The senior claiming he received the house free from a “special government program;”
- Distressed property is quitclaimed to the senior just prior to the reverse mortgage loan application;
- A power of attorney acting on behalf of the senior;
- A caregiver or family member appears to be coaching the senior; and/or
- The power of attorney is held by a caregiver but the senior has relatives.
Mortgage Application Fraud is a Crime
Mortgage fraud has been defined as a federal crime under the Fraud Enforcement and Recovery Act of 2009 (“FERA”). Federal criminal actions can be based upon a defendant who participated in a mortgage fraud through bank fraud, mail fraud, or wire fraud – and the defendant does not have to intend to do so.
A defendant who unknowingly assisted in the fraud can be held guilty of a felony under this fraud statute. Innocent or naive borrowers just wanting to buy their dream home and relying upon charming and friendly real estate agents and mortgage brokers can be charged for mortgage fraud.
Florida Real Estate Lawyer Can Help Buyers Avoid Mortgage Application Fraud
The best way for a borrower or buyer to make sure they are not vulnerable to charges of mortgage application fraud is to have an experienced Florida real estate attorney help them through the process of finding a home to purchase through the closing of the transaction.
Not only can the Florida real estate lawyer help with the documentation and sniff out any questionable circumstances, he can provide guidance on the reputation and inside “skinny” on many real estate agents, mortgage lenders, mortgage brokers, appraisers, title companies, and others involved in the purchasing process.
Moreover, having a lawyer helping with the purchase of a home or condo here in Florida can alleviate much of the stress and pressure that comes with this major life event of buying a home or condo.
Most real estate attorneys, like Larry Tolchinsky, will offer a free initial consultation to answer your questions.
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