How to Identify & Prevent Commercial Mortgage Frauds

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Fraud is when one person deceives another by misinterpreting facts, figures, and information. FBI states that when any property-related material is misstated, misrepresentative, or omitted or any underwriter or lender relies on a potential mortgage to fund, purchase, or insure a loan, it is a scam.

Read this article for a clear perspective on commercial mortgage scams!

What is Mortgage Fraud?

Mortgage fraud is not a natural lending practice for targeting specific borrowers. However, commercial lenders and individual borrowers can commit fraud while dealing with property mortgage projects.

Besides, the amount of money involved in such scams is not negligible. Mortgage fraud is committed by deceiving a lump sum of funds from one party by misinterpreting factual information.

Different Types of Mortgage Scams

The mortgage industry scams follow specific patterns, and focusing on that; mortgage frauds are divided into two categories. Maximum scams fall under any of these two following categories:

  • Mortgage scam for housing: When a borrower takes illegal actions to maintain or acquire a house or property’s ownership. For instance, when borrowers bribe appraisers for misinterpreting their desired property’s appraised value or manipulate their asset information or income. A residential mortgage is a part of this category.
  • Mortgage scam for profit: When a lender takes specific actions to enhance their earnings illegally, it is called mortgage fraud for profit. For instance, real estate professionals omit, misstate, or misinterpret borrowers’ or clients’ information to maximize profit. The report includes property value, debt and credit history, income, etc. This type of scam is known as commercial mortgage fraud.

What Causes Mortgage Fraud?

As discussed earlier, there are two types of mortgage fraud; one committed for profit and one for housing. The borrowers usually commit fraud for accommodation with an intent to maintain real estate ownership.

However, any professional associated with the loan transaction chain can commit fraud for profit. This can include insurance agents, loan officers, mortgage companies, real estate sales agents, property inspectors, builders, escrow agents, etc. These professionals commit mortgage fraud to gain extra commission from each sale or to increase their investment positions.

Ways to avoid mortgage Frauds

The U.S. Government has sanctioned several legislation and regulations to impede mortgage scams at state, federal, and local levels. In addition, they initiated educating the real estate industry professionals before they provided services.

Real estate, insurance, mortgage, and title agencies can only receive government licenses after acquiring the proper education.

However, more is needed to evade the fraudsters as there are educational limitations in certain places. So, you can consider the following steps to prevent your clients and yourself from these fraudulent activities:

  • Don’t proceed without verifying all documents, whether you are a borrower, lender, or MLO.
  • Always work with reliable mortgage professionals after checking their credibility.
  • You can ask for the documentation or investigate the matter upon feeling anything wrong.
  • Be aware of unsolicited offers. Do not accept them.
  • Have proper knowledge of your rights, and don’t miss advocating your client’s rights.
  • When anyone offers or charges an up-front fee, avoid them.
  • Always remember legitimate companies do not guarantee loan modifications.
  • If you encounter a dubious deal, report it as soon as possible.

As per state legislation, loan officers need to be educated and licensed to continue their job. Besides, government agencies provide licenses and track real estate, title, and insurance agencies.

So, there is no negligence of regulations to stop mortgage fraud at the state, local and federal levels. Moreover, in some states, the governing bodies opt for periodic auditing to monitor the transactions and activities of mortgage lending companies.

The FBI’s Economic Crimes Unit monitors any complaints and suspicious activities in the mortgage industry. Besides, professional organizations like NAMB (National Association of Mortgage Brokers) and MBA (Mortgage Brokers Associations) follow a peer-monitored code of conduct to combat mortgage scams.

What are the Common Mortgage Fraud Schemes?

Several types of investor mortgage fraud schemes include occupancy fraud, straw buyer scams, and property flipping. Let’s discuss each of them separately.

Occupancy fraud: Investors often apply this scheme to qualify for a lower out-of-pocket cost on property purchase, a higher loan-to-value ratio, and a low mortgage rate. In occupancy frauds, borrowers present a vacant property as owner-occupied to qualify for a favorable bank status.

Straw buyer scam: Straw buyers use someone else’s credit score, identity, or income to purchase a property they are not eligible to buy.

When someone allows a non-eligible buyer to use their identity and status to help buy a property, it is also counted as a straw buyer scam.

A straw buyer can falsify the verification letters needed for a mortgage by producing stolen bank records, tax returns, or even employment verification letters. Besides, they can make fake property ownership records to obtain the property.

Property flipping: If you intend to purchase a house, repair it and then resell it for profit, property flipping is not considered a scam. However, buying a property lower than the market price and immediately selling it at higher gains is regarded as a property-flipping scam.

There are records of same-day property flipping as well; when the owner sells the property the same day, they have bought it. In such cases, the title chain involves the flipper, seller, and unsuspecting buyer.

First, the flipper and the seller enter into a contract stating that the flipper will pay a lower price than the property’s actual market value.

Then, an assessment is performed at the inflated price that the flipper and end buyer have agreed upon after the flipper gives the end buyer a bogus title insurance commitment that falsely identifies the flipper as the owner (even though this is not the case).

Some Common Examples of Mortgage Scams for Profit

Here are some of the instances from the past that shows how people committed mortgage scams for profit:

Bank Fraud

In New Jersey, Dennys Tapia and some other conspirators conducted fraudulent activities to obtain mortgage loans from 2015 to 2018. Tapia used to provide false documents to lenders to get loans for unqualified buyers and generated huge profits.

On the other hand, lenders lost their funds and faced colossal losses. After investigating the entire matter, Tapia was sentenced to a 15-month prison on 9th October 2021. In addition, for conspiring to commit bank fraud, he was ordered to pay $182,508 in restitution and forfeit $176,532.

Commercial Real Estate Loan Fraud

Commercial real estate loan fraud occurs when a commercial property’s value drops rapidly, and the owner tries to secure financing by inflating the property’s appraised worth.

In such cases, individuals associated with the scam write false leases to look profitable. Besides, a doctored appraisal keeps lenders on the hook by making them believe that the commercial property has a consistent income stream.

In April 2016, a former chief investment officer, Barton Schack, used a false representation of 13 medical office buildings and borrowed a lump sum of $91.5 million.

U.S. Attorney Rachael Honig stated that Schack helped the owner of that medical property management company where he was employed to secure this massive loan.

Thus, the owner was also a co-conspirator in this case. Unfortunately, they misinterpreted the building’s occupancy status that was collateralized to borrow the loan.

Besides, Schack kept robbing the rent payments after the loan was closed. As a result, he was imprisoned for 30 years with a fine of $1 million.

Commercial Scams

Builders commit commercial scams to cope with losses due to declining demand and rising inventory. Developers convert the apartments bought during a housing boom into condos and recruit straw buyers to inflate the condos. It will generate a massive profit for them as they sell the condos at higher prices at closing.

From 2008 to 2013, Momoud Aref Abaji entertained a fraudulent purchase of more than 100 condos in California.

According to Stephanie Abbot, co-conspirators organized to buy numerous units at a discount in condominium developments across the nation where the builders had trouble selling units during the scam.

As a result, the developers gained by giving the impression that their condos were renting and increasing in value while the conspirators profited from the kickback.

Abaji and his accomplices persuade lenders to approve loans for more than the actual purchase costs by hiding the information about kickbacks.

During the 2008 financial crisis, they received kickbacks from condominium builders. Abaji misleads straw purchasers’ information to obtain loans. Mortgage lenders gave more than $21 million in funding to buy more than 100 residences due to this plan.

Finally, Abaji was sentenced to 9 years imprisonment and a penalty of over $10 million in restitution.

Conclusion

Real estate professionals and property owners should always stay aware of mortgage scams to maintain a reputation. Unfortunately, fraudsters conduct such inappropriate activities through online and offline means. However, the recent market has witnessed considerably lesser scam reports as several initiatives have been taken to eradicate these fraudulent activities.

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