How to Foil Mortgage Fraudsters

Jul 3rd 2014
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Despite heightened scrutiny of lending practices and new loan requirements, mortgage fraud appears to be once again on the rise. And yet again, the fraudsters find new ways of doing the dirty deed.

Picture the old arcade game of Whack-A-Mole—where a mole pops up out of one hole and you try to whack it only to see it pop up again elsewhere—and that's a good analogy for what law enforcement agencies and prosecutors face in keeping up with the schemes. (Worth noting, however, is that a March audit by the U.S. Department of Justice Office of Inspector General indicates that the DOJ and its components misstated their mortgage fraud efforts.)

So how's it done? The underpinning of all the schemes is misrepresentation and falsified documents, including income statements, W-2s, tax returns, and bank statements. The gist of it is to create a buyer—called a straw buyer—and get the lender to make the mortgage loan based on the fake documents. The loan is funded and goes to who the lender thinks is the legit buyer—but it's really the bad guys. Usually, identity theft is involved. And, while some fraud can involve only an individual, it's common that several fraudsters work together to pull the deal off.

Here's a sampling of schemes, courtesy of certified fraud examiner Douglas Pollock, vice president of IDSnetwork Inc. in Orlando, Fla. Pollock teaches prosecutors and law enforcement agencies how the schemes operate.

  • Title agency clones. Fraudsters will set up a fake title agency, cloning it from the name of a legitimate one. For example, ABC Title may be cloned as ABC Title II. They buy the identities of high-net-worth people from bank loan officers, pick a home to buy (regardless of whether it's on the market or not), and use the "buyer's" credit and identity to apply for a loan online. The deal is funded by a lender that thinks the deal is being closed by an actual title agency for a legitimate buyer.
  • Investor flips. An investor puts a property under contract for $70,000, and figures he could re-sell it for $100,000, thanks to perhaps a cooked-up appraisal. So he finds a buyer—or may pose as the buyer himself—and puts the property under contract again for the higher price before the first deal even closes. Both deals close at the same time, and the investor gets the $30,000 spread between the two deals. The fraud lies in the valuation and likely falsified documents for the buyer.
  • Short sale fraud. This is in the maybe-maybe not category, though we'll bet the lender would think it's fraud. An investor buys a house as a short sale, where the purchase price is for less that the amount of the mortgage. The investor sells the house back to the former owner at fair market value, which is likely less than what was owed on the mortgage. And, until early this year, that mortgage amount was forgiven debt. (There's some question where Congress will approve an extension allowing loan forgiveness to continue.) So the owner-seller-buyer gets the house back for less than was owed on it and doesn't owe the forgiven loan amount.

Finally, there's Walter Scott Fox III, a former KeyBank loan officer. He took out $14 million in loans using stolen identities to pay for trips, cars, boats, prostitutes, his kids' schooling and so on. He did it for 17 years but the jig was up in 2012, when KeyBank wouldn't increase a line of credit. Later that year, Fox became delinquent on all of the loans, and a supervisor started asking questions about his loan portfolio, according to the article.

In June, Fox was sentenced to 10 years in prison.


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