Depressed Markets Encourage Mortgage Fraud

The current real estate market conditions provide an excellent backdrop for mortgage fraud. Here are some of the typical factors that open the door to fraud:

     *     Buyers trying to get into the market before interest rates climb much
            higher are tempted to cheat to get what they want;

     *     Financially strapped homeowners with soaring adjustable rate mortgages
            who may be enticed to bend the rules to get out of a bad situation;

     *     Desperate sellers unable to find ready and financially able buyers who
            are lured by fraudsters who offer them a way out.

The extent of mortgage fraud isn't fully known; the FBI estimates that lenders lost about $1.5 billion to the crime in 2006, but that's only the crimes reported by federally insured agencies. Investigators predict the number will increase as fraudsters prey on people with adjustable rate mortgages now facing foreclosure as their rates reset and they can no longer afford their payments.

One common type is borrower fraud: A person lies on a mortgage application about income, the source of the down payment or length of employment. With the high cost of housing and the popularity of stated-income loans, it can be tempting for a person who is desperate to get into a house to fudge the numbers to make the loan work.

Much of the borrower fraud is being tacitly encouraged by real estate professionals who should know better, says Miami-based real estate attorney Oscar Rivera.

Too often, he says, mortgage originators look at a loan application and suggest to the borrower that a few doctored or falsified documents might qualify them for a better program. This is federal mortgage fraud. There's a whole undercurrent where people aren't thinking it's that big of a deal. But it's a federal crime. You can be indicted and go to jail.

Sometimes the real estate agent or the lender is the culprit. They're both paid on commission and may be struggling financially because of the real estate downturn, says Patricia Yamato, president of Florida Association of Mortgage Brokers. But the bottom line is that if the borrower signs a mortgage application and knows the information on it isn't true, everyone is responsible.

Desperate sellers can be easy targets. When a buyer offers more money than the seller is asking, it's hard to turn it down when it's been sitting on the market for months. But it should raise serious concerns, especially if the buyer wants the seller to "refund" the difference between the asking price and the sale price after the closing, or adds money for repairs the seller knows aren't necessary.

Homeowners who are having financial trouble need to be very careful of cold calls or letters from people who purport to be able to get rid of their debt, says Matt Schwartz, a New Jersey-based CPA and certified fraud examiner. "Where consumers have to be really careful is if someone comes to them, says, 'I know you're having trouble, I can help you out, sign these papers,'" Schwartz says. "They're getting you to sign over your property to them and they sell it."

One final word to borrowers who are tempted to lie on mortgage applications: you're not doing yourself any favors trying to qualify for a house you can't really afford. And there's probably another mortgage out there that you would have qualified for.

"Some people may think the only way they can get into a property is to BS the bank all the way through," says David Reed, president of CD Reed Mortgage Bankers of Austin, Texas. "There are so many programs out there. I've never met a borrower who couldn't get a mortgage."

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