Latest Scheme Takes the Country by Storm

In the current real estate market, some real estate agents are turning to fraud to boost their incomes. This latest scheme is pervasive throughout the U.S. and is being perpetrated primarily by selling real estate agents or brokers.

Fraud isn’t only committed by the public. Unfortunately, a growing number of real estate agents and brokers are doing it too. Here is a recent example of a scheme that is being perpetrated by real estate agents or brokers: a residential property is listed through MLS for $350,000. The buyer, through his or her real estate agent, tenders a purchase contract that is contingent upon financing and requires the seller to pay a percentage of the buyer’s closing costs. Everything proceeds in a customary and usual manner until closing.

At closing, the seller is shown a settlement statement that reflects a much higher sale price of $525,000. The settlement statement also reflects a payoff of an unsecured lien for more than $100,000. The payoff funds represent the proceeds of the fraud scheme.

Additional characteristics of these types of schemes include:

• 100 percent financing
• Over-inflated values in the appraisal
• False earnest money deposit
• Straw buyers (usually compensated outside of escrow)

Another scenario of the scheme is as follows: a property is listed through MLS for $375,500. The buyer, through his or her real estate agent, presents a purchase offer to the seller for $500,000. An addendum to the purchase contract requires that the net difference between the contract sale price and the list price be paid to release an unsecured lien, or to pay for a management fee, bills for repairs, new floor covering or painting of the subject property.

The amounts paid to third parties in these types of transactions are typically in excess of $100,000. However, no money is actually brought to closing and financing is generally at 100 percent of the contract sale price. Investigation has proven that the lender does not receive a copy of the addendum and is not aware of the additional terms that would preclude the lender from funding this mortgage loan. In addition, the payoff of the unsecured lien is reflected on the seller’s side of the settlement statement, which the parties believe will be overlooked by the lender.

What is the harm? These types of schemes are designed to defraud the lender or secondary market investor. They are illegal and participants risk significant civil and criminal penalties by engaging in these transactions.

Avoid being an unwitting participant by taking these measures:

• Never reflect the payment of unsecured liens in the 500 series of the HUD settlement statement.
• Always reflect payment of unsecured liens in the 1300 series.
• Never show buyer/borrower credits for monies paid outside of escrow on line 201.
• Always reflect those credits on or below line 204 with a complete description of the funds paid and to whom.
• Never reflect third party deposits on line 201 of the HUD settlement statement, even if the remitter’s name is disclosed on page three of the settlement statement. Lenders believe that amounts shown on line 201 were funds deposited by the buyer/borrower into an escrow trust account. Instead, show deposits from third parties on line 204 or below and designate the party the funds were remitted by. As an extra precaution, provide the lender with all copies of receipts, incoming checks and third party instructions, even if the lender does not request them.

In summary, if you receive an instruction to disburse proceeds to anyone other than the seller of record, you must receive written approval from the funding lender agreeing to your disbursement.

Too Good to Be True

A homebuilder receives an offer for $245,000 on a newly constructed home listed at $210,000. Desperate to sell, the builder ignores the warning signs that the deal might be too good to be true.

Mary Wilkinson, a closer at Alamo Title in Colleyville, Texas, received a contract and opened escrow for one of her reputable builders. The sale price on the contract was $245,000, although Mary knew the property had recently been put on the market for $210,000. The purchase agreement called for a bonus to be paid to the selling agent at closing in the amount of $35,000.

When Mary received her loan package, she made the lender, WFI, aware of the bonus money to be paid to the selling agent at closing. The lender had been told that the money was owed to the selling agent by the builder/seller for previous sales of the builder’s properties. Mary asked for the lender’s justification and response in writing for her file.

The lender’s response written was:

“WFI has reviewed the appraisal for this property during the course of our underwriting approval. Based on our due diligence, we are comfortable that the value of the property is supported at the sale price of $245,000. We request the bonus compensation of $35,000 be removed from the commission disbursement on page two of the HUD. This represents a bonus arrangement between the builder and the agent and it is not specific to our transaction. WFI acknowledges that Alamo Title can not monitor disbursements that occur outside of closing. Thank you for bringing this to our attention.”

As a result of this response, the selling agent asked Mary to help him create a document that obligated the seller to pay him the $35,000 bonus outside of closing. The selling agent told Mary that the money had to eventually be refunded to the buyer and wanted to know how a portion of the funds could be allocated toward the buyer’s down payment and closing costs.

There’s nothing like dealing with a first-time fraudster! The agent was obviously naive and did not know the ramifications of his requests. Once the lender found out the additional details, he declined the loan and thanked Mary profusely for saving him from funding a $245,000 loan that would have surely resulted in a short sale or foreclosure.

Moral of the Story
Be diligent in your pursuit of honesty. Mary continued to chase her suspicions and exhaust all avenues of warning the lender and stopping the transaction. Her best move was to get her manager involved. The manager took the heat and helped her communicate her suspicions to the lender.

Mary received $500 from the Company as a small token of our appreciation for detecting and preventing a fraudulent transaction from occurring.

What’s the Deal?

Don’t turn a blind eye to misrepresentation. When the seller is writing rent checks to the buyer at the closing table on an owner-occupied purchase, it might be time to contact the new lender.

Debbie Sanderson, a closer from Overland Park, Kansas, was conducting a closing and had the property’s seller in one of her conference rooms and the property’s buyer in the other. The buyer had closed on an owner-occupied purchase transaction for another property two weeks prior. Coincidentally, the loan application and loan documents for the transaction that the buyer was trying to close now also declared the property to be owner-occupied, but through a different lender.

Lending regulations state that a home buyer can only have one principal place of residence. All other properties owned by a consumer are considered second homes or investment properties, which are a higher risk to the lender and have a higher interest rate and more stringent underwriting requirements. A buyer claiming more than one property as his or her principal place of residence is deceiving the lender and committing mortgage fraud.

In both owner-occupied purchase transactions, the sellers listed the addresses of the properties that were for sale as their forwarding addresses on the 1099S forms. That seemed suspicious, so Debbie asked the loan officer what the deal was with two owner-occupied houses. He said the most recent property was in better shape, so the buyer was going to flip the prior one and move into this one. Debbie requested that the buyer sign a statement to that effect.

The loan application didn’t show the debt of the two-week-old loan and the borrower signed all of the documents that stated he was planning on occupying the property. The sellers on the previous transaction and on the current transaction were both in default on their loans. Debbie suspected that the buyer was obtaining the properties and then renting back to the sellers. In fact, one of the sellers had spent most of the time at closing writing out rent checks payable to the buyer. If the buyer was going to occupy the property, the seller should be vacating the premises, not writing checks for future rent payments.

Debbie called the funding lender and presented a hypothetical situation about the owner occupancy situation and the 1003-loan application. She asked if this situation would affect whether the lender would fund the loan. It would! The lender researched the transactions and ended up de-funding the loan. The lender was extremely grateful to Debbie and the Company for voicing her suspicions.

Moral of the Story
Don’t ignore the warning signs of fraud. Even in a tough market, it is not worth closing and insuring a transaction that has obvious warning signs of fraud, such as owner occupancy of two different properties by the same purchaser. Slow down and get your manager involved. As a result of your efforts, you could win a $500 reward, just like Debbie!