Subprime Lenders Dropping Like Flies

By Lisa A. Tyler
National Escrow Administrator

From 2001 through 2005 subprime business was phenomenally profitable. Home values kept appreciating and no loans ever went bad. Beginning late in 2005 weakening home prices and rising default rates rocked the subprime business.

As a result, a handful of lenders have filed bankruptcy, several have been acquired, a few have been shut down through cease and desist orders, and many have abruptly shut their doors. The process has left the principals involved in pending transactions in a quandary. Our offices have typically been kept apprised of lenders that have announced their inability to fund loans scheduled for closing. However, in a few instances, expected funds ultimately never came and we had to unwind transactions that were recorded prior to receipt of the funds.

As the saying goes, "Desperate times call for desperate measures," and some of our lenders appear desperate. We have even been asked to advance payment to mortgage brokers on pending transactions, a practice we do not endorse.

It is important that our escrow settlement officers exercise caution, good judgment and only close on collected funds. Keep your guard up for business practices that don’t follow our protocol. In addition, be sure to hone your crime busting skills by reading the heroic stories contained in this month's edition of Fraud Insights. Three of the company's best escrow officers were rewarded $500 for stopping crime in their own transactions. You could be next!


Who is the Mark?

Transactions involving relatives with the same first and last names are quite common. However, in this transaction it was difficult to determine which Mark was asking for the cash-out loan – the living Mark, the dead Mark or the one in prison.

This transaction involved the closing of an equity loan in second position. The title report revealed the property owners as Mark Miller and Mark Miller III. The mortgage broker in the transaction informed Ticor's Orange County, California escrow officer, Sandy Adams, that Mark Miller was deceased. The broker obtained an Affidavit of Death signed by Mark Miller III. The loan documents were signed in a prison facility where Mark Miller III currently resides.

The escrow officer received three different demands for disbursements on Mark Miller III’s proceeds:

  • $40,000 to an attorney handling his case (possibly an appeal)
  • $100,000 to a private party
  • The remaining balance (net proceeds) to an individual handling Miller’s criminal case (person given POA on behalf of Miller III)

The third demand from the "net man" was presented into escrow with a Power of Attorney signed by an M.B. Miller. The escrow officer compared the signature on the Power of Attorney to the signature on the recently executed loan documents and found them to be inconsistent. The escrow officer also realized the Power of Attorney was signed after the loan documents were signed and returned to our offices. Her curiosity raised questions: Did someone go back to the prison and get this signature? The "net proceeds" demand that was submitted with the Power of Attorney contained an authorization allowing the notary on the Power of Attorney to pick up the net funds when they became available.

In addition to the above unsecured debts, the title report revealed a judgment to be paid through escrow of approximately $10,800.

None of the demands for unsecured debts had been approved by Mark Miller III.

After receiving the Death Certificate the following day from the attorney (who had a demand for $40,000), the escrow officer noticed that the decedent was a Mark Miller Jr. Interestingly enough, Mark Miller Jr. was killed by blunt force trauma to the head at the property that was the subject of our escrow transaction.

Since the Death Certificate indicated Mark Miller Jr. was deceased and the title to the subject property is held by Mark Miller alone, the escrow officer could not determine whether or not Mark Miller and Mark Miller Jr. were the same person, or if Mark Miller was the father of Mark Miller Jr.

The escrow officer, along with her manager and title officer, determined that the transaction was not worth insuring and informed all parties we were declining to insure it or handle the escrow. Curt Taplin, Ticor's advisory title officer, put out a notice in the title plant records to alert other members of the Fidelity family in case the transaction was attempted at their offices.

Moral of the Story
The escrow officer felt a responsibility to both the lender and the borrower to reveal a potential loss to both parties. She, along with her management team, could not release funds to pay the unsecured debts without authorization from the borrower/inmate, and without further information regarding the identity of the deceased. The escrow officer felt that if the lender had attempted foreclosure for nonpayment of the second loan, there could be a cloud on title for the conveyance of the deceased person, who could still be alive.

When all parties were notified of our resignation as escrow holder and title insurer, the attorney who was orchestrating the transaction attempted scare tactics toward the escrow officer, threatening future lawsuits against the company.

Sandy stood her ground in spite of the threats and refused to close the transaction. For her efforts, Sandy received a $500 reward and letter of recognition on behalf of FNF.


One, Two, Three Strikes – You're Out!

Escrow officer recognizes a real estate agent and mortgage broker perpetuating mortgage fraud, putting an end to inflated property values, invalid home improvement invoices and unusually low down payments.

Joann Bersell, Escrow Officer from Ticor Title in Tucson, Arizona, noticed a trend that was occurring in her office. With all the signs of mortgage fraud, the trend made her extremely uncomfortable.

It all began in October of 2006. Joann opened a sales transaction in which the sales price was $15,000 more than the list price because the seller agreed to purchase a security system on behalf of the buyer. The contract sales price was $188,000. The buyer (who was also a licensed real estate agent) deposited only $250 earnest money.

Joann prepared her HUD-1 settlement statement to fully disclose the entire transaction and the lender approved the statement. Joann went even further and made sure that the lender had copies of all the addendums and instructions. Then she closed the transaction.

Shortly after we closed on the first file a second sale came in. This time the sales price was for $20,000 more than the seller's asking price. Once again the increase was to pay for a security system. This time the buyer (who was different than the buyer in our first transaction) assigned his interest to another individual. The original buyer made an earnest money deposit of only $250 and the new buyer did not replace the initial deposit. We closed using the deposit from the first buyer. Once again, Joann fully disclosed the entire transaction. The lender approved everything and she closed.

After closing the second file, Joann received a phone call from the selling broker on the first transaction. He requested copies of the documents from the two closed files, and explained that the selling agent was under investigation for mortgage fraud by the Arizona Department of Real Estate. The real estate agent had left his brokerage, signed on with a new broker, AND changed her name. Joann ran a report on the first property that she closed and discovered that the buyer/real estate agent was already in default.

In January 2007 our escrow officer received a third sale and her “escrow radar” immediately went off. She noticed these similarities on all three transactions:

  1. The buyer was listed and/or assigns.
  2. The sales price was at least $15K over the list price.
  3. The earnest money was for only $250.
  4. The increase in the sales price was to cover a security system. The invoice from the security company was the same on all three transactions.
  5. Same mortgage broker.

Upon further investigation she discovered that the security company was not a real company and invoices for the security systems actually came in from one of the buyers who assigned their interest. We resigned from the third transaction and have declined to do further business with that real estate agent.

One week later the escrow administrator received a call from a broker of one of the top real estate firms in Tucson. The escrow administrator was asked to review an offer they just received in their office to purchase one of their listings. It was the very same parties and the same modus operandi. It appeared as if they were attempting to perpetuate a mortgage fraud scheme once again in the Tucson area.

The broker decided to instruct his listing agent to have three estimates from three different (legitimate) security companies to substantiate the invoice submitted. When the real estate agent realized the listing broker was on to her scheme, she withdrew her buyer's offer to purchase.

Moral of the Story
It is important to be aware of where your business is coming from and to recognize a trend. Standing alone, the first two transactions did not necessarily indicate fraud. But combined with the facts listed above, the scheme became clear.

Congratulations to Joann for her detective work. She received a $500 reward and a letter of recognition for her efforts.


Silent Seconds

An Arizona Escrow Officer receives appreciation for notifying the lender of a silent second being contemplated at closing.

An escrow officer from FNT Maricopa County was closing a refinance transaction. She had the title commitment showing the first loan, and during the transaction the borrower asked her to prepare a private second note and Deed of Trust. Since the new second note was not reflected on the loan closing instructions, she made certain she sent the note and Deed of Trust to the lender and disclosed the second loan on her settlement statement. She wanted to be clear that the borrower was putting on the second note at the last minute.

The lender stopped everything, investigated this second note and did not proceed with the loan. The lender also thanked her for being honest.

"I want to thank you for not being reluctant to send them to us," said Patricia Schoolcraft at Mortgage IT in a message to FNT. "It is refreshing to know our title companies stand behind us in full disclosure and above-board ethics. We are not in a position to fund this loan at this time if indeed that note was valid, because that would be misrepresentation by the loan officer, and cause the broker of record considerable harm. Again, thank you for being professional in your approach to this. Please let me know if you have any further questions."


Lender Sends Bouquet for Not Closing

Argent Mortgage shows their appreciation to one of our top escrow officers for reading their voluminous instructions and alerting them to multiple transactions with the same borrower.

Sharla Rush, Escrow Officer with Fidelity National Title's Antioch, California office, was handling a purchase escrow for a repeat buyer who was represented by a mortgage broker she considered to be a good client. This transaction would have been their third closing in a week.

Sharla was ecstatic about the multiple transactions, until she realized all transactions had new financing and the borrower had represented to all three lenders that each home purchased would be owner occupied. The "red flags" began to wave! Sharla, just like many seasoned employees, knew that borrowers could receive more purchase money at a lower interest rate with less stringent qualifications by representing a loan for a principal residence, rather than for investment property. Lenders are more willing to finance when the borrowers have a vested interest in the property and stand to lose their primary residence for lack of payment.

Because Sharla was being pressured to close the second of the three transactions quickly, she began reviewing the multiple transactions with her county manager.

The eight pages of lender instructions received from Argent Mortgage required the escrow officer to sign confirming she had no knowledge of any other transaction involving their borrower. She certainly could not sign the instructions since she just closed escrow earlier that morning for the borrower on his first escrow.

At the advice of her manager, Sharla contacted her "good client" the mortgage broker and requested that he review the loan closing instructions. She told the mortgage broker she was not in a position to sign them because she was aware of the other two transactions with the same borrower. The mortgage broker did not see the statement in the instructions as a problem and instructed Sharla to talk directly with the lender to work it out.

Sharla told the funding supervisor at the lender's office that she was unable to complete their instructions because she had first-hand knowledge of multiple transactions with the same borrower. The funding supervisor told Sharla she would have to redraw the loan package for a non-owner occupied loan.

Later that day the buyer called to cancel the transaction altogether. Sharla felt guilty for losing the transaction and for possibly losing two good clients.

A week later, she received a beautiful bouquet of flowers simply signed, "thank you," sent from the vice president of Argent Mortgage. Sharla then realized the only thing lost was another case of fraud. Much to Sharla's surprise, the mortgage broker continues to send her business. Sharla has received a $500 reward from FNF for blowing the whistle on the mortgage fraud that almost happened in her office.

Moral of the Story
Read the lender's instructions and comply with them. It helped that the loan closing instructions clearly stated that the escrow officer had to make the lender aware of other transactions involving the borrower. Following the lender's instructions made Sharla the hero, not the "deal killer."