Fraud Continues to Flood the Industry

By Lisa A. Tyler
National Escrow Administrator

In the not-too-distant past, fraud flooded the real estate industry mainly through new loan origination. Now the industry has been overwhelmed with fraud of a different type – short sale and foreclosure fraud. Fraud Insights is the settlement industry's tool for staying abreast of the latest trends in fraud and for defending the industry against crime.

It's no secret foreclosures are on the rise. It is estimated that 60 percent of all loans that go into default will result in foreclosure. This increase in foreclosures opens the door even wider for people with less than honorable intentions to take advantage of homeowners that find themselves in a desperate situation. Read about the latest scheme in "What is a Foreclosure Trust?"

Have you heard the old saying, "No one will do you in faster than your friends and family"? Our South Lake Tahoe operation saw firsthand how a child attempted to squander the life savings of her own mother. This edition features the unfortunate tale in "Quarter-Share Timeshare."

Our offices are seeing a lot of those "I'm an auditor for the lender" inquiries with the borrower's authorization cut and pasted from the 1003-loan application. Those inquiries do not fall under our privacy policy. Read "Don't Get Duped!" to find out the necessary steps to validate the request and to prevent the disclosure of otherwise confidential information.

The escrow administrators are committed to providing settlement employees with interactive training. We accomplish this in a variety of ways, the most cost efficient of which is through Webcast events. Webcasts are offered to all employees who are unable to attend a live seminar event in their area. Webcast events offer different training topics than those provided at live seminars. The Webcast event runs from 1 to 4 p.m. CT for two days. These live events are interactive and provide opportunities for audience participation. Sign up for one today by visiting seminarregistration/ schedule_webcastcalendar.aspx.



What is a Foreclosure Trust?

A common scheme perpetrated on distressed homeowners is when a foreclosure rescue company convinces owners to transfer their property into a trust wherein the homeowner holds a percentage of interest, usually 51 percent. An investor holds the 49 percent ownership interest and acts as the trustee of said trust.

In this new scheme the trustee promises to assist the distressed homeowner if the homeowner brings his/her current loan and sets up a payment plan with the trustee, in the promise that the deal will repair the homeowner's credit without making him/her move. When all is said and done, the trustee ends up selling the property right out from under the homeowner after having stripped all of the equity and the home from him/her.

Where do we come in? Recently one of our offices received what appeared to be a sale transaction. The sale was written up on the standard local Association of Realtors® contract which outlined all of the terms and conditions. The Realtor represented both the buyer and the seller in the transaction. Attached to the contract were four items that were cause for concern because they were submitted by a company that wasn't even a party to our transaction. The Foreclosure Trust addendum included: estimated closing costs, the Retainer Agreement and Instructions to Escrow.

The addendum disregarded several pertinent sections of the contract. It stated that 1099-S and FIRPTA reporting might or might not be necessary. The buyer and seller would be transferring title into a Grantors' Revocable Real Estate Trust. Instead of a Preliminary Title Search the addendum called for a Lot Book and Lien Search. No title insurance would be issued.

The estimated closing costs outlined the monthly payment plan that the owner was entering into with his/her co-trustee, which included a monthly service fee to Foreclosure Trust. According to the worksheets, the owner had about $25,000 equity in his/her home. The trustee would pay $18,000 for his/her beneficial interest in the trust, which would be deposited with Foreclosure Trust.

The Retainer Agreement was between the owner and Foreclosure Trust. It stated that the owner was retaining the Foreclosure Trust Company to coordinate and arrange the creation of a revocable trust and secure a trustee. The agreement called for a nonrefundable retainer fee of $1,000 and $350 for the preparation of documents. These fees were to be paid up front, out of escrow and taken from the initial earnest money deposit.

The Instructions to Escrow were our biggest concern. First and foremost, they were deposited by an administrator of Foreclosure Trust. They were not signed by nor agreed to by the actual parties to our escrow, but they were addressed to the escrow agent. The instructions themselves were also disconcerting. They stated:

  1. No reference will be made to the word "SALE" anywhere in your instructions.
  2. Since this transaction is not the sale of real property, but is simply the transfer of the seller's property to the seller's family trust, you are hereby instructed not to create 1099s for any parties to the escrow.
  3. The term "sales price" should not appear anywhere in your documents. The term "transfer values" should be used instead.
  4. Since there is no sale of real property, the terms "seller" and "buyer" will never be used. "Investor" will instead be used for the seller and "resident" will be used for the buyer.
  5. Escrow agent is authorized to accept changes or modifications to terms set forth in the escrow instructions from Foreclosure Trust personnel only. The real estate agents have been so informed.
  6. Escrow holder is authorized and instructed to prepare a grant deed into the trust. There will be no documentary transfer tax. Escrow holder is instructed to record said deed as an accommodation only with no liability on their part. The transfer is exempt from reassessment.
  7. Escrow holder is instructed to obtain a Limited Assurance Guarantee.
  8. Escrow holder is not to be concerned with property or liability insurance on the subject property.
  9. Escrow holder is instructed to charge a flat fee of $750.
  10. The commission for this transaction is limited to $495.
  11. Buyer will deposit any additional funds required.

If this is not a sale transaction, then what is it?

Good question … aren't we in the business of closing sale and refinance transactions? YES! We did not accept this transaction for several reasons: We do not handle accommodation deeds. We must report all transfers to the IRS on form 1099-S and we are not licensed to prepare and record deeds for anything but sales. Lastly, we don't even have a title product called a Limited Assurance Guarantee, but anything that might be a limited type report is available to lenders only.

There were several red flags in this transaction. Two of the biggest issues were the fact that we were being told to take instructions from an entity that wasn't a party to our escrow and we were being asked to release deposits to that third party at the opening of our transaction.


Quarter-Share Timeshare

A daughter conspires to sell her timeshare investment to her ailing mother without her sibling's knowledge, but is stopped short by our knowledgeable staff.

A "timeshare" is a right, shared with others, to occupy a unit of accommodation for a period of time on a regular basis for a number of years. A "quarter-share" timeshare is three-month interval ownership, with a rotating schedule. Timesharing can be in a single building, an apartment block or even on a boat.

Marie Logie, an escrow officer in South Lake Tahoe, was handling the sale of a quarter-share timeshare. In her transaction the daughter was selling her timeshare to her mother. The file had been open for quite some time, and without warning from the parties or the lender, Marie received loan docs.

Her transaction was a high-value quarter-share timeshare, the sales price was $600,000 and the loan amount was $449,250. As soon as she received the loan documents, the mortgage broker started pressing Marie to prepare the settlement statement and to have the buyer sign (via e-mail) the same day with funding and closing the next day.

Marie prepared the settlement statement and sent it to the buyer, then proceeded to verify how the buyer was going to hold title when reading through the loan documents. She noticed the seller was signing with Power of Attorney (POA) for the buyer and immediately called her title officer. The title officer told Marie to hold off closing the transaction until she received additional information. The first party Marie contacted was the lender. Much to her surprise, the lender acknowledged and approved the use of the POA by the seller for the borrower.

Marie requested a copy of the POA document and by the end of the day, she received it along with a letter from a doctor stating that the buyer was unable to understand and sign documents.

Marie sent both documents to her title officer. Upon review of the POA, she saw the buyer's son was also named as her attorney-in-fact. Marie let them know that the only way she could proceed would be if the buyer's son, not a part of this transaction, signed on behalf of his mother. Instead of scheduling a signing with the buyer's son, the mortgage broker called Marie back to ask if the incompetent buyer could now sign the documents which caused her even greater concern for fraud.

Upon further conversations with her title officer and one of the other escrow officers in her office, Marie began to be very concerned about the possibility of financial elder abuse and decided to seek counsel of one of our Company's underwriting attorneys. Marie was asked to obtain a copy of the appraisal and the buyer's trust and will. The Company's attorney attempted to contact the buyer's and the seller's attorneys for their opinion on the transaction and whether or not it would be allowed under applicable laws. The concern was whether this was a permissible use of Power of Attorney.

California Probate Code section 4231 provides:

  1. An attorney-in-fact has a duty to act solely in the interest of the principal and to avoid conflicts of interest.
  2. An attorney-in-fact is not in violation of the duty provided in subdivision.
  3. This is solely because the attorney-in-fact also benefits from acting for the principal, has conflicting interests in relation to the property, care or affairs of the principal, or acts in an inconsistent manner regarding the respective interests of the principal and the attorney-in-fact.

The mother would not live in the unit, the transaction would undoubtedly deplete her cash holdings and she would take on large debt. We asked the buyer's attorney how the mother would benefit from the transaction because we could see no benefit to be gained.

No response was ever received from the buyer's attorney but she did receive a response from the seller's attorney. The attorney indicated that the timeshare would be an excellent investment for the buyer and the seller was well within her rights under the Power of Attorney to invest where she saw fit.

Under advice from counsel, Marie respectfully declined the transaction. The points of contention were as follows:

  • Seller purchased from the developer in August of 2006 for $437,500 and was selling it to her incompetent mother for $600,000, which equals a gain of $162,500, or a 27 percent increase in a declining market.
  • The appraisal showed a value of $599,000, and the appraiser used comps that were a year and a half old without adjusting for the declining market (There were no recent comps as no one had been purchasing this particular quarter-share development and listings had gone unsold).
  • Timeshares are not wise investments, they are vacation destinations. They are sold on the resale market for up to 35 percent less than the developers are selling the same unit for.
  • It was thought that this file was at great risk for investigation by the Public Guardian and causing significant loss to the Company.

For her recognition of a questionable transaction and her efforts to uncover the contentions that lead to our resignation as escrow holder, Marie was rewarded $1,000.


Don't Get Duped

Our escrow files are confidential. We cannot even acknowledge we have an escrow to just anyone who contacts us. We should not exchange information with or take instructions from anyone who is not a party to the transaction without appropriate written authorization from the principal to our escrow.

Our confidentiality lasts forever! We regularly receive post-closing inquiries on our escrows. The person contacting us might already have information regarding the transaction. Settlement employees need to be cautious and not disclose information to someone who is not entitled to it, regardless of how much information the inquirer might have. Even if our employees had contact with a person during the closing, we cannot give out information after closing without current written authorization from the principal to the escrow. If the settlement employee receives a letter or e-mail on official looking letterhead from an attorney or accountant, a written authorization from the principal to our transaction must be obtained to cooperate. Here are some examples of common post-closing inquiries:

  • An attorney or accountant calls for information regarding the closing because he/she represents one of the principals. Regardless of the reason for the request, we need written authorization from the client, who would have been a principal to our escrow (or a court appointed guardian, custodian or personal representative). In the case of litigation, he/she might need to provide a subpoena or court order.
  • A realtor is putting together a marketing package and wants information from our file. If he/she is listing the property for the current owner, then the owner should be able to provide all the information. If the owner was a principal to our escrow, then he/she can provide written authorization for us to provide information to his/her current Realtor. If the client was not a principal to our escrow, then neither is entitled to any file information. Your local Market Research Department has several informational products prepared from public records that can be provided to Realtors and Appraisers for little or no charge.
  • A person had a Power of Attorney (POA) for the closing and wants information from the file after closing. Just because someone has a POA, the principal in our transaction is still the seller or buyer/borrower. The POA might have expired, applied only at the time of the transaction or have been revoked by the principal. We will need to review the POA and might still need written authorization from the principal to release information after closing.
  • A relative, friend or other third party claims to be helping a borrower or owner and needs escrow information. Sometimes we even receive inquiries from a spouse who was not a party to our transaction. Regardless of the relationship of the caller, we must receive written authorization from the actual principal in our transaction.
  • If a process server shows up at your office to serve a subpoena, call your manager while the process server is there for direction on how to proceed. Only corporate officers can accept subpoenas. Your escrow or county manager will provide you with instructions, which would be to:
    1. Accept the subpoena; or
    2. Do not accept the subpoena and send the process server to the location of your escrow or county manager.
  • When government auditors or agents come to the office, we need to cooperate, but there are proper procedures we must follow:
    1. Do not provide any information or accept any subpoenas or court orders.
    2. Get their business cards and call your escrow or county manager while they are there. If your manager is unavailable, tell the government agents they must talk to the escrow or county manager and give them the manager's name, address and phone number.
    3. Keep their business cards. Once they leave, contact your escrow or county manager to let them know who came in, what they wanted and to expect a visit from them.
  • A quality control/auditing company representing a lender or mortgage broker wants a HUD-1, a copy of a borrower's check or other information. We need a written request for the information from the "auditor" and current written authorization from the borrower or funding lender. BEWARE! These auditors are cutting and pasting the borrower's authorization and signature from the original 1003-loan application. That authorization doesn't extend to escrow holders or third party auditors. Have all forms reviewed by escrow administration to determine if we should complete and sign it.

Some will argue that since the transaction is recorded, it is public record and anyone is entitled to the information. They can get copies of recorded documents from the recorder's office. Even though change of ownership affidavits disclosing sale prices are kept on file at the assessor's office and are available to the general public, we still cannot release it from our file. Protect the confidentiality of our files and don't be intimidated into giving out information without verifying the identity of the inquisitor or proper written authorization.