Short Sale Fraud

In this transaction a double escrow is used to defraud a payoff lender. The first transaction shows no proceeds in the sale, while the second transaction reveals at least $15,000 due to the payoff lender that should have been paid toward the amount of shortage due.

Cheryl Shaw from Burnet Title in Mequon, Wisc., recently uncovered a short sale fraud. On this particular property the title was held by a husband and wife. On May 15, 2008, the individuals deeded the property to their trust. The deed was signed by attorney Sue Colburn (who is also related to the sellers) under a Power of Attorney. Cheryl asked for a copy of the trust, per her normal practice, and discovered it was a Land Trust drafted by an attorney for Solutions Properties. A Land Trust is an agreement whereby one party (the trustee) agrees to hold ownership of a piece of real property for the benefit of another party (the beneficiary). Land Trusts were abolished in Wisconsin many years ago.

Attached to the trust instrument was an "Assignment of Beneficial Interest" from the same attorney-in-fact, Sue Colburn, acting on behalf of the beneficiaries (the true title holders), assigning their beneficial interest to Solutions Properties. The assignment was accepted by the trustee of the trust.

Cheryl received a call from Solutions Properties requesting a copy of the preliminary settlement statement. She sent a settlement statement representing a sale from the trust to an individual. Solutions Properties "reworked" the settlement statement for her and split it into two separate settlement statements, representing a double-escrow. One statement was for the "sale" from the individuals to their own trust for a deed that had already been recorded, with a sale price of $310,000 that zeroed out in the end to make the lender believe there was a true "short sale." This statement contained a huge commission to an unknown broker and bogus fees to the title agent that were never shown on Cheryl's preliminary settlement statement.

The second settlement statement from the trust to the eventual buyer contained an increased sale price of $325,000, another commission to the appropriate listing agent and more bogus title fees. On this settlement statement, the trust as seller would walk away with $310,068, because the earlier debt had been paid at the "short sale."

The short sale lender was JPMorgan Chase. The amount due to the lender in order to pay the loan in full was $164,051.31. The negotiated short sale payoff letter from JPMorgan Chase said it would accept $13,290.91 less as long as there were no proceeds to the seller. Cheryl completed her preliminary settlement statement and showed proceeds in the amount of $13,459.21 to the seller. Before she could add that dollar amount to JPMorgan's payoff and "zero-out" the seller proceeds, Solutions Properties told Cheryl not to complete the deal. This was when they told our Company there would be two settlement statements and two closings.

The middle man, Solutions Properties, planned to take a beneficial interest in the trust at the first bogus closing. Cheryl suspected it would then get the first commission as its fee. The listing contract specifically prohibited the listing agent (our customer) from discussing anything with the seller's short sale payoff lender. Furthermore, Solutions Properties did all of the negotiating with the seller's lender. Of course it didn't disclose the third party buyer, the fact that Solutions Properties was taking a beneficial interest in the trust or the fact that the sale price was really $15,000 higher than the short sale payoff lender was being led to believe.

Meanwhile, according to Solutions Properties, the sellers "fled to the Philippines" with no intent of returning to the U.S. So, they either knew nothing about what happened to their property, or they were waiting for all of their troubles to go away with the help of Solutions Properties.

Needless to say, Cheryl and her company declined to insure, close or have any part in preparing the closing documents. For her recognition of the scam and her courage to resign as escrow holder and title insurer, the Company has rewarded Cheryl with $1,000.

The Moral of the Story
The amount due JPMorgan Chase at payoff was $164,051.31. JP Morgan Chase initially agreed to reduce its payoff to $150,760.40, if the seller were to net zero proceeds at closing. Solutions Properties structured the sale so JPMorgan Chase would not receive any more than $150,760.40, even though there was more cash in the deal that could be paid toward the debt. Cheryl Shaw made the right decision not to participate in defrauding the payoff lender.

International Espionage

In this story a crooked seller draws against her line of credit just prior to close, transfers the funds to her checking account and then attempts to move the funds to a Swiss bank account. Fortunately for our Company, the local operation is relentless in its pursuit of justice.

A closer from Fidelity's Tampa, Fla., operation received a payoff statement on a line of credit loan from Bank of America® good through June 15, 2008. She performed the signing ceremony at 6 p.m. on June 9, 2008. The seller was a married woman who held title as sole and separate property. Her husband was a citizen of the United Kingdom. Prior to and at closing the wife directed our closer to wire transfer proceeds to a Swiss bank account in someone else's name. The closer refused and the seller ultimately provided her checking account information, also at Bank of America.

The seller provided a P.O. Box as her forwarding address on her 1099-S solicitation. The closer informed her our Company would require a physical address, not a P.O. Box. The seller reluctantly provided a physical address in the United Kingdom. Unbeknownst to us, after the signing ceremony, the seller withdrew $254,000 from her line of credit account and transferred the funds to her Bank of America checking account.

The funding from the buyer's new lender arrived via wire transfer on June 10, 2008. The file was disbursed and Bank of America received its line of credit payoff via check on June 12, 2008. We also wired more than $834,000 to the seller's checking account at Bank of America. The very next day a representative from Bank of America contacted our offices upon receipt of the check to let the closer know her payoff was $254,000 short!

We attempted to recall the wire of proceeds to the seller's account. The recall was unsuccessful. We immediately notified Bank of America the seller's checking account was holding the line of credit funds and sale proceeds should be immediately debited as the seller had drawn down the open line in an attempt to steal the monies. Those funds were needed to pay the line of credit account in full. Bank of America was stunned and began seeking authorization from its account holder, the seller.

In the meantime, we made several attempts to contact the seller first by telephone. However, there were no phone numbers listed in the file, nor did the real estate broker have any contact phone numbers for the seller. The closer sent an e-mail to the seller explaining the situation and requesting she immediately authorize Bank of America to transfer funds to pay the line of credit in full. The seller's response to the request was that they (her husband and she) were currently out of the country and would not return until July 31, 2008, and in the meantime would not be contacting Bank of America to transfer the payoff funds. They even stated if a mistake was made on their closing it had to be FNT's fault and not theirs!

With the fear that at any time the seller might drain her checking account of more than a million dollars, the next step was to engage the help of the local authorities. Tampa District Manager Cathy Anderson contacted an attorney to draw affidavits. If and when accepted by the district judge, it would "freeze" all of the seller's accounts at Bank of America.

In the meantime the seller used the online banking system to move the money to two other accounts in her name. She also transmitted four wire transfer requests to Bank of America to have the monies wire-transferred from her checking account to a Swiss bank account. The requests were all submitted using Bank of America's online banking system.

To Be Continued…
Will Bank of America accept the amount shown on their demand, release their lien and chase after the shortage from their borrower? Will the judge sign the temporary injunction to freeze the seller's bank accounts? Will the closer refuse to close any further transactions involving the payoff of a line of credit? This is an ongoing story. Tune in again next month to discover the outcome!

Fraudulent Property Owners

Our suspicions are confirmed! A number of sellers have acquired title to U.S. real estate property by fraudulent means. How do we close transactions with illegal sellers?

Due to a downturn in the market, we have had a number of property owners come forth and disclose to our settlement employees that they obtained their property by fraudulent means and need assistance in selling their property. Here are recent scenarios:

Scenario #1
The buyer obtained a purchase money loan using someone else's Social Security Number (SSN) and provided fraudulent information on the 1003 loan application. Now he owns the house and is trying to find a way to sell it legally. He was deported, but is now back in the U.S. illegally and trying to sell his home through a short sale. How does he sell it legally and how does escrow document the deal?

Scenario #2
The buyer needed a SSN and didn't have one. A real estate agent told the buyer not to worry. The real estate agent provided a falsified number to the buyer and now the buyer owns the property. The buyer needs to sell the property and still does not have a valid a SSN and the sale and payoff numbers on this deal are very close. The buyer will barely break even on the sale and does not have money to pay any FIRPTA withholding. The good news is the sale price is less than $300,000 and the buyer intends to occupy the property. The bad news is we have to file a 1099 without a SSN. We can't accept the Certification for No Information Reporting because it would be incomplete. The lack of an SSN on the 1099 might trigger an audit or inquiry of the buyer in this transaction to see how he complied with FIRPTA, which is why we do not want to advise him on how to complete the non-foreign certification.

Scenario #3
A man buys a house for his friends because they can't qualify for the purchase money loan. After closing on the house, he deeds the property to his friends. The purchase money loan is now in default. The original owner now wants to sell the property in an attempt to save his credit, but he is not the record owner.

All of these scenarios raise the following concerns for the settlement agent:

Proper Identification For Notarization
Does the seller have acceptable identification for a notary to acknowledge the seller's signature on a conveyance deed? We need to inform the parties early on in the transaction what the acceptable means of identification are in the state where the documents will be executed. If the parties are in the U.S. illegally, they might not be able to obtain proper identification and therefore should not attempt to sell their property.

FIRPTA Withholding
If foreigners divest themselves of U.S. real estate they must pay a 10 percent withholding to the Internal Revenue Service from their proceeds at closing. The 10 percent serves as an estimate of their taxable gain on the property, just like the capital gains tax U.S. citizens pay on the sale of investment property. The responsibility for withholding and remitting the payment on the sale of U.S. real property rests with the buyer. The IRS names the buyer as the withholding agent because they assume the seller will return to their homeland and the IRS will not be able to collect the amounts due them. If the buyer is the responsible party, the IRS can lien the purchased property for the outstanding debt.

State Withholding
Many states have similar withholding laws to the ones upheld by the federal government. However, most states will allow the sellers to claim they are selling the property at a loss and allow a waiver of the withholding at close of escrow.

As mentioned in previous editions of Fraud Insights, it is not illegal for foreign persons to hold title to property in the U.S., but when they or other U.S. citizens purchase the property by fraudulent means, there are added concerns for the settlement agent and title insurer. If you are handling a transaction where similar facts have been disclosed to you, don't hesitate to contact your escrow administrators for help! You can reach them 24/7 at settlement@fnf.com, or by phone at 949.622.4425.