The article "Recognizing Mortgage Fraud" in the March/April issue of Title News magazine (Volume 87, Number 2, pages 16-21) gives some great tips on how to spot the "red flags" to prevent a disaster from happening, some of which are included below:
Recognizing Mortgage Fraud
Real estate and mortgage fraud stories are all over the news. Learn some of the red flags to prevent a disaster from happening.
Mortgage fraud is being declared by many as real estate's white-collar epidemic. This type of fraud is quite complex and difficult to spot, which then makes it even more difficult to police. Artificially inflated homes that are either difficult or impossible to refinance or sell, lead to an increase in foreclosures. That in turn leads to deteriorating neighborhoods and an increased hardship for the people living in those communities and our industry as a whole.
According to the FBI Web site, the top ten states experiencing mortgage fraud in 2006 were California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Utah and TEXAS
There are two main types of mortgage fraud: Fraud for Property and Fraud for Profit.
Fraud for Property makes up approximately 20% of all fraud cases while Fraud for Profit makes up the remaining 80%.
Let's take a look at some of the different types of Fraud for Property schemes: 
- Occupancy Fraud- Buyer/Borrower or Mortgage Broker leads the lender to believe the buyer will occupy the property in order to obtain a lower interest rate.
- Silent Second Mortgage- In this scenario, the buyer borrows the down payment from the seller but it is not disclosed to the lender. After closing, the buyer will make two payments, one to the mortgage company and one to the seller. The lender lends the money believing that the borrower used his own money for the down payment.
- Disappearing Second Mortgage- The buyer supposedly borrows the down payment from the seller by means of a second mortgage. What the lender doesn't know is that the mortgage is not real and usually disappears after closing. The scheme is usually used for borrowers who require 100 percent financing but can't quality for it otherwise so the sales price is increased.
- Property Flip- This one you may be familiar with. Here's how it works. A buyer pays a low price for property, and then resells it quickly for a much higher price. It is not illegal to make a profit but it is illegal if an appraisal has been inflated to distort the value or if it is sold to an unsuspecting buyer and involves false information or statements. In many cases, funds derived from the second closing are used for the purchase in the first closing. The "flipper" seldom takes title or receives a 1099 for any profit made.
These are just a few examples of schemes being perpetuated at this time. The FBI considers industry insiders to include real estate professionals, appraisers, title companies, settlement agents and mortgage professionals and even if you are unaware that fraud is occurring in the mortgage part of your transaction you can still be held liable by a judge strictly based on your industry knowledge and licensing
One of the best and most prevalent examples of fraud is when the purchase agreement is presented to the seller, accepted, and then the price is later changed to fit the mortgage requirements. Say the original offer was accepted at $192,000.00 then the loan officer calls and says the sales price needs to be increased to $200,000.00 with $8,000.00 in seller concessions. The sales price is now inflated but where has the value increased. Why was the home worth $192,000.00 earlier and now suddenly it is worth $200,000.00? This scenario is still happening all too often. It is a creative way to allow the purchaser to get the closing costs paid in the mortgage amount, but the sales price can only be one amount. The sales price should be the amount reflected on the HUD-1 and it should be the same amount that the property transfer tax and the commission are based on.
According to federal law, the HUD-1 statement must contain accurate figures of all the debits and credits in a transaction.
How can you protect yourself? Below is a list of red flags that you need to be aware of: 
- Your customer doesn't have a driver's license or good form of identification
- The earnest money check is made payable by someone other than the buyer
- You receive a copy of the appraisal and the estimate of value is substantially higher than the sales price or seems in excess of value for the neighborhood.
- The amount of the loan commitment is higher than the purchase price
- A seller and buyer agree on a sales price, but the buyer's lender later asks that the contract be rewritten at a higher price to show the seller benefiting from a price differential.
- Buyer offers more than the seller's asking price subject to a seller carry back. A separate addendum not referenced in the purchase agreement states the seller will release the second mortgage upon closing.
- A buyer offers more than the asking price contingent upon the seller writing a check at closing that's made payable to a third party for renovations or decorating costs.
- You perform a market analysis for a potential listing and discover that the property was involved in several recent sales and with large and unexplained value increases.
- Property has been for sale for months without an offer and suddenly a buyer wants to make an offer at or above the listing price with no contingencies.
- A lender closing official asks your client to sign blank documents.
- Buyer's down payment is from a third party
REMEMBER If you feel uncomfortable about your transaction in any way.....
YOU ARE PROBALBY CORRECT!!
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