Tips to avoid mortgage fraud and loan scams (2 of 2)

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The FBI defines mortgage fraud as "any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan." 

• Misrepresenting income, whether it is an exaggeration of income on a ‘stated’ loan or altering payroll documents, is illegal.
• Over 27% of mortgage fraud in 2008 involved misrepresentation of assets, including tax returns and financial statements. Fake IRS filings, bank statements and asset declarations can be created, or manipulated, with numerous software programs. 
• Lenders offer higher interest rates and less favorable terms to non-owner occupants, because the lender's risk is higher. If you say a property is your primary when it is a secondary or investment property, it is considered mortgage fraud.
• There are specific guidelines regarding the terms of gift money. Gift funds cannot be paid back. Often loan applicants refer to a down payment as gift funds when it is actually a loan.
• The amount of the closing cost (fees) and the source of the funds used to finalize the transaction are inaccurate and, therefore, unverified.

• One common scheme is to stipulate a contract sales price that is higher than the list price. Often the real estate agent is asked to change the list price in the MLS.  
• Another common scheme is “contract kiting,” where the real estate professional generates two purchase contracts, sending the false contract, with a higher sales price, to the lender in the hopes of obtaining a higher appraised value, which allows for a larger loan. Another variation of the same scheme is to have the buyer and seller sign a separate contract addendum, but omitting the addendum when providing the contract to the lender. 
• A straw buyer is a person who uses, or allows their credit to be used, for the purchase of a property they never intend to use or control. Straw buyers can also be used to purchase non-owner occupied properties by being paid for the use of their credit.
• Equity skimming is when a buyer swindles a property owner out of equity under the guise of a purchase. The ruse transfers the homeowner’s equity or property to the buyer, who deliberately defaults, diverts the equity and leaves the property owner with a financial loss. 
• According to the FBI, ‘air loans’ are "non-existent property loans where there is usually no collateral. An example would be where a broker invents borrowers and properties, establishes accounts for payments and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc. for verification purposes."
• A borrower without a down payment, who borrows the down payment from the seller, or procures financing from the seller, must disclose the mortgage and the terms to the lender. Any terms, conditions, kickbacks, credits or secondary financing must be disclosed on the purchase contract.    If you make a deal with the seller to give you a credit or to give you cash at the closing table to pay for some upgrades, it must be disclosed to the lender or it is considered fraud. 
• Inflated appraisal values accounted for 22% of fraud cases in 2008. Many overvaluations were modest enough to avoid detection, but large enough to get the loan closed, which exposes the lender to significant risk. It is illegal to provide deceptive documentation to appraisers, or to exert pressure on them, to distort value.