Foreclosure “Rescue” Schemes:
A Rising Trend in White Collar Crime
In an increasingly unstable housing market, it is not surprising to learn that mortgage fraud is on the rise. The number of mortgage fraud cases opened by the FBI increased to 462 in Fiscal Year 2007, up from 295 in 2003, and currently there are more than 1,400 pending cases nationwide.1 During the housing boom, many scams were designed either to get under-qualified homebuyers approved for loans or to cash out over-inflated equity for existing homeowners. With the changing housing market, however, comes change in fraud. The mortgage bailout scam is a particularly devastating new breed of crime that intends to defraud desperate homeowners.
An increasing number of homeowners, weighed down by late payments and mortgages that exceed their financial means, are unknowingly falling prey to foreclosure rescue schemes, handing over the equity in their homes to fraudulent parties. While the media have devoted news coverage to these mortgage bailout scams, many—including both potential victims and law enforcement officers—may not fully understand how they work, or how victims become susceptible to this particular form of fraud in the first place.
A “concerned” party, often a mortgage broker, will offer to save homeowners from financial disaster and allow them to keep their homes. Homeowners are persuaded to transfer the deed over to the broker, who has promised to use a portion of the home’s equity to cover a certain number of mortgage payments, typically for 12 months. When the broker is placed on the deed, he is able to refinance the property in the name of his or her choosing and pull enough equity out of the house to cover the new mortgage payment amount, as well as the fees associated with refinancing.
This process allows the original homeowner to stay in his or her home without having to pay principal, interest, taxes, and mortgage insurance. He or she can then use this time to use a far less restricted stream of income to pay off or, at least, pay down debts, greatly improving his or her credit score in the process. If both parties fulfill their end of the bargain, the original homeowner’s increased net income and improved credit should be strong enough to refinance the rate and terms of the current mortgage payment, thereby placing the home back in his or her sole possession.
This transaction is legal and brokers who act in good faith actually can help homeowners avoid foreclosure. Knowingly trying to manipulate the system for personal gain, however, is illegal and many unscrupulous individuals have done just that to strip homes of their equity after their names have been placed on the property’s deed. This scam has proven to be highly lucrative, as one Washington, D.C., metropolitan area-based mortgage broker exhibited. By defrauding dozens of victims with this particular mortgage bailout scam, the owner of one now defunct mortgage brokerage was able to siphon off an estimated $35 million of her clients equity, easily enabling her to foot the bill for her nearly $800,000 wedding, among other things.2
Worried, deep in debt, and under-informed, many troubled homeowners are simply relieved to hear they may be able to keep their homes. Many potential victims of this particular form of fraud are unable to refinance the rate and terms of their mortgage because, at a minimum, they would have to be up to date on payments for their current mortgage before being able to refinance. Furthermore, with rapidly declining home values (caused in large part to foreclosures), many are already making mortgage payments that are more than what the home is actually worth.
Unfortunately, this is but one of many scams that local and federal authorities are contending with. Multiple mortgage fraud task forces and working groups have been established throughout the Department of Justice and across other federal agencies, all designed to take on multiple mortgage fraud-related issues with the hope of stemming the tide of various mortgage-related fraud activities. The FBI plays a major role in investigating mortgage fraud and works with many partners during investigations, including the Postal Inspection Service, Internal Revenue Service, Immigration and Customs Enforcement, Secret Service, U.S. Trustee Program, and the Inspector General Offices of the Department of Housing and Urban Development, Department of Veterans Affairs, and the Federal Deposit Insurance Corporation.
According to the FBI, in Fiscal Year 2007 there were 46,717
mortgage-fraud suspicious activity reports, with $813 million in losses.3 To combat mortgage fraud, the FBI has issued these helpful hints to protect homeowners:
- Get referrals for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county, or city regulatory agencies. Research all solicitors through the Better Business Bureau, state Attorney General's Office, and/or consumer protection service in the state or city where the company is located.
- Never sign any loan documents that contain blanks. This leaves you vulnerable to fraud.
- Be aware of offers to "save" homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. Seek a qualified credit counselor or attorney to assist you.
- Insist that all solicitors send materials to you in writing so that you are able to study the full details of the offer, as well as any guarantees, and/or refund policies.
- Understand what you are agreeing to and signing. If you do not understand, re-read the documents or seek assistance from an attorney.
- To stop receiving telephone solicitations, instruct solicitors to delete your contact information from all call lists and register with the Federal Trade Commission's (FTC) "Do Not Call" Registry. Report suspicious telemarketing calls, mail solicitations, or advertisements to the FTC, at 877.FTC.HELP or, online at www.ftc.gov.
- If it sounds too good to be true, it probably is!
For more information about mortgage fraud and the FBI’s efforts, visit www.fbi.gov/hq/mortgage_fraud.htm.