What Is Mortgage Fraud For Profit?

The Story:

In 2007, Sally was struggling to keep up with her mortgage payments. By September, she received a foreclosure notice. Shortly after, she was contacted by someone promising a solution: a $40,000 check to help her pay her bills and prevent foreclosure. Sally signed the papers in late October at a Maryland title company and received the check. She started making new house payments to District Properties in December.

Nine months later, Sally faced financial difficulties again, but this time received an eviction notice. She soon discovered that she no longer owned her home; she was merely a renter. When she called District Properties, she learned that Subprime Mortgage Co. held two loans against the property—one for $264,000 and another for $66,000. To buy back her home, she would need to pay $360,000—three times the mortgage she had a year earlier. With her poor credit and income, Sally couldn’t afford this amount. The representative simply apologized and hung up.

The Profile:

Sally fell victim to a mortgage fraud scheme known as "equity skimming," a form of mortgage fraud for profit. This scheme involved various players, including a mortgage broker, real estate agent, appraiser, "investor," "straw buyer," and "bird dog," each taking a share of the equity in Sally’s house. Ultimately, Sally lost her home, Subprime Mortgage Co. foreclosed, and the fraudsters profited over $100,000.

Unlike predatory lending, which typically involves a single loan with high fees and interest rates, mortgage fraud for profit is a complex scheme. It often includes inflated appraisals, falsified loan applications, and equity skimming. In these cases, the borrower is usually a straw buyer—someone who doesn’t intend to live in the home. Instead, the investor or their company makes the mortgage payments, and the property is eventually foreclosed or flipped for additional profit.

How the Scheme Works:

1. Bird Dog: Identifies distressed properties by checking public records and scouting neighborhoods, reporting these to investors for a fee.

2. Straw Buyer: Poses as the buyer with good or falsely inflated credit. In some cases, a straw buyer’s identity might be stolen. Often, they are recruited through word of mouth and may receive $5,000 to $10,000 for their participation. The consequences for straw buyers can include ruined credit, investigations for fraud, or even criminal charges.

3. Mortgage Broker and Appraiser: Actively participate by falsifying documents and receiving compensation.

4. Title Company Employees: Create and manage closing documents and disburse funds.

5. Industry Insiders: Often involved in mortgage fraud, with 80% of reported losses involving professionals from the financial industry, as noted in the 2006 FBI Financial Crimes Report.

Conclusion:

Mortgage fraud for profit is a serious issue, facilitated by various industry insiders and exploiting distressed homeowners. Professionals' involvement in these schemes underscores the importance of stringent regulations to protect consumers and ensure financial integrity.