MORTGAGE FRAUD

Loan Fraud can be complicated, and sometimes it as surprisingly simple. We might review boxes of loan documents only to find that the HUD-1 tells us all we really need to know.

If the HUD-1 shows a transfer to an individual or individuals who perceptively had nothing to do with the transaction, a red flag will go up. Prosecutors assume that the persons are involved in some nefarious deal and that all of the parties to the transaction - mortgage brokers, loan closers, buyer, seller and bank officers - are in on the fraud. Frankly, they are sometimes right. But often the generalization assumes too much.

One of the latest scams being prosecuted involves something called the loan "flip". Essentially, shell purchasers are employed to purchase and then immediately sell properties, using bank funds given on the second sale to fund the first purchase. The net proceeds on the second sale are then divvied up among the conspirators.

The scheme works pretty well, as long as property values go up, and for years that has been the case. Houston, like the rest of the country, has enjoyed a housing boom. It is awful hard to lose money purchasing a house, even fraudulently, when the value of the property continues to rise. The "purchaser" of the house can always sell it at profit, covering any skim from the purchase.

Typically, the bank that loaned the money isn't likely to complain if it doesn't lose any money. However, it is not necessary that a loss occur for a case to be prosecuted. We tried such a case in Federal District court. In that case, a warehouse purchased as a result of a "flip" deal was sold at a profit and the bank was fully restituted. However, the property was sold after it went into default, and the loan was sufficiently high that the bank began its investigation prior to foreclosure proceedings. Usually though, nobody cares unless the bank is left holding the bag.

Another popular scheme being prosecuted involves "shell" borrowers. It also depends on rising property values. In these cases, the person perpetrating the scheme recruits individuals with good credit to purchase homes for investment. The recruiter often will pay the purchaser to contract for and borrow money to buy a property. The purchaser is assured that the home will be sold for a profit and the loan paid off. Sometimes it is.

Often, the recruiter takes a share at closing, and if the property goes into default, it is the "shell" borrower that is held accountable. Prosecutors assume that the borrower and the recruiter are inscrutable schemers that have conspired together to steal from the bank, but this is too simplistic. Many times, both parties have every intention of paying the bank once the property is sold. When the market crashes, so do their plans.

In reality, there are many legitimate real estate investors that flip sales. There are also many who market - for a fee - investment opportunities. In today's environment, it is convenient for the State and Federal prosecutors to lump everyone into the same company. It takes quite a bit of work for a defense attorney to unravel the truth from fiction.

One type or prosecution that is especially troubling is the case against a borrower who has ostensibly made false statements on his loan application. A statement that is materially false and designed to induce a lender into making a loan, is subject to prosecution. However, we believe the State often does not fully understand the nature of the loan process.

Sometimes there is several profit seeking individuals who handle loan documents before they ever make it to the underwriter. Loan brokers get a fee, usually a point, for steering a loan to a particular bank. In commercial loans, that fee can be much more than one percent. The bank is naturally interested in making a loan to someone with good credit, and many times the bank loan officer gets rewarded financially for attracting these loans.

When a person is given a completed loan application to sign from a mortgage broker or loan officer, it is typical for that person to sign without reviewing the document. This is even more likely because of the number of documents that are prone to be thrust in front of him in real property transactions. If the mortgage broker or the loan officer has included information in the application that is not true, it can be missed.

Mortgage brokers have the same problem. If the borrower is intent on lying on his application, and has covered any verification problems, the broker will have no way of knowing. For example, if a borrower claims to make 30K a year working at a software distribution company, and has fraudulently listed his friend as boss, how will the broker know? Ostensibly, the underwriter is tapped to do the due diligence, but what if he drops the ball?

The banks have slacked on their responsibility. If you follow the money, it makes sense. They have made billions on this recent home purchase boom. All of their employee incentives are geared towards new loans. Most of their loans are bundled up and sold on the secondary market. They are absolutely complicit in this mess and prosecutors may miss this point.

If you have been accused of mortgage fraud in Harris County or have been visited by an FBI agent regarding a loan you have taken out, give us a call at Stradley, Chernoff & Alford. We don't charge for an initial consultation.