MORTGAGE HORROR STORY OF THE WEEK–MORTGAGE FRAUD MEETS FSBO

It’s not that I want to keep beating the mortgage fraud drum, it just keeps falling into my lap.

Furthermore, I figured that as a mortgage broker with almost two decades of experience, I could easily steer clear of trouble.  After all, if I can’t recognize mortgage fraud, who can? 

But today I learned a double lesson.  Mortgage brokers and FSBO sellers are both at risk of getting caught up in mortgage fraud.  Without even knowing. 

What happened?

This morning, a woman called in and asked to speak with “the broker”.  Hmmm….sounds like trouble.  Although reluctant at first to explain, she finally spilled the beans.   Here’s what unfolded.


The woman is a FSBO seller here in Sacramento, and her sale was supposed to close today.  She had grown concerned, however, because nowhere in the paperwork was there any disclosure of the cash she was giving back to the buyer after the close.  She told the escrow officer she wanted the credit disclosed in writing, but she was told to keep quiet or her loan would not fund. Is your Spidey sense tingling yet?

Originally, she had asked $440,000 for the home.  But the buyer offered her $500,000, with a $60,000 cash credit back after the close.  The credit would be disguised as a payment directly through title from the seller to the buyer’s son-in-law, a local underwriter for a well known subprime lender.  Handled this way, the credit would be invisible to the lender.  And as always with loan fraud, this was a 100% financed, owner-occupied, stated income loan.  So the borrower was borrowing $60,000 more than she was actually paying for the home.  The seller was told this was perfectly fine.

The Epiphany

Here’s the astonishing thing.  Despite the fact that this buyer is a past client of Big Valley Mortgage, her loan officer had no clue about the arrangement.  How could that be?   The buyer had approached the loan officer for help with a “rush”.  The deal had fallen apart with another lender and had only two weeks left to close.  To hide the credit, the buyer had used an out of town appraiser and escrow officer.  Presumably the appraiser cooked the books.  Certainly the escrow officer willfully defrauded the lender.   

After learning the truth, the loan officer immediately called the escrow officer to cancel the transaction.  But the escrow officer had already requested funds and released the Deed to record!  And just like that, the unwitting FSBO seller and loan officer had committed mortgage fraud.  

The Lesson

Mortgage brokers need to be alert to the signs of fraud, things like hurried deals, unfamiliar partners in the transaction, and the absence of Realtors as a second set of eyes and ears.  It isn’t unusual in today’s Internet world, for buyers to gather a team of people that are not local or acquainted.  But a local team may be a buyer or seller’s best defense against problems.

And FSBO sellers now have one more thing to watch out for when operating without the help of a real estate professional.

Epilogue

Fortunately, a call to the lender was sufficient to reverse the transaction and cancel the deal before the police showed up.  But it was close.

Got an opinion or thought on this?   Leave a comment below. 

Got a question or need help with a loan?   Shoot me an email.

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This entry was posted on Monday, January 29th, 2007 at 1:18 pm     and is filed under Loan Fraud, Sac Real Estate, True Stories. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

3 Responses to “Mortgage Horror Story of the Week–Mortgage Fraud meets FSBO”


Lucy Says:

And that sounded like such an innocent deal. Thats terrible that someone could have been taken like that. She was just getting change back, right? Not! Seems to be an alarming trend, the mortgage fraud business. Ralph Roberts is quoted in the Swanepoel Trends Report by saying that more and more people are being sent to jail on charges of bank fraud and conspiracy to commit mortgage fraud. I am concerned that this will get worse before it gets better. What do you think?

Marc Says:

Yes Lucy, just small change. $60k is no big deal.

I believe it will get worse before it improves. There is just too much money involved. I am worried too that scammers will target For Sale By Owners, trying to take advantage of a naive consumer who may be unaware for this stuff. An increasing awareness is the best defense, so I’m on my soap box a lot with Realtors and clients getting the word out.

Thanks for commenting!