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How to Spot Mortgage Fraud

How to Spot Mortgage Fraud
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How to Spot Mortgage Fraud

mortgage fraudIt seems like Florida is always nabbing one of the top spots on somebody’s “best of” list. Now, thanks to a booming housing market and the popularity of nontraditional home loans, suspected mortgage fraud is up 35 percent nationwide—and Florida ranks in the top 5 places in which that type of fraud can occur.
“When you look at the sheer volume of real estate transactions here in Florida, it’s inevitable that the state will have a higher delinquency, fraud and foreclosure rate,” says Edward M. Wentzel, senior vice president of SunTrust Mortgage in Orlando. Here are some recent scams and tips on what to look for in your real estate transactions.

1. Hyped Appraisals

One red flag, Wentzel says, is when a buyer is willing to pay more than the seller’s asking price. “I heard of one case where the sellers sold the house and the buyers actually went and got a mortgage that was substantially higher than the sales amount,” he says. “Then, the bank was left with a mortgage that was substantially higher than the amount [the house] was worth. They must’ve had an appraiser working with them because it takes a couple of people to pull it off.”

In November, worldwide financial services corporation Lehman Bros. Holdings filed suit against a group of investors, title companies, a mortgage company and an appraisal company involved in possible mortgage fraud at a New Port Richey condominium complex. According to the lawsuit (filed in Tampa), the defendants used inflated appraisals in a scheme to potentially defraud Lehman Bros. out of millions of dollars. Each of the properties (13 in all) were appraised at $733,000 when, in actuality, they were worth barely one-third that amount.

During the real estate boom of the past five years, it was easier for lenders to fail to spot loans that were worth more than the actual properties’ values. Now, as the market is cooling down, mortgage experts say lenders are expecting to uncover more cases of mortgage fraud.

In many cases, lenders don’t find out until buyers start missing their payments. As the lender prepares to foreclose, the inflated appraisal is discovered and the lender is out thousands of dollars or more when the home is sold. “In most cases, it’s down the road six months [or more] before people realize they had a faulty appraisal,” says Wentzel. “And [these criminals] usually need more than one person to carry it out. Somebody was in on the scheme.”

2. Phony Fees

Mortgage fraud needn’t involve big bucks to constitute a crime. Wentzel explains that, in many cases, mortgage fraud goes unnoticed because it consists of simply padding the paperwork with phony fees. “Someone can put a bogus fee on the closing statement and you might not find it until later when you’ve started auditing and you see that [someone is] getting $50 here or there from the closing agent,” he says.


It might be a good idea for sales associates to have the seller/buyer review the paperwork with an attorney prior to closing.



3. Altered Paperwork

Wentzel recommends comparing all of the documents prepared in advance with the final versions that will be signed at the closing to make sure everything is above-board. “Keep an eye out and [scrutinize] the HUD statement that’s prepared before closing, for example, and compare it to the HUD at closing to make sure there aren’t any strange third-party fees that popped up at the last minute,” he says.



4. Know Your Vendors

Wentzel advises sales associates to work with mortgage professionals, appraisers and title companies that they know and trust—or get referrals from reputable people in the community. Checking out professionals’ licenses with the state, county or city regulatory agencies is a must, he says, because their license could’ve been suspended for fraudulent activity in another area. Also, if an individual’s name is listed (instead of a company) as someone who gets paid for services rendered that could possibly indicate a scam, he says. “I’ve heard of that happening,” he says, adding that corporations—not individuals—should be paid for the appraisal, title work and so forth.

Where to Report Suspicious Lending

Visit the Mortgage Bankers Association’s (MBA) Web site dedicated to stopping and reporting mortgage fraud:


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