Mortgage Fraud (Part 1)

mortgage fraud

Mortgage Scam: An Alberta Classic.

Alberta is viewed as the mortgage fraud capital of Canada. We’ve all seen the media stories of massive mortgage fraud involving millions of dollars. Those are just the ones that get reported. Even amongst seasoned investors and after many warnings, mortgage fraud keeps raising its ugly head! Rather than trying to cheat the system, I say why not use a legal strategy like Agreements for Sale that allows you to buy property without having to qualify for a mortgage? And yet many people still try to pull off various scams, which are the subject of this blog post.

Basically, mortgage fraud can be defined as criminal misrepresentation on one’s application for a mortgage in order to get more money than would have been possible by telling the truth. But mortgage fraud can actually cover a much broader set of circumstances.

The Law Society of Alberta is extremely concerned about mortgage fraud; they are constantly on real estate lawyers advising them to watch out for it. In this article, we’ll look at some examples from the Law Society on the various kinds of fraud. Then, in Part 2, we will apply those comments to your real estate business.

Mortgage Fraud Examples that Lawyers Watch For

Could these apply to you, your associates, investors, and/or joint venture partners?

 

Fraud for Shelter

The owners or potential owners “fudge” their mortgage application so that they can get a mortgage they can’t really afford.

Comment: You have to tell the truth!

 

Oklahoma Flip, the Bump, and Value Fraud

In some types of schemes, the value of the property or income of the borrower is artificially overstated to deceive the mortgage lender. This may be done in one of several ways including:

‘Flips’ are where one or more superficial transfers of title are used to rapidly increase the apparent value of a property.

Comment: Don’t try to inflate the price of a property by flipping.

‘Straw’ buyers are persons paid to act on behalf of the fraudster and whose name and credit is used for title transfer mortgage application purposes.

Comment: Never sell your name or identity!

Collusion is when personnel at a lending institution, mortgage broker, lawyer’s office, and/or appraiser help to falsify aspects of a loan application.

Comment: You simply aren’t allowed to cheat and you certainly can’t cheat as a ‘team.’

Misrepresentation is often focused on the original purchase price (e.g. through vendor cash-back provisions) or of the revenue potential of income-producing real estate (e.g. cash-outs on commercial property).

Comment: Did you specifically tell the lender and get approval for the cash back?

‘Shot gunning’ is to approach multiple lenders simultaneously for loans on one property, representing to each lender that the property has substantial unencumbered equity. A similar tactic is called ‘chunking’ where one approaches multiple lenders simultaneously for loans to one individual, in excess of the debt service capability of that individual.

Comment: Simultaneous applications aren’t a loophole.

 

Identity Theft or Title Fraud

The legitimate owner retains title to a property that the fraudster has targeted. The fraudster obtains a mortgage with forged and false documents often with the assistance of a dishonest broker or bank employee.

The fraudster actually illegally transfers the property from the legitimate owner to someone else and that someone else gets a mortgage. Again, the true owner only finds out when the illegitimate mortgage goes into arrears.

Comment: Fraud and theft are very good reasons to have Title Insurance.

 

Rescue Fraud

The legitimate owners of a property are in financial difficulty and agree to sell their property to a fraudster with a numbered company for an inflated price. The fraudster promises to get a new mortgage and then transfer the property back in three to six months. The fraudster does get the new mortgage, and the owners pay rent to the fraudster equal to the new mortgage payments.

The problems start when the legitimate owners do not get anything more than a nominal amount from the net sale proceeds. The fraudster does not make the mortgage payments and does not transfer the property back to the legitimate owners, so new foreclosure proceedings are started and the original owners are eventually forced out of the property.

Comment: if you are in financial trouble or your mortgage is ‘underwater,’ watch out for unbelievable rescue plans. Often, there is no way out; you just have to bite the bullet.

 

Private Mortgage Financing Frauds

In these schemes, mortgage financing is raised by ‘private offerings’ in which investors are promised high returns on real estate properties or projects (e.g. condominiums). The returns are allegedly made possible because the managers of the scheme claim to have, in the case of:

New Projects: the ability to acquire, to construct, and to sell real estate developments at substantial profit.

Comment: Real estate development is a tough game. Is this ‘private offering’ too good to be true?

Foreclosure Acquisitions: special access to acquire such properties at prices substantially below market value.

Comment: No one has special access to foreclosure properties. Pricing is competitive.

 

Bankruptcy-Mortgage Frauds

In these schemes, a fraudster may acquire titles to multiple properties with no intention of paying the mortgages. The perpetrator collects revenue from the property and then files for bankruptcy to stall foreclosure and to allow the scheme to continue.

Comment: Whenever the market drops, values drop and high ratio mortgages especially are quickly underwater. Watch for fraudsters who offer to take over your mortgage. These fraudsters are sometimes referred to as ‘dollar dealers.’ They give you a dollar to take over your property and then run it into the ground.

Watch for our next article, where we will let you know what you have to do to protect yourself!

 

Stay out of trouble, folks. If you’d like to learn how to buy property without qualifying for a mortgage, check out the Agreements for Sale Home Study Kit.

Add to cart – CAD $947.00

 

Contact Barry now to protect yourself from mortgage fraud in Alberta.

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