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!

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

Wikipedia defines mortgage fraud as “a crime in which the intent is to materially misrepresent or omit information on a mortgage loan application to obtain a loan or to obtain a larger loan than would have not been obtained had the lender or borrower known the truth”. We think mortgage fraud covers a much broader set of circumstances.

Mortgage Fraud Examples That
Lawyers Are Advised to Watch for
(Could these apply to you, your associates, investors, and/or joint venture partners?)

  1. 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!

  1. Oklahoma Flip, the Bump or Value Fraud

In these 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’, where one or more superficial transfers of title are used to rapidly increase the apparent value of a property.
  • ‘Straw’ buyers (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!
  • Collude with personnel at a lending institution, mortgage broker, lawyer’s office, and/or appraiser
    Comment: you simply aren’t allowed to cheat and you certainly can’t cheat as a ‘team’
  • Target or work within certain ethnic or cultural circles
    Comment: watch for smooth talkers with big promises showing up at your church or cultural group!
  • Misrepresentation of 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?
  • Approach multiple lenders simultaneously for loans on one property (i.e. ‘shot gunning’), representing to each lender that the property has substantial unencumbered equity. Another tactic is to approach multiple lenders simultaneously for loans to one individual (i.e. ‘chunking’), in excess of the debt service capability of that individual.
  1. Identity Theft or Title Fraud

There are two kinds:

  • 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: One very good reason to have Title Insurance.
  1. Rescue Fraud

The legitimate owners of a property are in financial difficulty and agree to sell their property to a fraudster’s 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 but the legitimate owners do not get anything more than a nominal amount from the net sale proceeds. They pay rent to the fraudster equal to the new mortgage payments. However, 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.

  1. 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.
  1. 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 takeover 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!

Contact Barry McGuire now.
Alberta real estate needs an Alberta real estate lawyer.

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