Exposing common real estate, housing, and rental scams. (Scams #1-5)

When it comes to housing, mortgage and renting, there are plenty of hucksters out there ready to party you with your hard earned money. In fact, fraud in the real estate market is a lot more prevalent than you may think, with California home to four out of the top ten zip codes, and ten out of the top 25, when it comes to scams and fraud.

Each year, billions of dollars are siphoned off illegitimately by criminals who set out to sham the real estate, mortgage, and housing system. But it’s not only shady career felons, professional con artists, and organized crime bosses that perpetrate this kind of fraud, as plenty of regular citizens also dabble in doing the wrong thing.

In fact, an FBI special report on fraud states that guilty parties include Realtors, mortgage brokers, loan officers, lenders, appraisers, underwriters, accountants, attorneys, land developers, investors, builders, bankers, escrow and title employees, and plenty of landlords, renters, and plain old lawbreakers.

In this series, we’ll bring the most common scams from real estate, housing and renting to light, allowing you to protect yourself from being taken, too.

1. Straw-Man schemes

During the real estate boom of the mid-2000s, the market was white-hot, with homes appreciating so fast that it was all-too-easy to get a mortgage in someone else's name, and then cash in with a bogus sale, cash-out refinance, or over-appraisal.

In 2010 alone, more than $10 billion in mortgage loans originated based on fraudulent data on applications. Financial institutions also file their own Suspicious Activity Reports, and that same year, they reported $3.2 billion in losses, a 16% increase from 2009 and a shocking 117% increase since 2008.

The "Straw Man" was usually the person presented on paper to the banks, lenders and for the sake of the real estate transaction. They're usually someone with good credit, a legitimate job, etc., so everything was put in his or her name, which protects the real masterminds. Once the home/loan closed, the Straw Man got a small percentage of the profits for their trouble. Unfortunately, they were also usually the ones that got led away in handcuffs when the Feds started investigating this fraudulent transaction.

2. "Slamming"

"Slamming" is the street term for this scam, entailing when someone signs up for utilities like water, electric, gas, etc. in your name. There are a variety of ways they can run this cam, but often they knock on your door claiming to be a legitimate rep from the utility companies, offering to switch your account and save you money. Once you give them your personal and even financial information, they can open new accounts in your name, which you'll only find out about six months down the road when your own lights are shut off for non-payments in your name, and a host of collections hit your credit report.

3. The moving company holds your items hostage

Too often, moving companies run a hustle where they extort you for more money before delivering or even releasing your stuff. This happens most often when homeowners hire amateurish, unlicensed, and fly-by-night moving operations. Once they get your things on the truck and drive away, you'll probably get a call from the owner of the company saying that your items were over weight, over volume, or some other made-up story. Or they may just come out and tell you that if you ever want to see your boxes, bags, and furniture again, you better come up with some more cash.

Either way, the only way you can get them back is to pay more. Maybe you've signed a contract with fine print or maybe not, but having strangers hold everything you own in the world ransom is a terrifying experience, so unwitting homeowners usually just pony up the cash.

4. Collecting bogus rental application fees

This one is fairly simple, but also extremely difficult to detect and avoid. The enterprising con man advertises a rental property that’s just become available, usually for way less than market value. He or she may do open houses, put up CraigsList ads, or advertise it online by other means. When applicants express interest, they’re told that the house is going to go quickly since it’s such a good deal, so they should submit their application immediately if they want a chance.

The usual rental application comes with a $25 fee, of course, which covers the credit check and possibly a background check – all standard for rentals. However, this landlord/scam artist collects scores or even hundreds of applications, tossing them in the trash, and putting all of the $25 fees in their pocket without running one single credit check.

When no one hears back from the landlord, they just assume that they didn't get it, or they're told someone else got the home. In some cases, the scammer doesn't even own/manage the property, and they run this game online with ten houses at the same time!

In a more aggressive version, they collect first month’s rents and down payments from prospective renters en masse, but then no one is there to give them the keys on move-in day.

5. Renters hustle landlords, too

The homeowner isn't always the one in control and running game, as plenty of tenants can cheat money from their unsuspecting landlord. We've all heard horror stories about tenants that move in and just flat out refuse to pay. By the time the landlord can take them to court and have them forcibly evicted, they've been in the property for six months or so without paying a cent, usually also doing costly damage to the property.

But a more sophisticated scam looks to exploit the timing (and trust) between renter and landlord when the lease is signed. Renters for a long-term lease or vacation rental say they want the property and send an advanced check. However, they make an intentional mistake by sending way too much money, and then confess that they were confused, thought it would cost more, or wanted to pay several months in advance. The landlord then agrees to send them back the overage (or just hand them the cash) to make it right, but when he or she does so, the tenant is never heard from again. And their original check in that big amount? It either bounces or was a phony check, all together.

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 Unfortunatley, we have a lot more scams to expose, so look for parts #2 and #3 of this blog series! 

The disturbing facts behind mortgage and real estate fraud.

What is mortgage fraud?

Mortgage and real estate fraud entails deliberate falsification, misrepresentation, or action with the aim of financial gain through illegal, illicit, and unethical means within mortgage and real estate transactions.  It’s a broad definition that encompasses every consumer who lies about income on their loan application, all the way up to the most sophisticated and treacherous criminals who bilk the banks out of millions of dollars in phantom transactions. 

Who commits mortgage fraud?

Mortgage fraud in all its forms, big or small, is perpetrated by a variety of players.  The FBI’s special report on mortgage fraud states that guilty parties include mortgage brokers, loan officers, lenders, appraisers, underwriters, accountants, real estate agents, attorneys, land developers, developers, investors, builders, bankers, escrow and title employees.  Some are legitimate and licensed business people who think they are just bending the rules, while others are career, rogue criminals. 

The FBI reports that organized crime is more frequently involved with mortgage fraud, not only to steal money but to launder existing drug money or money from other illicit activities.  In recent cases there have been Asia, Balkan, Armenian, La Cosa Nostra, Russian, and Eastern European organized crime groups involved with various mortgage and real estate fraud schemes.

While this sounds like the stuff of action movies, the majority of fraud is perpetrated by regular consumers, lending professionals, realtors and loan officers who think they are only bending the rules, but cause irreparable damage to the greater system and betray the consumer’s trust.

Where does it occur?

Mortgage fraud occurs in every state and every city of the country, but there are some areas that seem to be hotspots of illegal activity, for a bevy of factors.  Recently, Nevada jumped ahead of California as the #1 riskiest state for mortgage fraud.  California is second, followed by the District of Columbia and then Florida. 

However, when it comes to zip codes where mortgage fraud is rampant, California still has four out of the top ten, and ten out of the top 25.

What does it cost us?

The true price tag of mortgage and real estate fraud is almost impossible to tally.  Of course only a portion of crimes every get reported, or arrests and convictions are made.  In addition, the cost of lower-level fraud, like lying on mortgage applications, overestimating appraisals, and the practice of pocket listings, may not have consequences until much later on.  But there are some factors that help guide us:

According to CoreLogic, since 2012, mortgage application fraud has totaled more than $30 billion annually.  Note that’s just mortgage applications.

That same source reports that in 2010 alone, more than $10 billion in mortgage loans originated based on fraudulent data on applications.

Financial institutions also have their own figures to report, as their Suspicious Activity Reports in 2010 red flagged $3.2 billion in losses, a 16% increase from 2009 and a shocking 117% increase since 2008.

The following five states had the highest estimated value of fraud among mortgage applications per year: 

California: $864 million 

New York: $278 million 

Florida: $273 million 

Texas: $261 million 

Virginia: $231 million

Is all fraud treated equally?

Generally, it’s considered there are two kinds of fraud: 

Fraud for property/housing.

This is when a consumer falsifies documents, lies, or manipulates numbers on loan applications or other mortgage and real estate paperwork in order to obtain a primary residence.  Sometimes it is still fraud, it is well intentioned and the person intends to pay back the loan.

Fraud for profit.

This involves schemes with the sole purpose of stealing money or making a profit illegally. 

Law enforcement agencies estimate that roughly 20% of all mortgage fraud is fraud for profit.

What types of mortgage fraud exist?

Loan Origination Schemes

Backwards Application Schemes

Fraudulently Inflated Appraisals

Illegal Property Flipping

Title/Escrow/Settlement Fraud

Real Estate Investment Schemes

Short Sale Schemes

Commercial Real Estate Loan Fraud

Foreclosure Rescue

Advance Fee Schemes

Builder Bailout Schemes

Equity Skimming Schemes

Debt Elimination/Reduction schemes

Bankruptcy Fraud

Loan Modification Scams

Rent-to-Own Scams

Multiple Listing Service manipulation and pocket listings.

Who is fighting mortgage and real estate fraud?

There are several organizations that investigate and prosecute fraudulent activities.  HUD, the department of Housing and Urban Development, has its own internal mechanisms to find and screen out fraudsters, and pending investigations into single-family residential loans hit an all-time high recently at 765.  The same is true of mortgage giants Fannie Mae and Freddie Mac. 

Financial institutions like banks and lenders are required to file SAR’s, or Suspicious Activity Reports, when they detect some sort of impropriety, even if it implicates their own employees or dealings.  In 2010, there were 70,533 mortgage fraud –related SAR’s filed!

The Internal Revenue Service is extremely active in battling real estate and mortgage fraud, especially from the angle of dissecting the paper trail of financial criminals.  They’re focus is on finding and collecting evidence to prove tax improprieties and money laundering activities, but there is a huge crossover into real estate and mortgage transactions.

The IRS can take civil action by calling for an IRS audit, which happens thousands of times every year. 

The IRS also works closely with the Department of Justice for criminal cases.  The DOJ also includes the FBI, Federal Bureau of Investigation.  Starting in June of 2010, the DOJ and FBI announced a join special taskforce aimed to combat real estate and mortgage fraud, named Operation Stolen Dreams.  It’s been the largest collective effort to date.  So far, 1,125 defendants have been identified, 485 arrests made, 673 indictments, and 336 convictions.  The FBI has earmarked the defendants responsible for $2.3 billion in mortgage fraud losses.

Operation Stolen Dreams uses sophisticated investigative methods, such as wiretaps and undercover operatives, to collect evidence and prosecute offenders.   The FBI also works closely with 25 different mortgage fraud task forces.  Recent estimates say they have well over 3,000 active investigations.  More than 70% of those pending investigations involve cases with dollar losses totaling more than $1 million.

Do market factors come into play?

As we’ve seen, first with the real estate market decline and now with its rebound, criminals are intent on perpetrating fraud no matter what the market conditions.  It seems that different types of fraud are more prevalent in different markets.  When the market is in a decline, fraudsters prey on financial desperate victims and foreclosure, short sale, loan modification, and debt rescue scams.  When the market is appreciating it’s far easier for them to funnel money through bloated appraisals, straw buyers, and loan misappropriations.

Statistics show that it’s far easier for criminals to make bigger money through fraud in a rising market, where consumer victim exploitation increases in down markets. 

How do criminals find their victims?

HUD reports that fraudsters are trolling unemployment offices, churches, and public foreclosure rescue fairs targeting vulnerable homeowners.  In addition, criminals find their victims:

With Craigslist ads.

Small signs on the side of the road.

With multi-level marketing and Ponzi scheme organizations.

Social media ads and posts.

Websites

YouTube videos.

False news stories.

Seminars and workshops.

Driving by houses and seeing vacant, boarded up homes, houses with For Rent, For Sale, or For Sale by owner signs, or houses with notices on the door.

How can you prevent mortgage fraud?
Report any suspicious activity to your local law enforcement agencies or the FBI.  Most cities have a governing body of realtors and mortgage professionals, like the Sacramento Association of Realtors, etc., and you can report any impropriety to them, as well.  If you are involved in a transaction and suspect fraud, keep careful notes of all communications, confirm your questions via email so there is a paper trail, and double check any gray areas with multiple sources, like title companies, etc.  You can also talk to your CPA or account and attorney to make sure you are not a victim of mortgage fraud - or unwittingly perpetrating it yourself.