Sadly, REALTORS^® are familiar with the mortgage fraud schemes that arose out of the demand for housing in the last decade. Buyers and industry professionals used dishonest means to obtain funds for the purchase of housing that buyers really could not afford. Now, a dramatic reversal has occurred and the focus of fraud has shifted: homeowners attempting to get out of housing they can no longer afford fall prey to scam artists promising relief from foreclosure. Some buyers even cook up fraudulent schemes of their own to escape from the impossible burden of their mortgages. Scams and schemes are being reported at an alarming frequency.

Potential victims of fraud are not only your neighbors or clients who are facing foreclosure. The negative impacts of fraud extend into the neighborhoods; property values decrease, owner-occupied housing diminishes and the number of abandoned and vacant properties rises.

The following are brief illustrations of some schemes that are being used to defraud homeowners, lien holders, brokers and investors.

Scheme one: “Let us renegotiate your loan” 

A consultant contacts a homeowner facing foreclosure and offers to renegotiate the mortgage loan on the home with the lender. The appreciative homeowner pays a large upfront fee to the consultant, sometimes paying out the last few hundred dollars in the homeowner’s savings. The unscrupulous consultant pockets the fee but does little or nothing to renegotiate the loan. Assuming the consultant is acting on the homeowner’s behalf, the homeowner stops communicating with the lender — as the consultant had directed — and is surprised when the foreclosure proceeds. The homeowner now has little, if any, time to try a short sale, has lost the fee paid to the consultant and faces a larger delinquency.

Avoid the scam 

Homeowners should avoid consultants who initiate contact. Homeowners should always continue to communicate with the lender, open all mail and correspondence, and respond in a timely manner.

In Wisconsin, legitimate mortgage foreclosure consultants are required to enter into a written contract with the homeowner explaining the exact nature of the consultant’s services and the total amount of compensation. The consultant cannot be paid any upfront fees; a consultant can only take money once the services are performed. These are just some of the safeguards put into place when Wis. Stat. § 846.45 was adopted.

Legitimate foreclosure consultants can be found by contacting government agencies and nonprofit organizations. More information about foreclosure consultants is available in the June 2009 Legal Update, “Mortgage Foreclosure Scams,” at www.wra.org/LU0906.

Scheme two: “We will negotiate a short sale and buy your house” 

A “middleman fraud” scheme victimizes both the homeowner and the lender. The scheme starts when the seller is approached by the scam artist acting as a buyer. The buyer/middleman offers to negotiate a short sale with the lender on behalf of the seller so the scammer can buy the house. The seller enters into a contract with the buyer/middleman (frequently an option) at a low price and the buyer/middleman works with the lender to structure a short sale. Meanwhile the middleman recruits a new buyer to purchase the property at a much higher price, often with simultaneous closings.

According to the FBI, two Connecticut real estate agents were indicted for their participation in this type of short sale mortgage fraud scheme. Although most short sale transactions are legitimate, in these cases the brokers allegedly defrauded the lenders of the proceeds due on the deals. The real estate licensees allegedly knew that the short sale buyers were not the end buyers and that the end buyers had executed offers at legitimate purchase prices with the middleman. These real estate licensees face maximum penalties of imprisonment of 30 years and fines of up to $1 million for each count. For more information, visit http://newhaven.fbi.gov/dojpressrel/2009/nh100809.htm.

Avoid the scam

Be wary when a party that has a vested interest in the home is negotiating with the lender. Having independent legal counsel work with the lender to accomplish the short sale protects the homeowner’s interests. Also, option contracts are risky for a homeowner. An option may be exercised at the will of the middleman. If the middleman cannot find an end buyer or will not make enough money on the scheme, he or she can walk away from the option leaving the homeowner with only the option fee paid, if any, lost time and no buyer.

Wisconsin real estate licensees have disclosure obligations to secured lenders. According to Wis. Admin. Code § RL 24.07(4), “a licensee, when engaging in real estate practice, who becomes aware of the fact that a party to the transaction has not disclosed that party’s entire agreement regarding the transaction to that party’s secured lender, shall disclose this fact, in writing and in a timely manner, to the party’s secured lender.” If a licensee knows the buyer or seller has entered into a side deal relating to the property (like a middleman fraud deal), the licensee must disclose this to the lender.

Scheme three: “Sell it to a friend” 

The homeowner/borrower finds a person (who is in on the fraud) to act as the buyer to make a low offer on the home. The lender, unaware of the relationship between the buyer and seller, approves a short sale at the artificially low price. The homeowner remains in the property and later buys back the house after securing a loan for a lower amount from a different lender.

Avoid the scam 

Lenders have become wise to this scam and often require that all short sale transactions are arm’s length deals. Some lenders are requiring the parties to sign affidavits to that effect and may investigate the relationship between the parties. If caught, the parties could be sued for defrauding the lender. Friends don’t let friends drive drunk or buy out their interest in real estate.

Scheme four: “We’ll buy your home now; you rent it and buy it back later” 

There are several variations of buy and rent back arrangements. One involves equity skimming from a homeowner who has occupied the property, paid the mortgage for years and built up some equity in the home, but who can no longer pay the mortgage. Such homeowners typically did not buy in the recent hot real estate market so they have equity in the home.

Because the homeowner is in financial distress and cannot make the mortgage payments, the buyer offers to buy the home and lease the home back to the seller at a low rent. The fraudster says he will sell the property back when the homeowner gets back on his feet. The owner signs a deed to the home and the fraudster takes out mortgages on the property, thereby skimming the equity. Sometimes unsophisticated homeowners believe they are getting a loan from the fraudster, but they are really signing over title to the property.

Another variation of the equity skimming scam is when homeowners are contacted by someone offering to work on their behalf in a sale, rental and buy back scenario, sometimes offering to be a power of attorney. The scammer uses the power of attorney to transfer title into a trust or to a third party, takes out a new or second mortgage, and then disappears with the proceeds.

Avoid the scam 

Homeowners must always know what they are signing! Homeowners in trouble can negotiate with the lender for lower mortgage payments for a period of time or ask the lender for forbearance or other loan modifications. Forbearance is an agreement to temporarily let the homeowner pay less than the full amount of the mortgage payment, or pay nothing at all, during the forbearance period. Mortgage companies may consider forbearance when the owner can show that funds from a bonus, tax refund or other source will bring the mortgage current at a specific time in the future.

More strategies for assisting distressed homeowners are offered in the January 2007 Legal Update, “Avoiding Foreclosure,” at www.wra.org/LU0701, and the March 2009 Legal Update, “Working with Distressed Sellers,” at www.wra.org/LU0903.

Scheme five: “Buy and bail” 

The usual victim of this scam is a homeowner who has negative equity in the home because of decreasing home values in the market or because the homeowner borrowed too much; the loan(s) greatly exceed(s) the property’s value. Before foreclosure begins, the homeowner makes an offer on a lower-priced home. When applying for the new loan, the homeowner presents a falsified lease of the current house in order to qualify for the new home loan. The new lender funds the new loan, and the owner moves into the new home and walks away from the original home, allowing it to go into foreclosure. Because of the timing, the buyers are able to avoid having the foreclosure show on their credit report, so they are not prevented from acquiring the new home.
Both lenders are defrauded. An unknowing tenant moves into the first home and is quickly served with notice of the foreclosure.

Avoid the scam: 

Homeowners should refer to the terms and conditions of their mortgage before renting property. It is not nice to fool Mother Nature, and it is a federal crime to falsify loan application documents. Truthful completion of forms, arm’s length transactions and transparency of all aspects of the deal benefit the buyer, seller, lender and REALTOR^®.

Homeowners who believe they have been a victim of loan modification or foreclosure rescue fraud should file a complaint with the Wisconsin Department of Agriculture, Trade and Consumer Protection and the Wisconsin Department of Financial Institutions at:

Department of Agriculture, Trade and Consumer Protection: Consumer Protection Hotline: 1-800-422-7128
File your complaint online at www.datcp.state.wi.us/cp/consumerinfo/cp/complaint-form/CPComplaintForm.jsp.

Department of Financial Institutions: 608-261-9555
File your complaint online at www.wdfi.org/contact_us/ComplaintDefault.htm.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.