If you have followed the news recently, you may have read articles about mortgage fraud. Several “sub-prime” lenders are going out of business – in part due to mortgage fraud.
More troubling, I have met with several potential bankruptcy clients recently who have gotten themselves caught up in some of these mortgage fraud transactions. In most of these cases, the potential client loses money, but in more and more cases, the potential client may find himself with possible criminal liability.
Here’s how one version of a classic mortgage fraud scheme works: my client is approached by a friend or acquaintance with an opportunity to participate in a profitable real estate investment. The “friend” has a friend who is in the real estate business and he knows of a neighborhood where there are good deals on rental properties. In many cases these rental properties already have tenants. The “friend” can also arrange financing in which my client does not have to put any money down and the debt service (i.e., the mortgage) will be covered by the rental income.
The “deal” works because the rental properties have appraised for thousands more than the selling price. My client attends a closing, signs a few documents and now he owns one or more rental properties.
Shortly thereafter, my client – and the bank – get left holding the bag. The tenants disappear and my client discovers that he cannot find any replacement tenants to pay even half of what the original tenants paid. Furthermore, when my client calls a real estate company to list the property, he discovers that most agents won’t touch the neighborhood and the few that will suggest a listing price far less than what is owed on the property.
Here’s what happened. The seller, the appraiser, the closing attorney and possibly a real estate agent or a mortgage broker are all working together to rip off the bank. They buy several houses in a neighborhood and perform a few minor repairs. The appraiser then writes up an appraisel showing a dramatically increased property value.
Next, its time to find a gullible “investor.” My client is recruited to buy the property at the inflated value. The seller or agent (sometimes with the help of a mortgage broker) finds a sub-prime lender who will issue financing based on the appraisal. The closing attorney processes the closing and the deal is done. The closing attorney, remember, must run the title so he can clearly see that the property value has been artificially inflated.
The sale generates thousands of dollars in profits – and these profits are distributed amongst the seller, the appraiser and the closing attorney. In most cases my client even collects a few thousand dollars at closing – he is told that he has the good fortune of participating in a deal where the property appraised at significantly more than the sale price and he is therefore entitled to pull money out of the deal.
Now my client comes to me to file bankruptcy. If we file, the U.S. Trustee will spot the fraud and contact the U.S. Attorney. If my client received cash at closing he is considered a party to the fraud and can find himself with criminal charges. Having received cash, he may also blow his discharge.
So, in many of these cases, I have to advise my client not to file because of the possible criminal repurcussions and because of a likelihood that bankruptcy will not discharge the debt arising from the scam.
What can you do to protect yourself:
1) recognize that if an investment deal sounds too good to be true it probably is
2) if you choose to make a real estate investment, do your homework. Hire an independent appraiser and buyer’s agent.
3) avoid investing in neighborhoods where most of the properties are rental homes
4) if someone offers you cash back on a real estate deal, be very, very suspicious
5) if the investment promoter, agent, attorney, etc. discourage you from hiring your own professional counsel, avoid the deal
6) if you find yourself being rushed into a deal, be very suspicious
7) if someone you know only casually approaches you about a real estate deal, be suspicious
8) if you suspect that you have been involved in a fraudulent transaction, contact a real estate and or criminal defense lawyer immediately
Jonathan Ginsberg, Esq.
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Last modified: January 23, 2010