Fraud in Real Estate Introduction
According to government law enforcement statistics, various types of mortgage and foreclosure fraud soared 800 percent in just the past five years. As much as $4.0 billion worth of property may be involved in some fraudulent activity, striking at honest but vulnerable homeowners, straining financial resources of lending institutions already hurt from the credit crisis, and federal and state governments that are forced to investigate and punish scam artists. The Federal Bureau of Investigation has increased its manpower devoted to real estate fraud by three times. Unfortunately, many of these crimes are difficult to prosecute or to punish severely, and, as a result, many state governments are considering legislation to criminalize foreclosure fraud. Taking advantage of a person or family’s misery hurts the entire housing industry. Ohio’s Attorney General, Marc Dann, stated bluntly that he could not think of something more “shameful or sleazy than attempting to profit from the misery and fear of Ohioans facing foreclosure and willing to do anything to grab onto any ray of hope that may enable them to keep their homes.” Illinois Attorney General, Lisa Madigan, calls the fraud a “cancer” that is “eating away our neighborhoods.” Both the federal government and state governments are considering harsh penalties for foreclosure predators.
Types of Foreclosure Fraud
There are three general types of foreclosure fraud:
1. Phantom help
2. Bailout/Bustout schemes
3. Bankruptcy Scams
1. Phantom Help
Phantom help is a scam where a “distressed property consultant” contacts a homeowner whose property is in the foreclosure process. The “consultant,” who poses as a sort of credit adviser or counselor, perpetrates the fraud by promising to “rescue” the owner by “buying time” so the home can be saved through negotiations with the lenders. This consulting work almost always requires an upfront fee of several thousand dollars.
Of course, after the fee is paid, little or no effort is put forward for the homeowner who is now even more strapped for cash. The scam artist walks away with the money, and the help is a phantom. In a growing number of states, it is illegal for a foreclosure consultant to receive money before performing services.
In October 2007, the State of Texas filed charges against one foreclosure consulting operation, which had received between $100,000 to $150,000 per month from stressed homeowners. Southern Residential LLC used newspaper, radio, and television advertising, as well as the House911.com and Stop911.com websites with the offer to save homeowners from looming foreclosure. The firm’s “stop foreclosure specialists” pestered owners to pay an upfront fee of up to $2,000 for advisory services and then prohibited homeowners from contacting their mortgage lender.
In other instances, Southern Residential required balloon payments of tens of thousands of dollars to settle mortgage re-negotiations that never happened. An untold number of homeowners have since lost homes and been forced into bankruptcy. The Texas AG is seeking court-ordered restitution for harmed homeowners and wants civil penalties of up to $20,000 per act for the company’s violation of the state’s Deceptive Trade Practices Act and $5,000 per incident for failing to register with the state as a telephone solicitor.
2. Bailout/Bust Schemes
A bailout scheme – also known as a bust out the scheme – is the second type of common foreclosure fraud. In a bailout scheme, an individual facing foreclosure agrees to “temporally” sign over complete or a fraction of the title of their house to a company that ultimately turns out to be fictitious. As an added incentive, owners are told they will gain full title to the property after the foreclosure is solved. Then, through another illegal act known as equity skimming or equity stripping, scammers then drain the equity out of the house, through the shell company, and all the homeowner is left with is trouble. In addition to worsening financial trouble, a few states make it illegal for a homeowner to convey the property to stop a foreclosure if that is the intent, which leaves the homeowner liable for criminal penalties. With the bailout, the scam artist might buy the home for a fraction of its value and then collect rent from the homeowner. That money is used by the scammers to pay the mortgage for the property that is now in their name. If the original owner wants the house back, the price is so inflated that it is impossible for the original owner to repurchase. The new titleholder simply sells the property and keeps the equity earned by the former owner.
In a nationally recognized case in 2004, a Washington D.C. judge called such a foreclosure “outrageous” and awarded $415,000 to the estate of a dead woman. The case went to Rodney Byrd and his Creative Investment Company who had “rescued” a sick and bedridden widow named Hattie Smith. Byrd convinced Smith, who had fallen behind on mortgage payments – but who had over $100,000 of equity in her home – to convey the property for $33,000. Byrd, through Creative Investments, then sold the house to a partner, Kevin Judd, for $150,000. Judd sold the property soon afterward for $282,000. Byrd disagreed with the judgment and appealed stating that he “didn’t force anyone to sign anything.”
3. Bankruptcy Scams
Bankruptcy scams are also a common way that crooks make illegal profits. In this type of scam, the defaulting property holder sells fractional interests in a property to a straw buyer through the “rescuer.” The straw buyer – or sometimes the buyers – file for bankruptcy, and this action puts the foreclosure on hold long enough for the crooks to get monthly income from the homeowner. In one case in California, the property was tied up in 24 separate bankruptcy actions. It is common for scam artists to collect monthly fees from the homeowner who knows nothing about the bankruptcy action on their property.
Bait and switch is an old con famously used by unscrupulous car dealers. In the context of bankruptcy scams, in a bait-and-switch situation, the owner’s sign what they believe are new loan documents that will help them get out of their situation. In reality, they are signing forged documents that give the scam artists ownership of their home.
In July 2007, Christopher Craig pleaded guilty to bank fraud in a foreclosure lending scheme in Sacramento, California. Craig contacted homeowners on the verge of foreclosure with an assistance plan that promised to loan them new money. Homeowners signed documents that, in reality, deeded away their property to two partners. These partners acted as “straws” and took out home equity loans from Washington Mutual Bank. They claimed they were the true owners and that there were imminent mortgage problems with the property. The scheme defrauded Washington Mutual Bank of nearly a million dollars and an unknown number of homeowners, primarily in northern California.