Mortgage Fraud - Continued

Who’s Liable? Everyone’s a Conspirator!

The Mortgage fraud is typically uncovered when the buyer refuses to make any payments (or doesn’t make one payment!) and the lender pursues foreclosure.  If the lender is a secondary market investor, it may look to the loan originator as the fraudulent party for selling him a loan that the loan originator knew was an incapable (or maybe non-existent) applicant.  There is usually a pattern to these fraudulent transactions. Again, they can almost always be tied to a loan originator working in concert with an appraiser. The appraiser, however, only gives an opinion of value and therefore it is hard to find liability with the appraiser, provided his opinion can be justified. Remember, the surrounding neighborhood had high values. It’s hard to prove fraud in an appraiser’s opinion. The mortgage broker may already be in jail.

The real estate brokers have potential liability, particularly if the buyer’s representative is also the loan broker.  This tends to lead to conflicts of interest wherein a real estate broker/loan broker loses as a sale (and his share of the commission) if the buyer does not qualify for the loan.  In situations where there is excess money being funded back to the buyer at the closing, there is a concern that both buyer’s broker and the seller’s broker may have some liability if they “turn a blind eye” to an obvious fraud being committed on the lender because of over-inflated appraisals, amended contract prices, or false debtor information.  These issues are being criminally prosecuted as well as civilly prosecuted in the courts today. In Oklahoma, a listing broker was indicted for the “blind eye.” She maintains she knew nothing of the “buyer’s shenanigans” at closing…she was merely helping her sellers get their sales proceeds. The FBI, and the federal prosecutors, think differently.

The title company seems to be in the middle of everything! While the title company is a disinterested third party, they are present when the closing takes place, when the instructions from the lender are tendered and the parties sign the documents.  Remember, though, that as is a disinterested third party they cannot take sides in representing one party against another. Courts have held that the traditionally fiduciary escrow duties are somewhat limited to the instructions of the parties because the title company necessarily serves two conflicting parties; but recall Home Loan Corporation v. Texas American Title Company, supra, wherein the court held that the title company was a fiduciary to all parties of the transaction and had a 100 percent duty of disclosure to all parties of the transaction. While this case seems to be very troublesome, it has had a significant impact on how title companies handle escrows in the future.

At least one inventive victim profited from a transaction In CTC Real Estate Services vs. Lepe, 44 Cal. Rptr. 3rd 823 (Ct. App. 2006), Ms. Lepe’s identity was stolen and used in a fraudulent mortgage transaction. The transaction closed, her signature was forged, and a foreclosure ensued. A bankruptcy procedure had been filed in her name without her knowledge. Her credit card accounts had been closed, and, of course, her credit was ruined. The foreclosure, however, resulted in a $51,000.00 surplus at a foreclosure sale. Ms. Lepe said she was s entitled to the surplus, even though she did not sign the mortgage documents. The court reasoned that if the identity thief had continued in the fraudulent activity, the lender would have paid surplus to the thief. Had this occurred, Ms. Lepe would have been able to recover the surplus from the thief. Otherwise, the thief would have been unjustly enriched.

Note the following list of “Red Flags”:

  • “Investors” making offers of significantly above asking price, particularly on property which has been on the market for a long time.
  • Investor/buyer/mortgage officers telling buyers that they can acquire appraisals in excess of the sales price.
  • Investors claiming property as their primary principal residence which is to be owner occupied, and you know they are acquiring other properties.
  • Investors and/or nominees receiving excess sales proceeds.
  • Use of for-sale-by-owner transactions to circumvent the use of real estate professionals.
  • Use of inexperienced or unsupervised licensees.
  • Undisclosed concessions at the closing table.
  • Not knowing the source or actual amount of the buyer’s down payment, inflated appraisals, false information about the borrower’s credit.
  • Secret second mortgages and earnest money deposits paid outside of closing (POC).
  • Double contracting - closing the sale on one tract while closing the loan on the second, higher priced contract.
  • ID’s don’t match.

When any of the foregoing become apparent, the advice is easy: get out of the transaction. If you are an escrow officer, don’t close the transaction. While one may forego a commission or a title insurance premium, it is a lot cheaper than what may be a cost of defense at a later date, particularly in light of the new whistleblower legislation.

NOTE NEW TEXAS STATUTES: The 2007 Legislature passed new Section 343.105 of the Texas Finance Code, which requires that the lender, mortgage banker, or licensed mortgage broker provide each home loan applicant the following Notice of Mortgage Fraud in at least 14-point type, at closing. The loan applicant must verify the information and execute the notice.

The state has also established a residential mortgage taskforce consisting of various state office holders. This task force focuses its efforts on sharing information and resources and enforces administrative and criminal actions against perpetrators of mortgage fraud. A concurrent change with the Code of Criminal Procedures extends the statute of limitations for prosecution for mortgage fraud to seven years (Article 12.01 (3) (D), Texas Code of Criminal Procedure).

On receipt of the notice, the loan applicant must verify the information and execute the notice (Section 343.105, Texas Finance Code).

Another change to the Government Code provides that if anyone who determines or reasonably suspects that fraudulent activity has been committed or is about to be committed, must report this information to an authorized governmental agency, such as the attorney general, local or state law enforcement agency, prosecuting attorney, or Texas Department of Banking. The agency receiving such a report may not disclose to any person involved in the fraudulent activity that the fraudulent activity has been reported (Section 402.032, Government Code).

Chuck Jacobus teaches Real Estate MCE at Champions School of Real Estate in Houston, Texas and is an attorney practicing in Bellaire, Texas as well as Executive Vice President of Charter Title Company in Houston, Texas. Chuck is a pre-eminent author of several books about Texas Real Estate and Texas Real Estate Law. He is currently a member of the Texas Real Estate Commission's Broker/Lawyer Committee and is Chairman of the State Bar of Texas Title Insurance Committee.