In two recent, separate instances, individuals - including licensed mortgage brokers, loan originators, appraisers and other coconspirators - were convicted of engaging in fraudulent practices known in the the finance industry as creating "straw" transactions or "property flipping".
Admittedly, it is tempting to reap $2,862,567.00 in illegal profits in less than a year, as the FBI reported in the first case, or more than $100,000.00 in just one day, as the U.S. Department of Justice stated in the second case. But these amounts are not "bargain purchases."
At the end of the dollar trail are a five year prison term, three to five years of probation, a criminal Internal Revenue Service audit, loss of licenses and even gaining the absolute privilege of paying back all money received in these "sham transactions," under a court-ordered restitution. In other words, one single wrong decision might, in many cases, equate to a life sentence.
Now that we know their consequences, lets look at what straw transactions and property-flipping are. Let's deal with straw transactions first, using facts from one of the cases recently reported.
Mr. Davis, a licensed mortgage broker, conspired with other codefendants to submit false and fraudulent residential mortgage applications to multiple banks. At the heart of the scheme was the recruitment of straw borrowers. These borrowers merely would lend their identification information to a transaction. Furthermore, the loan documents submitted to the victim lenders misrepresented the borrowers' financial standing as well as the underlying property's fair market value, with appraisers' help.
The brokers helped borrow $3 million of mortgage money that literally was secured by substantially overvalued residential property. As these properties went into foreclosure, the straw borrower, also commonly known as an "investor," was left holding the bag.
Fraudulent documents and assorted payoffs can also be at the heart of property flipping. Although there are variations, a "flip" usually follows a pattern similar to this:
Mr. Smith purchased a house with a fair market value of $200,000.00. Soon after, he retained a property appraiser, who determined that the house really was worth $400,000.00. Mr. Smith then found Mr. Strawman, who purchased the overvalued house in his name and used his financial information to obtain a substantial mortgage on the property.
Using a 90-percent debt-to-equity ratio, all parties of this criminal conspiracy split the $160,000.00 of excess mortgage money. In most cases, a substantial part of the "excess" money will go to the original purchaser, Mr. Smith, who put this plan into motion.
As part of the scheme, Mr. Smith promises to pay the large mortgage. But sooner of later, he stops paying. As intended from the start, Mr. Strawman now owns residential property with a fair market value that is substantially less than the mortgage. In other words, the property was "flipped" in just a matter of weeks for a substantially inflated price.
If you think that this can't happen to you, think again. Recently, a lender contacted a company and was concerned about some "inconsistent documents" - another way lenders refer to fraud - in its loan packages. Apparently, the borrower's provided Social Security number really belonged to a deceased individual.
If this weren't enough, the income documentation also seemed a bit "irregular." The company called the loan officer and learned that all information came from an individual who merely was an "investor." Immediately understanding that this "investor" likely was a straw man, the company sought legal advice and insisted that its loan originator contact the FBI's mortgage-fraud division. Even if the originator did not, the company would have had to report the apparent problem itself. But with the loan officer acting promptly, the company realized that she was not part of a bigger conspiracy.
The bottom line? If a loan originator is approached by an "investor" or any other individual who is "just trying to help" a prospective borrower obtain a mortgage, think about these scenarios. If you still have reservations, take a deep breath and contemplate these words:
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