Recognizing Real Estate Fraud – Day 2

Published: January 14, 2009

I’ve gotta say right up front, I’m not used to attending seminars where other attendees are packing heat. While it might come in handy at some of the real estate conferences I’ve been to (especially when what’s his name heads for the microphone yet again), we’re a pretty tame bunch considering our reputation. However, as I mentioned yesterday, at Rachel Dollar’s Conference, the audience is heavy with law enforcement and a few heaters are much in evidence. It does make you a little wary and you don’t nod off as much when the guy next to you is sporting a small canon on his hip and pepper spray.

However, thankfully Day 2 was lacking in events that might lead to gunplay and the agenda was more slanted toward the schemes and trends rather than the enforcement strategies of yesterday. Many of us have been exposed to one or more of these schemes but I’ll do a quick run-down for those of you who may have been blessed to live in an area that has thus far been spared the fraudsters arrows.

First you need to understand there are only two kinds of markets in the U.S. – those that have already experienced real estate fraud and those that will. Breaking that down further, there are two main categories of real estate fraud:

  • Fraud for Property – by far the most prevalent and previously unprosecuted. This category includes all the little ‘fibs’ buyers tell to qualify for a house. Mis-statements of income or employment, work history, whether they plan to reside in the property of not – things like that. Everybody knew it went on, frequently with the encouragement of an agent or a lender to ‘help’  somebody get that loan. As long as the market was on high-speed cruise everything was capacetic and nobody got hurt but, as the saying goes, the minute the tide started going out it exposed all the people who weren’t wearing their bathing suits. As these people increasingly default on their loans, lenders and prosecutors are increasingly likely to go after them to recover the damages from the fraud. If the lender or an agent was culpable, they’ll be brought into the mix as well.
  • Fraud for Profit – this has been the most pervasive and damaging on a large scale. This category encompasses the major scams and network operations resulting in 1000’s of homes lost and billions of dollars in damages. This is where the pro’s play and the serious money changes hands. This is why some of the attendees wear guns. I’m going to cover only the first 3 or 4 of these schemes tonight in  the interest of space and because I just flew into Orlando from Miami and I’m dog tired. These scams include:
    • The Classic – where a home is listed for sale for $300,000 and a ‘Buyer’ comes in offering $450,000 with the overage being returned to some 3rd party at close of escrow. This was extremely popular during the big price run-up prior to 2006 and typically involved the collaboration of lenders, appraisers, agents and escrow/closing agents to perpetrate. While still out there, it is becoming much more difficult to pull these inflated sales prices in our deflating markets although I just had a Realtor send me 14 recent cases of this occurring in her market within the past 90 days. In addition to the others involved, the success of this scam often includes a – 
    • Straw Buyer – typically someone who does not exist at all but has been created from whole cloth by the ringleader to act as a buyer. That’s why you rarely ever meet the ‘buyer’ in these transactions, their signatures may not match from one document to the next and they never move into their new home. More often a straw buyer is someone the ringleader has hired to play the part. They may even lend their true identity including their good credit for fees ranging as high as $10,000 to enable a ringleader to purchase one or more properties using their identity. Initially viewed as another victim in the scheme, law enforcement is increasingly prosecuting these individuals either as co-participants to the fraud or to leverage their testimony to bring down the ringleaders.
    • Air Loans – are becoming more prevalent right now. An air loan involves a lender industry insider making a loan typically to a straw buyer for a non-existent property. This type of scam is usually initiated as a short-term cash flow fix by a lender to cover another bad debt or non-performing asset. The revenue generated from this loan covers the deficit in the first loan in hopes that the first loan will start performing again in the next month or two. Of course we know in this market they rarely do so a couple months later the fraudster has to float another air loan to cover that 2nd loan, leading to another and another and… In addition to paying off part of the prior loans, there’s usually a little bit that sticks to the fraudsters fingers on the way past. If this sounds sounds like a classic Ponzi it’s only because it is except it’s usually just one inside guy at a bank generating loans on forged documents to someone who doesn’t exist for a property that isn’t there.
    • Double Sales – is pretty much what it sounds like. A lender will sell a loan twice – say once to a Countrywide and a second time to a Fannie Mae, for example. This actually happens by accident more often that you might expect but it’s usually noticed within a couple days and the lender calls one party or the other and cancels one of the transactions. But sometimes it isn’t an accident and the lender simply pockets the proceeds from one of the transactions. That might net you a few hundred thousand and may go undiscovered until the buyer starts getting mortgage bills from 2 different companies in 7 or 8 weeks. Now imagine you’re a lender that pulls that trick on a few loans a day for 3 or 4 weeks until you pack up one afternoon with the little redhead from HR and head off to a small beach house in Belize. Or maybe the blond from accounting to Costa Brava? Heck, why not both?  

Well, there’s more but that’s all I’m going to talk about today. There’s easily another half dozen or more major categories that we know about today. By tomorrow there’ll be more. Because unfortunately as soon as we – Realtors, Lenders & law enforcement – figure out what they’re up to and how to crack one scam, the perpetrators have moved on to another, and another. Right now there are people out there working out the details of how to lay their clammy little hands on as much of that $1 trillion bail-out money as they can.

And Realtors are on the front lines of this battle. Law enforcement only learns about it after the fact – usually after it’s been done several times and they can pick up a pattern and follow the paper trail. Lenders usually come to the party late too. Oh, they’re out in fron on some of the deals like the air loans and double sales, but as with The Classic, Realtors knew something was amiss years before the lenders suffered their first loss.


Realtors are part of the solution – not part of the problem. Make it so.

Visit the Mortgage Fraud Group and post your experiences. We learn from one another.


‘Recognizing Mortgage Fraud – Day 2’

The opinions in this commentary are strictly Gene Wunderlich’s personal opinions. While any reasonable and/or rational indivdual should agree wholeheartedly, the opinons reflected herein may not necessarily be those of SRCAR/GADBLOG, ActiveRain, The Valley Business Journal or any local or state government or other mental institution. 

Last modified: January 14, 2009 at 10:51 am | Originally published: January 14, 2009 at 10:51 am
Printed: September 22, 2020