Mortgage Fraud – Beware Of Flipping Schemes

House flipping is for those with an appetite for risk. Unfortunately, some flippers also have an appetite for fraudulent schemes and practices. According to RealtyTrac, over four percent of home sales in 2014 were flips. For purposes of the survey, a flip is defined as the purchase and sale of a home within a 12 month period of time.

The average gross profit on a flip has increased over eight percent in the first quarter of 2014. That is the highest profit since this survey began in 2011. Yet there are dangers, and flipping can sometimes unfairly exploit the housing market. But more importantly, consumers must be alert to flippers that artificially inflate their value through the use of false appraisals. Here is how it works:

The flipper identifies homeowners who are at risk of defaulting on loans or whose property is already in foreclosure. Fraudulent flippers then mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed and up-front fees. The fraudulent flipper profits from these schemes by remortgaging the property or pocketing the fees paid by the homeowner.

The “flipper” can then repurchase the inflated properties numerous times for a higher price. Flipped properties are often ultimately repurchased for substantially less then original value of the property.

Property flipping typically involves such activities as fraudulent appraisals, doctored loan documentation, inflating buyer income, kickbacks to buyers, investors, loan brokers, and appraisers.

Beware of the Silent Second

The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his or her own money in the down payment, when in fact, it is borrowed money. The second mortgage may not be recorded to further conceal its status from the primary lender.

Use of Straw-Man Buyers

An investor may use a straw-man buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title.

The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later. The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan.

Fictitious/Stolen Identity

 A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant’s name, personal identifying information, and credit history are used without the true person’s knowledge.

Air Loans 

This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones with each player playing their role of employer, appraiser, credit agency, and any other person who could play a role in falsely verifying a buyer’s creditworthiness.


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