The Red Flags of Mortgage Fraud

With mortgage brokers like these, you don’t need enemies. Know how to protect yourself from a scam.

They don’t wear black hats. There is no twirling mustache. They aren’t accompanied by a big beefy man with knuckle rings and a grimace, to imply that if you don’t cooperate your knees may soon bend backwards. In fact, they’re often wearing a suit, tie and concerned look on their face. What’s so insidious about a bad guy involved in mortgage fraud is that he (or she) is disguised as the white knight come to pull you out of the mess that you’ve found yourself in.

Losing your house to a con artist may be a lonely affair, but those who have had it happen aren’t alone. According to FBI statistics, mortgage fraud and deed theft costs homeowners up to $6 billion every year. That’s a big part of why Congress is looking at a number of bills, which, if enacted, will create law enforcement units that can specifically combat mortgage fraud.

So if you’re currently in foreclosure and are worried about what predators are out there, or want to make sure that you never get in that position, look out for these red flags when it comes to mortgage fraud:

  • Too Good to Be True
  • Entitled to Your Title
  • Promise You the World
Lawmakers are establishing agencies that investigate and prosecute real estate fraud. 

You know the saying, if it’s too good to be true...

Tanya Peila, a 30-year-old administrative assistant, and her husband, Justin, 33, a lumber truck driver, from Tacoma, Wash., were told about a company, Empire Timber and Logging, which was offering a chance to refinance a house with just a 2 percent interest rate on their mortgage, and all they needed was to put down a 1 percent down payment.

Typically, a homeowner is required to put down at least 3 percent of a down payment on a house, and so 1 percent would be a pretty amazing deal. Two percent, however, would be a phenomenal interest rate, given that the best rate people can get now is 4.82 percent. The lowest interest rate on record was 4.78 percent, which was in 1971, and so 2 percent, so far, simply hasn’t existed.

The Pelias, who paid their 1 percent, translating to $2,200, can hardly be blamed for being taken in. They were told about the company by a trusted friend -- who was a mortgage broker.

“The owner has since skipped town with federal charges pending,” says Tanya Peila, who says that they received a notice from the FBI that they had been the victims of fraud. They were lucky, however. They paid their 1 percent to a title company and not Empire Timber and Logging. It took a year of convincing, but apparently because the title company didn’t want to get a bad reputation, they returned the Pelias’ money.

Be wary of any amazing deal. Do your research and get multiple opinions. 

If you’re asked to sign over the title of your house.

The con artists sound logical enough (when your own logic is warped with fear). They ask for the deed, and you pay your mortgage to the third party negotiator that’s supposed to be working with your lender. Of course, it never works out that way. The con artist takes your monthly mortgage payments for as long as it takes for the victim to become wise to what’s happening -- and once they are wise -- the con artist owns the house and can sell it to an investor or some unsuspecting dupe who doesn’t realize that its being inhabited already.

“A borrower should never sign over the title to their home,” says Michael J. Sichenzia, CEO of Dynamic Consulting Enterprises in Deerfield Beach, Fla., emphatically adding: “No legitimate foreclosure would ever ask a borrower to do that.”

Sichenzia would know. His company specializes in identifying fraud and financial misconduct in mortgage lending and also restructures loans on the behalf of individuals. He knows what scammers are thinking -- he was an expert in committing fraud before he became an expert in fraud. Sichenzia served four years in New York State Prison for scamming people out of their mortgages. Now, he is determined to right wrongs by saving people from the type of person he used to be.

Never sign over the title to your home, no matter what is promised. 

If a foreclosure rescue company or specialist makes a promise.

Foreclosure rescue, says Sichenzia, is “the most prevalent type of mortgage scam out there today. People, usually ex-mortgage brokers running boiler room type call centers, are taking $2,000 and $3,000 upfront fees from borrowers and promising to stop the borrowers’ foreclosure or promising to get borrowers huge and unrealistic reductions in the principal indebtedness owing.”

He stresses, “No legitimate foreclosure consultant would ever make these types of guarantees.”

Of course, what makes things so complicated is that some of these companies that do ask for you to pay upfront are reputable companies. Donna Johnson, an Austin, Texas, public speaker who almost lost her house to foreclosure last year, saved her house by working with a third-party loss mitigation company, which restructured her loan as a loan modification.

“Our lender did more harm than good,” recalls Johnson, “pressuring us into making arrangements that we could never keep. This company undid that mess for us.”

That said, just because a third-party company is reputable, most experts nonetheless recommend working with your lender or a nonprofit agency like well-respected Homeownership Preservation Foundation. Because even if a third party makes no guarantees, there is no guarantee they can help, and you still may lose your house and be out a couple thousand dollars to the mitigation company that couldn’t work out a deal.

Of course, it might sound crazy that so many people could get entrapped in a crooked financial snare that takes their money and possibly even their house, since so many of these red flags are, well, pretty red (and big) and obvious.

But while “it’s easy to judge people when you’re on the outside looking in, in all honesty, it’s just not that black and white,” says Johnson, who was on the receiving end of mailings and calls when she was in foreclosure and has made it one of her missions to educate homeowners about mortgage fraud.

“For those who purchased the house with the intentions of raising a family and being there long term, your stability is jeopardized in that moment,” continues Johnson. “You feel as if you’ve failed and let your loved ones down. You’re literally between a rock and a hard place, and all you want is for someone to be able to help you. And as a result, the more desperate you are, the more vulnerable you become.”

And as the economy continues to be uncertain, this sort of crime isn’t going away. “You know, you used to be able to rob a bank with a gun,” says Sichenzia, “but if you got caught, you could end up doing five to 15 in the 'pen,' so to speak. Well, about eight years ago, cons figured out that you could rob a bank with a pen and paper and probably never get caught at all. Hopefully, that’s about to change.”

In the meantime, keep your guard up, and if you do lose your house to a con artist, Sichenzia reminds ex-homeowners that they can fight back. “These crimes leave a huge paper trail, and if pursued with vigor through law enforcement and civil litigation, you can get your house back. People just give up too damn easily.”

Geoff Williams is a regular contributor to FrontDoor.com and often writes about personal finance.

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