In a day and age rife with identify theft and Ponzi schemes, the last thing you want to worry about is yet another way to get ripped off.
But as a homeowner, you need to be aware of crimes on the rise known as mortgage fraud and real estate title fraud.
Red Flags - Mortgage Fraud
- Someone offers you money to use your name and credit information to obtain a mortgage
- You are encouraged to include false information on a loan application
- You are asked to leave signature lines or other important areas on a loan application blank
- The seller or investment advisor discourages you from seeing or inspecting the property you will be purchasing
- The seller or developer rebates you money back on closing, and you don't disclose this to your bank or lending institution
The most common type of mortgage fraud involves a criminal obtaining a property, then increasing its value through a series of sales and resales involving the fraudster and someone working in cooperation with them. A mortgage is then secured for the property based on the inflated price.
"Straw Buyer" Scheme
Because of the recession, more people are desperate and eager to find a way to hang onto their homes. A couple was recently arrested in Canada after duping 100 families looking for help to avoid foreclosure in the US.
Another term for mortgage fraud is the 'straw' or dummy home buyer scheme. Joe, who is renting, does not have good credit rating or is self-employed and cannot get a mortgage, or doesn't have sufficient down payment, so he cannot purchase a home. He or an associate approaches Sue, who has good credit; she is offered a sum of money (can be as much as $10,000) to go through the motions of buying a property on Joe's behalf - acting as a straw buyer. Sue lends her name and credit rating to Joe for his purchase of a home.
Other types of criminal activity often dovetail with mortgage fraud or title fraud. For example, people who run 'grow opps' or meth labs may use these forms of fraud to "purchase" their properties.
The Fallout for Banks
Fortunately (for you, at least) mortgage fraud typically hurts the bank/lender the most.
Canadian precedents have been set in which banks are held responsible for mortgage fraud. The BC Court of Appeals recently ruled that "the lender — not the rightful property owner — is the one out of luck in a fraudulent mortgage scheme" and that lenders "must ensure their mortgages are valid by taking steps to ensure that the registered owner obtained title to the property legally." The same conclusion was made by the Ontario Courts a couple of years ago.
Banks, as you can imagine, aren't too thrilled about this trend. Royal Bank of Canada recently sued a former bank employee over an alleged mortgage fraud scheme.
Sadly, the only red flag for title fraud is that your mortgage mysteriously goes into default and the lender begins foreclosure proceedings. Even worse, you as the homeowner are the one hurt by title fraud, rather than the lender as in the case of mortgage fraud.
Unlike mortgage fraud, in the case of title insurance, you haven't been approached or offered anything; it is a form of identity theft.
Here's what happens with title fraud: A crook - using false ID to pose as you - registers forged documents transferring your property to his/her name, then registers a forced discharge of your existing mortgage and gets a new mortgage against your property. Then the fraudster absconds with the new home loan money without making mortgage payments. The bank thinks you are the one defaulting - and thus begins your economic downfall.
How to Protect Yourself
- Always view the property you are purchasing in person
- Check listings in the community where the property is located; compare features, size, location to establish if the asking price seems reasonable
- Make sure your representative is a licensed real estate agent
- Beware of a real estate agent or mortgage broker who has a financial interest in the transaction
- Ask for a copy of the land title or go to a Registry office and ask them to do a historical title search
- In the offer to purchase, include the option to have the property appraised by a designated or accredited member of the Appraisal Institute of Canada
- Insist on a home inspection to guard against buying a home that has been cosmetically renovated or formerly used for as a grow house or meth lab
- Ask to see receipts for recent renovations
- When you make a deposit, ensure your money is protected by being held "in trust"
- Consider the purchase of title insurance
Have you or someone you know been a victim of mortgage or title fraud? How did it end?
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