For many of us who hold Florida real estate licenses in the state, you will be renewing this year. Renewal is pretty easy, it’s a 14-hour open book test and a state fee. Every renewal period addresses different aspects of real estate and this year one of the modules, as they’re called, addresses fraud in real estate transactions, specifically in real estate financing. So, I’m sharing some of what I’ve learned with you.
Mortgage fraud manifests in many ways, so many that it’s impossible to review every law-breaking scheme creative fraudsters come up with, however, mortgage fraud is at the top of the list. Any misstatement, misrepresentation or omission of information that lenders relied upon to fund the purchase of a property is considered fraud.
An outright lie by a homeowner or their broker relative to a structural defect for example, is fraud. Likewise, fraud can also be the omission of a material fact that involves the structure of a property, like not disclosing that you have a leak in the bedroom from the roof and simply painted over the stain. This all goes back to the seller’s disclosure obligation as we discussed several weeks ago.
An anxious seller may also commit fraud by improving the financial position of a marginal buyer by offering them cash, enhancing their ability to qualify for a mortgage. Any money exchanged between a buyer and seller without the knowledge of a mortgage lender that affects the value of the property could be viewed as fraud. This isn’t to say that a buyer can’t offer their furniture for sale to a seller for a dollar amount separate from the purchase price.
Anyone who has applied for a mortgage since 2010 wonders why their lender is putting them through financial hoops and asking all kinds of questions, requiring a variety of documents to prove who you are and a signature on multiple disclosure forms. The answer is that in the wake of the financial crisis, The Dodd-Frank Act was enacted in 2010 and added a whole new level of regulations affecting the financial industry. Nevertheless, there is still room for fraud.
Probably the most frequent fraud by buyers is not being truthful about their income and/or their other financial obligations. Income that cannot be verified because of self-employment or being paid off the books is a red flag for lender underwriters. Likewise, not disclosing what your actual monthly debt obligation is and getting away with it is fraud and punishable by the law. Fortunately, lenders will pull a credit report and, most of the time, will know if you have more than one mortgage on your current property, a car loan or credit cards you have not disclosed.
Also, lender applications will ask what the intended use of a property is. If the buyer is intending to set up the property as an income rental but does not disclose this to the lender, this too is fraud. Buyers who are intending fraud may also misrepresent the value of the property in order to qualify for a larger mortgage. This is where property appraisers come in. The majority are honest, but when a dishonest appraiser works with a dishonest buyer they can produce a fraudulent appraisal. This particular fraud was not uncommon in the run up of the financial crisis where loans were placed on properties because of fraudulent appraisals and/or misrepresentations of buyer qualifications.
Where there’s money there’s fraud and I’m saving a few other frauds for another week. Be careful out there. There’s always someone out to get your money. You need to outsmart them.