March 1st, 2012

Scotsman Guide

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Fighting Fraud with Due Diligence

Criminals will always find ways to take advantage of unsuspecting victims, but crime itself is evolving constantly. In today’s economic climate, more criminals are hatching intricate escrow- fraud schemes to bilk innocent people out of equity and other finances. As such, mortgage professionals need to be diligent about protecting themselves and their clients. Although crime can come in different forms and approaches, it’s a good idea for mortgage professionals to familiarize themselves with a few of the common ways that criminals direct their efforts at the housing industry. An example Criminal threats can come from a variety of places, both inside and outside the mortgage industry. Let’s say, for instance, that a real estate agent, escrow officer and shortsale negotiator collude with each other to scam a pair of distressed homeowners. They might begin by simply approaching the homeowners about short-selling their property. The scammer would then have the real estate agent get the listing, advertise the property as a short sale and then even contact a lender to start the shortsale process. From there, consider the following sequence of events:

•• The property is listed, and innocent buyers bid on the property.

•• The unsuspecting sellers are told that their buyer is a limited liability company (LLC), but in fact it’s a shell corporation created by the fraudsters themselves.

•• Short-sale approval letters are forged in favor of the LLC, using a template from a prior approval obtained from the bank and then forwarded to the sellers to induce them to execute a grant deed in favor of the LLC.

•• The buyers are told that the short sale has been approved, so they transfer the purchasing money into escrow.

•• The escrow company, which is also involved in the scam, fails to verify the veracity of the short-sale agreement with the lender, as lender-underwriting requirements could jeopardize the scheme.

•• The conspiring escrow officer then transfers the money to the scam’s coconspirators and provides false HUD-1s showing that the funds were used to pay off the lender.

•• Deeds are then created by the shell LLC and transferred to the buyers.

•• The sellers, meanwhile, assume that their loans have been paid off and thus stop making payments, causing the lender to begin foreclosure proceedings. It’s only now when the innocent buyers — and any innocent mortgage professionals involved — first learn that they have been defrauded.

Be diligent

This is just one example of the many real estate scams that floated in the market in recent years. It’s become critical for borrowers, brokers and lenders alike to conduct proper due diligence and ensure the safety of a transaction. The sophistication of scams has increased with technology. In addition, cash-strapped homeowners have become more desperate to sell. That is why it can be helpful to use attorneys that are familiar with real estate schemes to prevent fraud before it occurs or, alternately, to unwind a scam and press charges against wrongdoers after it occurs. Regardless, keeping yourself educated while also undertaking proper due diligence can help your clients’ transactions move more smoothly and, in certain cases, can even help you avoid being liable for a breach of fiduciary duty.

By: Eric P. Early and Scott E. Gizer

Source: Scotsman Guide