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Diligence offers protection from mortgage fraud

Steve Hovland

The term “fraud” often refers to a business whose accounting department had substandard internal controls and the bookkeeper was able to steal the owner’s cash. We take some interest in the story at the time, but then quickly forget about it after the paper has been set down. We tend to think that if we don’t own a business, the fraud won’t directly affect us.

However, there’s one type of fraud that affects everyone: mortgage fraud.

The Federal Bureau of Investigation classifies mortgage fraud into two distinct areas — fraud for profit and fraud for housing. Those who commit mortgage fraud for profit are often industry professionals, such as bankers, brokers, appraisers and others who have special knowledge or authority. Fraud for housing typically represents illegal actions conducted solely by a borrower who’s motivated to acquire and maintain ownership of a house under false pretenses. Mortgage fraud schemes include foreclosure rescue, loan modification and illegal property flipping, to name a few that directly affect individuals.

The perpetrators of foreclosure rescue schemes prey on homeowners who’re in foreclosure or at risk of defaulting on their mortgages. They mislead homeowners into believing they can save the their homes by transferring deeds or putting properties in the name of an investor. The perpetrator profits by selling the property to an investor. Homeowners are informed they can pay rent and then repurchase the property once their credit has reestablished. The homeowner makes the rental payments to the perpetrator. But mortgage payments are never made and the property still goes into foreclosure.

Loan modification schemes are similar to foreclosure rescue schemes. Perpetrators offer to negotiate the terms of a loan with the lender for an up-front fee. Often the perpetrators will negotiate unfavorable terms for the homeowner or don’t negotiate at all. The homeowner will then lose their home as well as the fee.

Illegal property flipping constitutes a scheme most people might not realize has happened to them. It’s important to note  that when someone purchases a piece of property, makes necessary improvements and then sells at market value, that’s not illegal. Illegal property flipping occurs when a property is purchased, falsely appraised at a higher value and then sold quickly. What makes it illegal is the appraisal information is fraudulent. The appraisal might indicate renovations were made to the home, when in fact, there were none or the renovations consisted only of minor cosmetic improvements. The prospective homebuyer will then purchase the property at a value greater than what that property is actually worth.

So how can you protect yourself? An FBI special crimes report offers some suggestions.

If you’re in financial distress and need a loan modification, never pay advance fees for promised services and remain wary of unsolicited offers to save homeowners. 

If you’re purchasing a home, review written information  about recent comparable sales in the area and such other documents as tax assessments to verify the value of a property. Review the title history of the home you’re planning on purchasing to determine if it’s been sold multiple times within a short period. It could mean the property has been illegally flipped and the value falsely inflated. Obtain an appraisal independent from the one the seller obtained. Have the home inspected and the inspector issue a written report.

Performing due diligence on the companies and properties involved provide control over the largest transaction most of us will ever undertake.

Steven D. Hovland is a certified public accountant and certified forensic accountant with Dalby,Wendland & Co. Hovland specializes in financial statement audits and internal control assessments. Dalby, Wendland & Co., a full-service auditing and accounting firm , opened its doors in downtown Grand Junction in 1948. For more information about the firm., including tax updates, visit www.DalbyCPA.com.
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