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Fighting Back Against Mortgage Fraud

CEO Ed HaldemanFraud follows misfortune. After 9/11, hucksters submitted phony death claims to insurance companies in hopes of benefiting from the tragedy. After Hurricane Katrina, scammers set up fake "charities" that siphoned relief dollars away from legitimate storm victims. The housing crisis is no different: swindlers are exploiting desperate borrowers with phony guarantees to save their homes from foreclosure.

Reports of mortgage fraud are on the rise. According to the FBI, financial institutions reported nearly 38,000 cases of mortgage fraud in the first half of 2010 – a 13 percent increase over the same period in 2009. Law enforcement officials estimate losses at between $4 billion-$6 billion annually.

Victims lose their savings – and often their homes. Lenders, investors, communities, and taxpayers lose billions of dollars a year. And, given the fragile state of the economy, mortgage fraud may be delaying the nation's recovery by adding to the inventory of foreclosures and fueling public uncertainty about housing. In other words, mortgage fraud harms everyone.

Fraud preys on the vulnerability of struggling borrowers. It's easy to understand why a sales pitch promising a quick fix might be tempting to a homeowner who is deep in debt. That certainly explains the increase in fraud committed at the servicing stage of a loan and targeted at troubled borrowers who fear losing their homes.

A common ploy for a scam artist is to approach a homeowner with an empty promise of "guaranteed" mortgage relief or a modification to the terms of their loan. They might even say they'll rent the home back to the owner in exchange for the title. Of course, the relief never materializes. In a lease-back scheme, the borrower is eventually evicted and the home is sold.

  • Case Study: A Las Vegas woman was recently indicted on felony charges after her "foreclosure rescue" business allegedly bilked clients out of as much as $2,000 apiece. The woman allegedly promised customers their mortgage loans would be modified or the principal reduced. According to the Nevada attorney general, no work was ever performed.

Short sale fraud is another scheme we're seeing in increasing numbers. As defaults have risen, so have short sales. That's when a borrower who can't pay the mortgage is allowed to sell the property for less than the amount owed and is released from the mortgage debt. With short sale fraud, an industry professional such as a real estate agent, mortgage broker, appraiser, investor, or title agent typically works against the borrower's best interests by misleading the lender into settling for less than what an informed buyer would pay for the property. They then flip it for a higher amount.

  • Case Study: A real estate agent in Pennsylvania recruited an associate to act as the buyer on the short sale of a property backed by a Freddie Mac-owned loan, for a price of $160,000. Simultaneously, the agent was marketing the property for sale as if the associate was the owner, and found a buyer unaware of the actual sale price who was willing to pay $225,000. Both loans were scheduled to close the same day.

    Our fraud investigators were tipped off about the plan and successfully stopped it. But had the deal gone through, the new owner would have paid more than an informed buyer probably would have, Freddie Mac would have been denied a legitimate recovery, and the real estate agent would have fraudulently netted a $65,000 profit at the taxpayers' expense.

How is Freddie Mac combating mortgage fraud? Since the creation of our Fraud Investigation Unit two decades ago, we've worked diligently with law enforcement to prevent and detect many types of mortgage fraud. We are constantly refining and updating our efforts, given the proliferation of mortgage scams and our commitment to protect the taxpayers' investment in Freddie Mac.

For example, in September we began requiring an affidavit, signed by all parties to a short sale, certifying the arm's-length nature of the transaction. We hope requiring a sworn statement will deter a perpetrator from committing fraud. If fraud occurs anyway, the affidavit provides another tool to use in pursuing those responsible.

To ensure our business partners remain focused on fraud, we've incorporated a new chapter on fraud into our Single-Family Seller/Servicer Guide. The revised Guide specifies where, when, and how a seller/servicer must report suspected fraud to us.

We've also joined industry groups and governmental agencies in launching public education campaigns and websites where consumers can report fraud directly to the authorities.

Freddie Mac will continue to work with our partners in the fight against fraud. Our goal: to arm consumers, seller/servicers, and others with the facts; proactively detect mortgage fraud early on; and help ensure that perpetrators are pursued and prosecuted vigorously. We may not be able to completely stop fraud from following misfortune, but if and when it does, we're more prepared than ever before to combat it.

Four Tips for Avoiding Mortgage Fraud

  • Refuse to do business with anyone who: demands upfront fees, guarantees results, tells you to send your mortgage payments somewhere other than your lender, or asks for the title to your home.
  • Don’t sign anything you don’t understand, and never sign documents with errors or blank spaces. It’s your responsibility to ask questions.
  • Beware of phony credit counseling schemes that charge high fees. These services are often available elsewhere at little or no cost.
  • If it sounds too good to be true, it probably is.

Resources:

 

* Ed Haldeman left his position at Freddie Mac in May 2012.


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