Emerging fraud trends – foreclosure rescue scheme

Fraudulently originated loans are receiving increasing attention both from the media as well as from regulators and law enforcement.  With a slowing market, shrinking origination volume and rising default rates, now more than ever, lending professionals, regardless of the role they play in the process, need to be more vigilant about mortgage fraud schemes.

Some of the most heart-breaking fraud stories involve distressed homeowners who have lost their homes to a foreclosure rescue scheme. Often, the victims of a foreclosure rescue scheme are homeowners who do not fully understanding all aspects of this type of transaction. 

What is a foreclosure rescue scheme?

A foreclosure rescue scheme is a type of fraud that takes advantage of homeowners who have fallen behind on their mortgage payments.  The fraud perpetrator approaches the homeowner with promises of paying off the delinquent mortgage and helping the homeowner stay in the property. 

How does a foreclosure rescue scheme work?

Review the following illustration that provides a visual explanation of how most foreclosure rescue schemes work.

The most common foreclosure rescue scheme unfolds when a homeowner receives a solicitation in the mail that promises short-term financing from a 'private investor' offering to pay off a delinquent loan:

• The homeowner is told they can stay in their home and rent back from the 'investor'
  
• The homeowner is convinced to transfer the title of the home to the 'investor' as collateral. The 'investor' promises that the homeowner can continue to live in the home and repurchase it later or promises them new financing.  If the homeowner is promised new financing, a straw borrower will then be involved. 

Where does the private investor get the money to invest? 

• The 'investor' recruits a straw borrower who thinks that he or she is purchasing an investment property with an existing tenant
  
• The straw borrower applies for a mortgage and is qualified based on misrepresentations
  
• The straw borrower is usually compensated for his or her participation in the scheme

What happens to the homeowner?

At closing:

• The homeowner deeds the property to the straw borrower, relying on the false promises made by the ‘investor’
  
• All proceeds are used to pay off the defaulted loan
  
• The homeowner walks away with nothing
  
• The 'investor' pockets the equity and runs
  
• The straw borrower defaults on the loan
  
• The homeowner is evicted, loses the house and all equity
  

There are many variations of a foreclosure rescue scheme.  Some schemes require the homeowner to unknowingly transfer the property title to a third party.  Other schemes will promise homeowners that if they transfer the title, they can continue to rent the home and repurchase it at a future date.  The purchaser of the property, sometimes the foreclosure rescue artist, is now free to refinance the property or to sell the property to another party.  Sometimes the foreclosure “rescuer” charges the borrower high 'service fees' up front and then disappears with the money without providing the promised service. 

What are the 'red flags' of a foreclosure rescue scheme?

Identifying 'red flags' on a foreclosure rescue scheme is challenging because in most instances a scheme cannot be identified until it has come full circle.   However, some of the primary things to look out for are borrowers who are: 

• Purchasing a home as an investment while continuing to rent
  
• Purchasing multiple rental properties simultaneously
  
• Purchasing the property as a primary residence when they already own a home of superior value
  
• Unable to contribute funds to close

As states continue to consider and, in some cases, enact legislation to help prevent foreclosure rescue schemes, the most important thing you can do is to familiarize yourself, your staff, and your borrowers about how fraud artists operate and what the indicators are of a possible fraudulent trap. Check out our new fraud workshop described in our Mortgage fraud – How to protect your organization article in this issue.

For more information about the foreclosure rescue scheme and other fraudulent practices, please contact Freddie Mac’s fraud hotline at 1-800- 4FRAUD8.