FIU case study: Foreclosure rescue scheme with an investment property scheme
Rescue scams that promise to save borrowers from foreclosure are occurring at an alarming rate across the country. Scam artists prey on borrowers facing foreclosure who are often vulnerable and desperate. Through advertising and simple contact approaches, such as a phone call, an e-mail, or mail, such borrowers are easy to reach and manipulate.
Freddie Mac, through its Fraud Investigation Unit (FIU), remains committed to helping the mortgage industry fight fraud. Our FIU helps identify and prevent fraudulent mortgage schemes and creates awareness of fraud trends among industry constituents. Below is an FIU case study that provides insight into how foreclosure rescue schemes and investment property schemes can easily victimize borrowers who are in financial trouble.
What is a foreclosure rescue scheme?
A foreclosure rescue scheme takes advantage of homeowners who have fallen behind on their mortgage payments. The fraud artist approaches the homeowner with false promises of paying off the delinquent mortgage and helping the homeowner to stay in the property. The perpetrator then strips all of the homeowner’s equity and/or pockets the service fees that the borrower is charged.
What is an investment property scheme?
An investment property scheme may involve a single investment property or multiple investment properties sold to one borrower, usually a straw buyer*, along with no-money-down promises. Most investment schemes promise either a substantial increase in the value of the property resulting in a significant return on the investment, higher-than-market interest on contributed capital, or even both. Additionally, scam artists promise that mortgage payments will be made on behalf of the investor and that the property will be professionally managed.
The fraud perpetrator then typically flips the properties to the borrowers using inflated values. The usual end result — no maintenance is done on the property, mortgage payments are not made, the borrowers quickly default and the lender ends up with non-performing loans that are upside down.
*A straw buyer is a person who uses, or allows their credit to be used, for the purchase of a property they never intend to occupy or use.
Freddie Mac’s FIU case study
The set up
A self-proclaimed financial advisor sets up a company (Company X) to acquire properties from homeowners facing foreclosure. The financial advisor convinces investors to act as straw buyers on behalf of the company in order to transfer those properties to the individual investors’ names.
The homeowners facing foreclosure are told that:
- Participation in this plan is the only way to save their homes from foreclosure.
- They can keep their homes by renting them back from the investor for up to five years.
- After five years, they can purchase their homes back from the investor.
- Upon sale of the property to Company X, all of the equity will be taken out of the homes.
- Half of the equity will be paid to Company X as a non-refundable option fee.
- Company X, will hold the other half of the equity on the homeowner’s behalf, to be used as a down payment on the option purchase price.
The straw buyer investors are told that:
- They will be helping people facing foreclosure keep their homes.
- They will receive a monthly stipend for each purchased home.
- Company X will make all mortgage payments and manage and control all properties.
- They will not have to put any money into these transactions.
- They will need to use a certain bank to obtain the initial financing and then quickly refinance through a predetermined mortgage broker for the end financing.
- They will receive a percentage of the profits when the property is sold back to the original homeowner.
The end result
- Company X arranges for straw buyer investors to purchase the properties and take out investment property loans with the promise of receiving monthly proceeds in addition to payment of their mortgage obligation.
- Company X pockets all of the homeowners’ equity.
- Company X stops making mortgage payments and loans go into default.
- The investor's mortgages begin to go into default.
- The homeowners face eviction, and will lose their homes and all of the equity.
- The lenders are given loan files that fail to disclose the true nature of these transactions and do not contain the multiple contracts and agreements signed by the parties involved.
- The lenders end up with non-performing loans and borrowers who did not intend to repay.
Important Freddie Mac fraud prevention resources
Leverage the following resources that provide more information on dealing with fraud: