Straw Buyers and Straw Purchases are Always Fraud

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I've gotten several emails to articles recently having to do with straw buyers, and more search hits. Straw buyer fraud is popular because people want a better loan and many don't see anything wrong with it since "we intend to repay the lender". However, they are intentionally deceiving the system that lenders have evolved that prices loans in accordance with the risk involved in a given borrower and situation. Furthermore, straw buyer activity opens you up to potentially unlimited legal liability. All of those wonderful consumer protections that our government is so happy to enforce go out the window if you commit this or any other kind of FRAUD. Furthermore, straw buyer scams are one of the biggest potential "stings" in schemes perpetrated by scamsters. You can trivially find yourself liable for much more than the property you have a mortgage on is worth.

A "straw buyer" is someone whose credit is used to purchase a property and secure financing, but whom isn't actually going to own the property. Sometimes they cooperate willingly and sometimes they are victims of identity theft, but it's always illegal. It is also, as these two cases illustrate, hazardous to your financial health.

The most common scenario is Person A wants to buy a property, but convinces person B to step in as a "straw buyer" to obtain terms that Person A could not. Alternatively, person A steals person B's identity, and forges all of their information on the purchase and loan papers. In both cases, person B is not the person really purchasing the property, but their name is on the mortgage. In the first case, person B is fully responsible for the loan and everything else that goes on, as well as having committed FRAUD. In the second case, they've got a long hard row to hoe to convince everyone that they weren't involved, because with hundreds of thousands of dollars on the line, it is worth the lender's while to be as hard-nosed as possible. The lender does not particularly care about justice in this case; what they want is the money they loaned out to get repaid.

The closest thing to benign that happens in straw buyers is when one relative, let's call him Junior, convinces another relative, call her Mom, to use her good credit so that Junior can afford the payments on a house he really does want to live in. Please note that this is still fraud - you are deceiving the lender for the purpose of getting a better loan than you would be able to obtain if you told the truth. Good agents and good loan officers want no part of this, because it doesn't matter how benign the intent, the fact of the matter is that it is still fraud. The lender discovers it, or if payments get missed, that agent or loan officer is legally toast. Note that this is different from Mom buying Junior a property for Junior to live in, or helping Junior afford property Junior wants to buy. There is sometimes a thin but always bright line between legal and illegal activity, and starting to deceive people - telling anything less than the whole truth and nothing but the truth - is always a sign you have stepped over the line.

Once you get away from this most nearly benign straw buyer scenario, things degenerate quickly and there are many scams and frauds that can be pulled. Many of them involve appraisal fraud. Most common is that someone persuades you to allow them to apply for a loan on your behalf to buy a property for them, which has supposedly appraised for $700,000. You end up responsible for a $700,000 loan on a $400,000 property, and the people who pull this scam walk away with $300,000 (or more) free and clear.

There are also all kinds of scams involved with people that want someone else on the mortgage, but themselves on title. If you quitclaim off of title, this does not absolve you from the mortgage. In general, the only way to absolve yourself from the mortgage is for them to refinance in their own name, and since they are claiming they couldn't do this, that just isn't going to happen. It's one thing for one spouse to qualify for the mortgage on their own but legally quitclaim it themselves and their spouse, husband and wife as joint tenants with rights of survivorship. It is something else entirely to quitclaim it to Joe Blow (or Jane Blow), but allow yourself to remain on the mortgage. If Mr. or Mrs. Blow does not pay the mortgage, guess who is liable?

I get hits on this site every day asking, "How do I remove myself from a mortgage?" The answer is that you don't. The lender has your signature on the dotted line that says "I agree to pay..." The only way they are going to let you off is if the people remaining qualify for the loan without you - by which I mean a refinance. Even most loan assumptions (for loans where assumption is possible and approved) are subject to recourse for at least two years, usually longer. This is one reason that for divorcing couples, it needs to be part of the dissolution agreement that the property will be sold or mortgage refinanced before the dissolution is final to protect the spouse that isn't keeping the property (they're often entitled to some cash from the equity, as well).

There are good and strong reasons why straw buyers are illegal, reasons that start at fraud and run through confidence games of all sorts, which are also fraud, albeit with a personal as opposed to corporate victim. The games that can be played on you when you cooperate with a straw buyer request start at major financial disaster, and often include felony jail time.

Caveat Emptor

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Tanyaonya said:

what can one do if they realise they are the victim of a straw buyer scam?

Dan Melson Author Profile Page said:

The beauty of most straw buyer scams (from the viewpoint of the perpetrator) is that the victim has broken the law every bit as much as the perpetrator. The identity theft version is uncommon - the vast preponderance of the victims cooperated willingly, thinking it was somehow morally or legally ok. Ir's not, and when the victim figures it out, the perpetrator has this fact to hold over the victim and prevent them from going to law enforcement. This at least delays criminal prosecution, perhaps even allows stature of limitations to run out.

The only advice I can really offer is to talk to a lawyer. You really need to, because the fact you violated the law is not going away.

Olen Soifer said:

In the current financial crisis, a lot of people are raving about "straw buyers" in connection with mortgage fraud. But, it is unfortunate those pontifications disseminate wrong information. The primary purpose for using a straw buyer is to conceal the ultimate user/purchaser of a property. While the practice may be called subterfuge, the statement that a straw buyer is always committing an illegal act is as preposterous as saying that shooting someone is always illegal.

It is illegal, on its face, to use forged documentation, or that which belongs to someone else, to obtain a mortgage approval. The fraud is the use of phony documents, or one of conspiracy with an illegal intent to deceive another. The borrower, who obtains a mortgage on false pretenses, is guilty of perjury. The person, who lends their identity with the intent to deceive a third party, is also a perjurer, as well as an illegal coconspirator. But, in the case of the buyer retaining the property, it isn't even a correct use of the term, "straw buyer", even though their actions are criminal.

When a straw buyer claims that they intend to occupy the property, but they do not, that is perjury and a fraud. Again, the fraud is the lie about their intent to occupy, NOT that the buyer gave no advance disclosure of their intent to transfer ownership after the settlement.

When a straw buyer obtains a loan to purchase a property, and then transfers title without paying back the loan, that is a breach of the loan contract (mortgages), if it contains a due-on-sale clause, as most do. The breach of contract is the issue, NOT that the buyer didn't give advance disclosure of their intent to transfer ownership after the settlement. In this case, if the lender was foolish enough to fail to include a due-of-sale clause, or other prohibition on assignment/assumption of the loan...they might not even have any case for griping about the transfer of title.

The term "straw buyer" has come to be associated with mortgage fraud, but it should be obvious that the term may have little or nothing to do with the frauds that are being committed. The use of straw buyers has long been used to conceal when a single entity was trying to accumulate property without causing a jump in the sales prices of the property. Take, for example, the accumulation of land by the Walt Disney Company in contemplation of what has become Florida's Disney World. In accumulating the property, WDC used numerous straw buyers. Now, it is understandable that land-sellers in the area might have been upset because they accepted a lower price than they might have insisted upon, had they been aware of the land-grab. But, the use of the straw buyers was totally legitimate, even if the sellers thought it was underhanded. In reality, unless they are tied in with some sort of fraud, straw buyers are about as illegal as retailers who don't voluntarily disclose their wholesale prices to their retail customers.

Unfortunately, the original rant, above, equates the use of a straw buyer with fraudulent docs our conspiritorial actions with the intent to deceive a lender. Assuming an automatic connection is preposterous. It is not the straw buyer that is the illegal entity, but the liars, fraudsters and conspirators who are the criminals. I won't get personal, here, but I suggest you get down off of your high horse and your soapbox and get your terms right before you accuse the wrong people of the wrong crime.tnmtkj

Dan Melson Author Profile Page said:

When Walt Disney used this trick in Florida, what you call "straw buyers" were real. They took title themselves before transferring it. Furthermore, the loans were always in the proper entities name - they didn't use someone else's credit (i.e. Disney) to get the loan. There is a difference between a stalking horse and a straw buyer.

Furthermore, if you compare the relative frequency of stalking horse (where they want to keep it quiet exactly who is really behind all of the purchases, but still perform the transactions truthfully) versus straw buyer where they pretend the buyer is someone other than who it really is for purposes of getting a better deal from the LENDER, you will find that the latter is dozens if not hundreds of times more common. Stalking horse is legal if ethically debateable (I think they're a pretty light shade of gray - the owner agreed to that contract of their own free will, so they must have been getting something they saw as worth at least as much as the property). Straw buyers are both illegal and unethical.

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This page contains a single entry by Dan Melson published on March 29, 2014 7:00 AM.

Looking For Loans In All The Wrong Places was the previous entry in this blog.

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