Mortgage Fraud Is Still Happening - What To Do About It

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You would think these nitwits would learn. You would think they'd all be out of the business. Sadly, that is not the case.

It started innocently enough. It always starts innocently.

This was an email I got (specifics redacted).

Hi Dan, I came across your blog looking for information on what to do when your mortgage loan might not go through at the very last minute. I live in DELETED, and realize your in the San Diego area, but you really opened my eyes on the subject and I had to let you know. We are in escrow with a close date of DELETED, and our VA lending agent no longer works with the company after 2 months of paperwork, assurances and promises. The newly appointed agent says they don¹t know how DELETED was going to close the loan and everything is falling apart. DELETED went as far to say he could close the loan in 5 days to use as a negotiating tool to get a contract with the seller which won us the house. We never heard of getting a back up loan or a purchase money loan? It¹s not over yet, but any advice would be GREATLY appreciated as we are 1st time home buyers and really feel taken.

My response

(name deleted),
VA loans are dead simple providing you have the following qualities:

-VA eligibility

-sufficient income to cover the payments and other debt (see debt to income ratio)

-acceptable loan to value ratio. In the case of VA loans, this can be up to 103% of the purchase price or appraised value, whichever is lower. This is the only widely available "no down payment" loan right now.

-Property that meets VA and FHA standards (No holes in walls or cracks in windows, subfloors all covered, etcetera)

-enough time to get the government bureaucrats to do what they need to.

Unfortunately, there's a lot of loan officers and real estate agents out there who still don't understand how the market has changed. I have always built client affordability and a budget into my transactions from day one, but the reason we're having problems is that a lot of my competitors didn't.

Here's what you need to do: Find out if there is a reason this transaction is not going to fly.

Obvious reasons why it definitely would not fly:

  • Can't document enough income for a long enough time
  • something wrong with the property
  • property appraises way too low
  • no VA eligibility


There are other possible reasons, but those are the main ones. If there is such a reason, bail out NOW. If there isn't such a reason, find someone who knows what they're doing IMMEDIATELY. Alas, I don't know anyone in DELETED, but I believe my company does business there. The good news is you still have almost a month, which should be enough time.

If this property doesn't work out for you, may I suggest finding DELETED or DELETED and asking one of those fine gentlemen to be your agent? They're both ethical agents who won't be searching for properties you can't afford and who do know competent loan officers. I can get their contact information if needed, but they're both easy to find online. Tell them I sent you - they both know I neither ask for nor accept referral fees, but that the occasional free client I send their way will disappear if they mistreat anyone I send.


I went out looking at property, and when I came back this email was there:

Thanks for your quick reply Dan, I know you must be busy, and I really appreciate all your information.

The only factor the new agent is citing is that we do have a high income to debt ratio. We know this. Everyone knows this, and it has not changed since we started the process 2 months ago. The first loan agent was going to get by this by paying down one of our high credit cards with seller money. We asked for 4% back from seller for this reason which they agreed to. Done. Now the new lending agent is saying that won't fly, that we can't pay down the debt we have to pay it off, and the 4% is 2000 short of our credit card debt. So she does not know how she can do it but is getting back to us today.

We have not talked to our real-estate agent yet, but we will today as well. Would you recommend we contact your mortgage company in the mean time to try to push through and cover ourselves?

Oh my.

Lions and Tigers and Bears and people trying to commit fraud. Oh, my!

My heart goes out to this person, especially as they are a veteran, but there's very little I can do beyond make them aware of some facts before things get any worse.

This is fraud. No maybe about it. I have written about this before in Real Estate Sellers Giving A Buyer Cash Back is Defrauding the Lender. If the purchase price is $400,000 but the seller is returning cash back to the buyer under the table, then the buyer isn't really paying $400,000, are they? Nor is the seller really getting $400,000, are they?

here's the legal definition of fraud:

All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.

Now if they don't disclose that 4% cash back, they are misleading the lender and the government into believing that the property is worth more than it is. In other words, fraud. Furthermore, the former loan officer evidently hadn't disclosed it from the fact that the new loan officer is saying the lender isn't buying off on it now.

(I should say that the Department of Veteran's Affairs apparently allows this, but they are not lenders or loan officers, and whether the lenders would accept it is another matter. They can add other requirements if they so desire, and I would not expect this to pass muster with any lender I am aware of, as it violates generally accepted accounting principles (GAAP). Truth be told, I've never tried to get such a thing accepted, but I would try if the client really needed it and understood what needed to happen and the dangers to them. Even if the VA and the lender both permit it, it must be disclosed to them and approved by the underwriter in order for it not to be fraud. For standard conforming "A paper" loans, and for that matter even subprime ones, cash to the buyer from the seller, or cash to pay the buyer's debts, is strictly forbidden. Finally, considering such things from a dispassionate neutral point of view such as "are they a good idea?" or "Is the consumer likely to be able to repay the loan?" or "Is this a good risk for the lender?", I have to agree with GAAP - the answer is no, and the prognosis is that given the consumer's financial habits, this is setting them up for failure. But "good idea" and "legal" are two distinctly different concepts.)

Whatever the lender's fraud policy may be, the government comes down on people who participate in mortgage fraud that involves VA or FHA guarantees like a ton of bricks. Just because the VA permits it doesn't mean it isn't fraud if the lender doesn't, or didn't approve it in this particular case. They are going to throw the book at you. Have you ever seen the list of government regulations? Ouch, both literally and figuratively.

Let's suppose the buyer and seller do not commit fraud, fully disclosing the cash back to the lender and the government. If they do this, the lender and the government will both treat the purchase price as being the appropriate amount less than whatever cash is going from seller to buyer. As I said in When The Appraisal Is Below The Purchase Price for Real Estate, this will mean the borrower basically has to make up the difference in cash. Net result, the buyer/borrower needed that 4% cash not to pay off their consumer debt, but for the down payment on the property. Net gain to the buyer from that money: Zero. Nada. Zip. Zilch.

Both the loan officer and real estate agent and their brokerages need to hear about this, at a minimum. The loan officer for actively planning a fraudulent transaction, the real estate agent for not speaking up and putting their foot down, because they should have known better, but were keeping their mouth shut to get a bigger commission check.

Now that stated income is, to use Miracle Max's wonderful phrase, "mostly dead", there seems to be no shortage of nitwits trying this fraudulent trick to get loans and transactions through. It is not a minor violation that nobody cares about. It goes straight to the heart of the notion of property value, and the lender's expectation that if you do default, they will be able to get their money back by selling the property. This trick fraudulently persuades a lender to accept more risk than they are aware of, or worse, tricks them into taking a risk that they would reject were they in full command of the truth. That's fraud.

It also goes right to the heart of whether the client can afford the property. In this case, they clearly can not. If they could, there would be no need to commit fraud in order to generate a false picture of them being able to afford it. Debt to income ratio is there for the borrower's protection as much as the lender's.

Here's the rest of my response to the clarification:

Your loan officer has hosed you badly. I really hope it's not going to end up losing your deposit. If so, in your place I would talk to their company about paying it in your stead. Their loan officer was trying to make a fraudulent transaction fly; that's failure to supervise. If they don't promptly agree to indemnify you in writing, talk to a lawyer. Actually, talk to a lawyer anyway. But if your loan contingency is still in effect you may be able to get out of it without losing your deposit.

I don't know your situation or your state's law or the contract you signed on this, and I definitely am not a lawyer. Talk to your real estate agent about getting out of the contract RIGHT NOW because this transaction is not going to happen.

Once you're out of the contract, I'd fire that agent if I were in your shoes. He helped negotiate the contract, he should have known it was fraudulent and the requirements for making it legal and the consequences thereof.

After sober reflection several hours later, I am, if anything, madder than I was. I would be ready to do violence to these two twits for what they did to someone who not only wants to put money in their pocket, but served our country, so it's a good thing they're not here in front of me. If it were me, or some situation I had an interest in (legal standing), I'd certainly make a written complaint to the regulatory authorities. I want these clowns gone, out of business, locked up in prison so they can't attempt to repeat this nonsense with some other innocent client who doesn't know any better, and I want their enablers and those who fail to supervise them gone, too. Helping someone with their home buying is a trust, and I have no more sympathy for those who knowingly and willfully violate that trust than I do for pedophile priests.

I'm not here to act like the Black Knight, shouting "None Shall Pass!" That didn't work out too well. But you need to consider 1) Can you really afford it? 2) Is it consistent with your financial habits?, and 3) Is it fully disclosed to everyone it needs to be? That lender is loaning out hundreds of thousands of dollars based upon their understanding of the situation. If that understanding is not in full accordance with what is actually going on, that's a problem. A big problem that's likely to come back and bite you and everyone else involved.

Caveat Emptor

Original article here

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About this Entry

This page contains a single entry by Dan Melson published on May 13, 2021 7:00 AM.

Buying Real Estate Without A Source of Income Or When You Are Changing Careers was the previous entry in this blog.

You've Got a Great Offer, But Can The Buyer Consummate It? (Cash to Close and Appraised Value) is the next entry in this blog.

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