Who Is Committing Mortgage Fraud?

Jun.13.10 | About: SPDR Homebuilders (XHB)

Calculated Risk had a nice collection of items yesterday (Saturday, June 12) on mortgage fraud. CR cites an article by Suzanne Kapner at ft.com indicating that the 2009 mortgage fraud report from the FBI is scheduled to be released June 17. In the past the release of the annual report has coincided with a surge in new cases being filed. Thus, this week could see a large number of new mortgage fraud cases.

Although the total number for 2009 is not known, as of June the filings were on a pace to reach 17,000 cases for the year. More than 15,000 cases were taken to court in 2008, covering a total of $1.4 billion in losses to fraud. In 2009, the dollar amount total is expected to be higher, possibly by as much as 30%.

Just who is being arrested in these cases is not entirely clear. According to Calculated Risk:

The FBI usually only arrests people engaged in fraud for profit and not fraud for housing - they typically don't arrest borrowers who misrepresented their income - they arrest mortgage brokers who encouraged people to falsify their income. Although the distinction was blurred during the bubble ...

However, there definitely are some individuals being prosecuted. Sally Kestin writes in the South Florida Sun-Sentinel that squatters are being arrested when they occupy vacant properties and claim ownership under an old English common law concept known as adverse possession. Under this principle, ownership of abandoned property can be assumed if the person agrees to live there and pay taxes. Florida law actually recognizes the adverse possession principal and hundreds of filings have been made to assume ownership under the law.

Where individuals run afoul of the law is when they occupy such properties or collect rents on them. Those acts are felonies if done before the deeds are transferred and people are currently in jail awaiting trial on criminal trespass and/or larceny charges for taking actions of possessions. The Florida law requires a seven year time lapse from filing to deed transfer and some filers are taking actions of possession immediately.

Thursday, Sen. Harry Reid proposed extending the closing date deadline to Sept. 30 for the federal home purchase tax credit for those who signed contracts by April 30. Currently the tax credit can not be claimed unless the closing occurs by June 30. James R. Hagerty, writing in the Wall Street Journal, says this is an open invitation for fraud. Some of the examples he cites of fraud that may occur or may already have been planned include:

  1. Buyers signing contracts after April 30 insisting on closings by June 30 could be planning on backdating their contracts to claim the tax credit.
  2. Pending sales contracts for April have continued to rise into June. This is highly suspicious behavior. Normally pending sales contracts for a month decline in the next one to two months as deals fall through.

Hagerty says that extending the deadline for closing past June 30 is simply a fraud enabler, giving more time to engage in backdating and other subterfuge.

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