A mortgage fraud occurs when lenders are induced into making loans, secured by real property through material misrepresentations of information. The loans would likely not be extended if the true facts were known to the lender. One type of mortgage fraud, known as a fraud for property, is where a potential home buyer misrepresents their income or assets in order to purchase a home with credit they are not qualified to receive. The more serious type of mortgage fraud, referred to as a fraud for profit, is typically committed with the complicity of insiders such as bank employees, mortgage brokers, appraisers, real estate agents, title companies, and attorneys who are paid inflated fees out of the mortgage loan from a lender.
Some have referred to mortgage fraud as the biggest scandal in human history. The reason for this dubious distinction is the fact that the fraud, in its heyday, was perpetuated by people at all levels of society – from the un-savvy home buyer on Main Street to the sophisticated financier on Wall Street. Another unique facet of mortgage fraud is the fact that many people who took out fraudulent loans and who are now the subjects of mortgage fraud investigations and prosecutions were, in many ways, victims of mortgage brokers and lenders who were too eager to give out loans during the real estate boom that ended in approximately 2007.
Recently, in the United States District Court for the District of New Jersey, Ronald Harris, Jr. of Piscataway, New Jersey plead guilty and was sentenced for his role in a purported mortgage for profit scheme. According to an Information filed with the Court, Mr. Harris operated a mortgage rescue company. The mortgage rescue company looked for distressed homeowners who had equity in their homes, but were facing foreclosure, and told them it could provide relief.
Harris asked homeowners to permit title to their properties to be put in the names of third party purchasers, who acted as straw buyers. The homeowners would be permitted to remain in the homes, even though title to their homes transferred to other individuals. During a six month to one year period while the title was in the name of the straw buyers, Harris would attempt to improve the credit scores of the homeowners so that they could repurchase their homes at more favorable rates. The straw buyers were told that they would make a profit when the home was re-sold to the original homeowners.
Harris purportedly made false statements on the mortgage applications of the straw buyers in order to obtain the best rates and mortgage terms possible. Harris also purportedly filed false liens on the properties prior to the sale of the properties to the straw buyers, and these liens, which were often in the name of companies owned by Harris, were paid off at the time of closing. Harris would also be paid a fee out of the loan proceeds after all other fees and the homeowner’s debt were paid off. Harris plead guilty to one count of conspiracy to commit wire fraud in violation of 18 U.S.C. Section 1343 and one count of conspiracy to commit money laundering in violation of 18 U.S.C. Section 1349. He was sentenced to 46 months in federal prison.
What is unclear about the reporting on the Harris case is whether or not Harris was able to actually help distressed home buyers. In many mortgage fraud cases, lenders and brokers turned a blind eye to fraudulent activity as long as they were making money and loans were being repaid. It was only after the real estate bubble burst and home prices began to decline sharply that defaults on loans started to increase. Once banks started to lose money, they took a better look at their lending activity and were able to easily uncover fraudulent transactions. Had they used that same vigilance prior to making the loans, a real estate bubble would likely have been avoided.