Creative Fraud 101
In 2003 delivered one of my keynote presentations on mortgage fraud at a lending convention and tradeshow dealing with the real life consequences of committing mortgage fraud. About an hour before my talk, I took a stroll around the exhibitor’s booths checking out all the latest in mortgage programs.
It had been a while since I actually originated loans so I was not really up to speed on the flexibility of today’s mortgage product guidelines. I stopped at the booth of a well known wholesale lender to brush up. Since a friend of mine is interested in refinancing her investment property, I thought I’d check out their loan programs; learn the latest loan to value limits.
The guy behind the booth told me that they’d go as high as 90% Loan To Value on a rate and term or a cash-out refinance on an investment property. I thought that was pretty good. I thanked the young man and turned to leave. I must have seemed unimpressed because he stopped me before I could continue on my stroll.
He said, “Well, we can go to 95% if it’s a second home.” Then I replied, “It’s not a second home. She just rents it out. Thanks.” I turned again to walk away.
This should have been the end of it, but this guy wouldn’t let me go. He said, “Wait, how far is it from her primary residence?” I told him it was over 150 miles. Then he asked, “What’s the value of her primary residence compared to this investment property?”
Okay, I could see where he was going with this. I haven’t been out of it that long. He was trying to see if this deal would “make sense” to his underwriters. If this other property was not worth as much as her primary residence, and if it was a significant distance away, then it is conceivable he could call it her “second home”. This is typically how an underwriter would scrutinize this type of transaction.
I was now curious to see how far this guy was going to take it. I answered his question by telling him that her investment property was about half the value of her primary residence. Clearly proud of the facts he had just uncovered, he proclaimed that this was definitely a loan that he could do as a second home refi at 95% LTV.
I wanted to give him an opportunity to back out of this quagmire he had created for himself. I responded, “But it’s not her second home. She doesn’t ever stay there.” He then explained how the value and the distance would “make sense” to the underwriter.
Apparently this guy wasn’t getting it. I turned fully toward him and looked him straight in the eyes. I said, “She doesn’t live or stay there. Ever. She rents it out 100% of the time. She tells me that she will never ever live there.” His only response to me was a shrug of the shoulders and a flip, “I guess it just depends on how creative she wants to be.” He then moved on to the next potential co-conspirator who had just stepped up to his booth.
I just had to walk away.
“Creative?” What he was suggesting isn’t creative financing. Creative financing is when a loan officer puts to use his vast base of product knowledge and his solid understanding of the guidelines. A good “creative” loan officer is one who knows how to take a borrower’s uncommon financial picture and find a mortgage loan that meets her needs. Put a square peg into a round hole; not by force or deception, but with skill and finesse. Creative financing does not involve the withholding or the misrepresentation of information. Especially information that is pertinent to the lender making the loan.
There are reasons why lenders have guidelines. The money that the customer borrows comes from somewhere. When it is all said and done, it is actually someone’s money. Ultimately these people, the Money People, trust the lender to be the gate keeper of their money. The lender promises to only open the gate if certain circumstances and conditions exist. The Money People may say, for example, that they don’t want to lend more than 90% to someone who doesn’t actually live in the home (non-owner occupied). Why? They have done research and found that, among other things, people are more likely to default on a loan if that loan isn’t securing the roof over their head.
So, let’s just say Mr. Creativity submits an application on behalf of his client, Ms. Liar. The application says that Ms. Liar is going to live in the home that she’s actually going to rent out, and she wants to borrow 100% of the purchase price. Based on this information, the lender opens the gate and lends the money that has been entrusted to them.
Four months later, Ms. Liar defaults on her loan because she can’t find a decent tenant. The Money People have now stopped getting principal and interest payments, so they call the lender to find out if the guidelines were followed. The lender (now a fraud victim) says they thought they followed the guidelines but as it turns out, Ms. Liar has never lived there. They said that they relied on the information they received from the applicant. If they had known the truth, they never would have made the loan to Ms. Liar.
Mechanics of Real Estate Fraud
Now the Money People (fraud victims) want the lender to return their money (buyback). The lender talks to Ms. Liar to find out why she said she was going to live there but never did. Ms. Liar tells the lender that it was all Mr. Creativity’s idea. Mr. Creativity says that he didn’t tell Ms. Liar to do anything. This is known as the finger-pointing portion of the fraud.
The lender decides to launch an investigation. They review all of Mr. Creative’s closed loans. They discover he’s had a number of similar transactions in the past. No defaults yet, but misrepresentation nonetheless. The FBI gets called in. A few months later Mr. Creativity is hauled out of the office in handcuffs for committing mortgage fraud.
That’s why lenders have guidelines.
Note: This article was written years before the mortgage; real estate industry melt down that took place in 2008. This article does not focus on the consequences of the victims. See article on The Money People for more on the loan programs that deal with the mortgage melt down of 2008.
I walked away from that booth without any doubt in my mind that Mr. Creativity has put together many transactions just like this one. I wondered, “who trained him? Has he trained anyone else? Does he realize this is wrong? Does he know it’s wrong but doesn’t think it’s a big deal? Has he seen much worse around his office, and therefore thinks, ‘this isn’t as bad as forging a signature’? Does he know that people go to prison for much less? Does he have kids? Does he know how he would explain his 21 month absence from home to his three year old if he went to prison? Would he find a better way to explain it than I did?”
The worst part of a federal fraud conviction is not prison. Of course, prison isn’t great. I don’t care how much fun we all think Martha Stewart had in there putting together decorating contests. I was there, and I just don’t remember it being that fun. It’s no picnic being stuck living with hundreds of men who don’t have personal hygiene anywhere on their priority list. Then there’s the loss of freedom, etc., etc., etc.
No, the worst part about a federal mortgage fraud conviction is the unwritten sentence. The true consequences of committing mortgage fraud are the loss of respect in your industry, the loss of self esteem, the loss of a career and the fact that even though it was you who did something wrong, everyone else close to you has to go through the same thing too.
About an hour after I parted company with Mr. Creativity, I addressed the group in the convention hall. I gave my talk on the real life consequences of committing fraud. I kept an eye out for Mr. Creativity but didn’t see him. I hope he was there. He’s the reason I was asked to come and speak.
Jerome Mayne is the author of the book, Diary of a White Collar Criminal (Amazon) and co-author of Mortgage Fraud and Predatory Lending – what every agent should know (Dearborn/Kaplan). He is a keynote speaker and has worked with dozens of companies and associations helping their people make the right decisions, when the right decisions aren’t easy.
Keynote Speaker on Mortgage Fraud
Jerome Mayne is a Public Speaker for Fraud Conferences and Fraud Conventions, including Mortgage Fraud Conferences and Mortgage Fraud Conventions. In addition to being a Fraud, Mortgage Fraud and White Collar Crime and White Collar Mortgage Fraud Public Speaking Expert, he also consults for Public Speakers who speak in the areas of Fraud, Mortgage Fraud, White Collar Crime and White Collar Mortgage Fraud Public Speaking.
A customized public speaking engagement can include fraud statistics, federal fraud statistics, mortgage fraud statistics and the effects of fraud on a company.
Has been an Expert and a Keynote Fraud Public Speaker at Fraud, Mortgage Fraud, White Collar Crime and White Collar Mortgage Fraud Public Speaking events, including conferences and conventions.
Primary Areas of Expertise:
Public Keynote Speaker and Expert on Mortgage Fraud, White Collar Crime at conferences and conventions.
Jerome develops keynote presentations on ethics and fraud that evoke thought and discussion. He explores general business ethics and the set of principals of right conduct, or ethics as set forth by an employer or a trade association. One of his talks on ethics was designed for presentation to the MBA program at Hamline University in Minneapolis, Minnesota.