July 15, 2020

Mortgage Fraud Schemes Plague Struggling Homeowners

With Tennessee again leading the nation in bankruptcy filings, it is no surprise that instances of mortgage fraud are on the increase throughout the state.  According to the FBI, there are two categories of mortgage fraud – fraud for property and fraud for profit.

Fraud for property involves situations where a homeowner misrepresents his income and/or net worth on a loan application in order to qualify for a mortgage.  The homeowner’s intentions may be to remain in his house and repay the loan, but falsifying a mortgage application is a federal crime and can result in prosecution.   However, mortgage companies are generally interested in avoiding loss, meaning that if you materially misrepresented your financial information on a mortgage application there may be an opportunity for you to work out a deal with the mortgage company itself and avoid criminal prosecution.  In a bankruptcy context this may mean that you would agree to waive the discharge of a certain portion of your debt to the mortgage lender as a form of settlement of claim.

According to a recent FBI press release about mortgage fraud, the FBI’s main focus is on the second category of mortgage fraud – fraud for profit.  Fraud for profit generally involves multiple players and can result in hundreds of thousands or even millions of dollars of losses to banks and lending institutions.   In some of these sophisticated frauds, crooked appraisers, closing attorneys and real estate agents work together to secure inflated loans on properties that have very little market value.  Often trusting but naive individuals (who may end up as our clients for bankruptcy cases) are brought into the process as “straw buyers.”

For example, we previously represented a Chapter 7 debtor who came to us after his “real estate investments” went sour.  It turns out that our client had been solicited by his pastor to “sign some papers” for a real estate deal.  Our client was paid $10,000 for his involvement.  In fact, our client was being used as a straw buyer for a real estate scam.  He ended up as the title owner to several properties in the same neighborhood, all of which were subject to mortgage debt far in excess of their value.

When questioned if he thought it odd that a group of people he did not know would pay him $10,000 to sign his name to some papers and to become title owner of 7 houses, he had no response.  The problem, of course, is that by accepting the $10,000, our client became part of the fraud conspiracy.

If you are struggling financially, and someone comes to you with an offer that seems too good to be true, call our office and speak to one of our staff attorneys.  While bankruptcy is mainly about getting our clients out of trouble, we can also be helpful in spotting signs of real trouble before they happen to you.

As Foreclosure Rates Rise, Beware of Foreclosure Scams

With foreclosure numbers in Tennessee cities on the rise, it should come as no surprise that desperate homeowners are being targeted by scammers.  Usually the scammers pitch promises to stop a pending foreclosure using a "secret provision in the law" or an alleged special relationship with mortgage lenders.

In almost every case, the scammer asks for several hundred or several thousand dollars, then he prepares a two page Chapter 13 "emergency petition" in the homeowner’s name and files the petition in the local bankruptcy court.  The scammer does not put his own name on the petition – instead he signs the homeowner’s name as if the homeowner filed the case.

Often the emergency filing will stop the foreclosure, although only temporarily.  Under the bankruptcy law, a Chapter 13 plan and schedules must be filed within 15 days of the "emergency" filing.  Since the homeowner did not intend to file bankruptcy in the first place, many of these cases are dismissed by the clerk’s office when no plan and schedules are filed.

Further, many of the emergency petitions are filed without proper documentation – no credit counseling certificate and no pay advices.

At best, the bewildered homeowner will realize what is going on and will retain counsel to either proceed with the Chapter 13 or to file a dismissal in court.  More often than not, however, the homeowner will be afraid to take any action out of concern that the homeowner himself did something wrong.   The wrongfully filed case will wind its way through the bankruptcy system until it is eventually dismissed and the homeowner will be left facing foreclosure again, but with less of a bankruptcy option because of the previous filing.

Recently a federal judge in Kansas denied bond to a foreclosure scammer named Issac Yass, who owned a company called Stopco that allegedly perpetrateda slightly different type of bankruptcy fraud in several States, including Tennessee.  Investigators say that Yass operated by filing Chapter 13 petitions on behalf of fictitious persons who claimed to have a fractional interest in the properties in foreclosure.  He then charged homeowners a monthly fee.  Yass’ case is unique in that the alleged fraud was perpetrated on a grand scale – investigators contend that since 2006, Yass stopped foreclosures on over $50 million worth of properties.

At Clark and Washington, we have seen many cases of many kinds of foreclosure scams.   Sometimes we can help pick up the pieces, and sometimes there is little or nothing we can do.  If you are facing a foreclosure in Tennessee, we strongly recommend that you seek competant legal advice from a lawyer who is a member of the Tennessee bar.  If a non-attorney foreclosure prevention company solicits your business, run the other way.