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.