The New Face of Wire Transfer & Real Estate Fraud Schemes | Axos Bank

The Newest Face of Fraud in Mortgage Lending


 
Person holding a mask behind their back

Fraud takes many forms in mortgage lending, but the newest one is a dark specter, hidden from view, with the power to hijack wired funds and vanish without a trace. The FBI reported that $969 million was "diverted or attempted to be diverted" from real estate transactions and wired to accounts under criminal control in 2017. In stark contrast, only $19 million in wire transfer frauds affected homebuyers in fiscal year 2016. Although some of this drastic increase may be attributable to increased reporting by consumers, banks, and real estate industry professionals, the theft of wired funds from home purchase transactions is indisputably the fastest-growing form of real estate cybercrime in the U.S.

Homebuyers are the most common target for this fraud, but anyone involved in wiring money during the mortgage process can become a victim.

Like so many other fraud schemes perpetrated on the web, this type of mortgage fraud utilizes email hacking and identity theft. Hackers gain entry into the email system for a title company, escrow company, or real estate agent and single out an upcoming mortgage transaction. The homebuyer, escrow company, or lender then receives an official-looking email with instructions for wiring the funds needed to close. Instead of the company’s legitimate account, the criminals substitute their own bank account. The money is diverted to this fraudulent account, and the criminals quickly withdraw the funds before anyone is aware of the deception.

Because this type of wire fraud is often international and the perpetrators camouflage their identities, it’s extremely difficult to track. However, victims can fight back by calling the local field office of the FBI immediately, visiting the FBI Internet Crime Complaint Center, and initiating a little-known FBI weapon called the “Financial Fraud Kill Chain.”

Financial Fraud Kill Chain

The Financial Fraud Kill Chain (FFKC) is used to recover substantial international wire transfers that have been stolen through email scams and other crimes. It gives U.S. financial institutions an additional method for getting victims’ funds back. FFKC can be used if the fraudulent wire transfer meets all of the following:

  • The transfer is $50,000 or more.
  • The transfer is international.
  • A SWIFT recall notice was initiated.
  • The FBI is informed of the details within 72 hours.

If the wire transfer doesn’t meet the above criteria, it should still be reported by the financial institution to law enforcement. It’s vital that the fraud be reported to the FBI quickly enough to initiate a “kill chain” effort to recover the diverted funds.

Some title agencies, real estate agents, and mortgage lenders have been sued by distraught homebuyers for negligence and delays in reporting fraudulent activity.

Other Forms of Mortgage Fraud

Although wire fraud may be the fastest growing form of mortgage fraud, lenders continue to face better known scams such as fraud for housing, fraud for profit, straw purchases, illegal property flipping, silent seconds, and equity skimming. All are characterized by some type of material misstatement, misrepresentation, or omission in relation to a mortgage loan to influence the lender’s decision.

Fraud for Housing

Fraud for housing typically involves illegal actions taken by a borrower who wants to buy or maintain ownership of a house. The borrower may misrepresent income and asset information on a loan application, claim the home will be owner-occupied, or entice an appraiser to over-value a property.

Fraud for Profit

Fraud for profit generally involves industry insiders using their specialized knowledge or authority to commit or assist the fraud. Securing the home is not the goal of this type of fraud. Instead, the mortgage lending process is manipulated to steal cash and equity from lenders or homeowners. Fraud for profit can utilize one or a combination of straw buyers, property flipping, silent seconds, and equity skimming.

Straw Buyers

Straw buyers are individuals who apply for mortgages and make home purchases on behalf of others. In some cases, the real buyer may have bad credit and be unable to qualify for a mortgage on their own. Other times, the true buyer is just a scam artist looking to gain money by manipulating the mortgage and real estate transaction process. Straw buyers commonly have good credit but little money and are paid to accept the risk that the actual buyer will default. Even though this ruins their credit, they are motivated by the immediate payoff offered by the true buyer.

Property Flipping

Property flipping is generally not illegal when the buyer purchases a house, renovates it, and then resells it for a profit. In contrast, the activity becomes illegal when the property is purchased, falsely appraised at a higher value, and then immediately sold. This scam can involve one or more of the following: fraudulent appraisals; falsified loan documentation; inflated buyer income; or kickbacks to appraisers, straw buyers, investors, loan brokers, and title company employees.

For example, the scammer legally purchases an inexpensive property. Arrangements are made for a dishonest appraiser to reappraise the property at a much higher value, well above what it's worth. The scammer then resells the property to a straw buyer who qualifies for a mortgage at the inflated appraised value, but has no intention of making the monthly mortgage payments. The scammers walk away with a profit, the difference between the inflated mortgage value they sold the property for and the original amount they paid to purchased it. Kickbacks are then paid to the appraiser, straw buyer, and anyone else involved in the scheme.

man putting cash into an envelope

In another variation, the property is sold to an unwary investor, often with the expectation that the scammer runs a legitimate real estate investment and management service. In this scenario, the investor is duped and the scammer and dishonest appraiser share the profits.

Silent Seconds

Silent seconds refer to mortgage purchase scams where the buyer and seller work together to hide a second mortgage from the primary mortgage lender. A common form of the scam involves the seller lending money for the down payment to the buyer after both agree to an inflated sale price. The buyer benefits from not having to provide a down payment from their own funds. The seller profits at the time of the property sale by receiving more money thanks to an inflated sales price. The unfortunate result for the primary lender is that they’ve issued a mortgage for more than the property is worth.

Equity Skimming

Equity skimming involves an investor using a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name. After the loan is closed, the straw buyer signs the property over to the investor in a quitclaim deed, which relinquishes all rights to the property and provides no guaranty to title. The investor doesn’t make the required mortgage payments, rents the property until foreclosure takes place months later, and pockets the rental income.

Minimizing Mortgage Fraud

U.S. financial institutions are highly regulated on both a federal and state level with many policies and procedures, mandated by law, regarding customer information and transactions. However, there are some best practices a lender can follow specifically when it comes to wire fraud and other forms of mortgage fraud.

Work with service providers you know and trust.

Lenders should perform due diligence on the appraisers, title companies, and closing agents involved in their mortgage transactions. A service provider with no vested interest in the successful outcome of a transaction will often reflect their indifference in the way they run their business. Look for service providers who adhere to policies and procedures, invest in technology and training to protect their customers, have an awareness of the latest scams, and consistently work to make themselves resistant to fraud.

A robust pre- and post-funding quality control program is essential in the prevention of wire fraud.

Adequate policies and procedures should be developed, and strict adherence to them is a key component of preventing fraud. Individuals processing wire requests should be encouraged to question something that seems unusual and be alert for suspicious activity. In addition, a manual review of all wire requests is a basic fraud prevention strategy. Although the verification of account numbers can be tedious, it’s often a method preferred by lenders that process a small number of wires each day. Automated systems that utilize data analysis to detect and prevent fraud are also available. Lenders should regularly audit appraisers and develop control procedures for accepting appraisal reports.

Clear communication among all parties involved in a mortgage transaction can block scams.

At the beginning of the transaction, the lender, Realtor, and escrow officer should have a clear conversation with the buyer regarding their communication practices, especially with regard to wiring instructions. Buyers should be warned to be suspicious of emails with changes to wiring instructions, especially ones received immediately before funding. Closing agents and title companies should receive clear directions regarding funding, and cookie-cutter closing instructions should be avoided. Utilizing encrypted email during the loan process, especially when sending wire instructions, can also add a layer of protection.

Unfortunately, mortgage scams and wire fraud, in particular, are ongoing challenges in today’s lending industry. Minimizing the threat begins with an awareness of the various forms it takes and the specific activities that can signal the fraud. As with many scams, a good defense is the best weapon. Working with trusted partners who have been properly vetted and are committed to security, along with a robust quality control program, can shield a lender from the devastating consequences of mortgage fraud.

For more information on Axos Bank and our Warehouse Lending Program, where we invest in the technology and processes to ensure the security of all our financial transactions; please contact us at 1-888-764-7080 today.

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