Fraud How does it happen why does it happen?
The main motivation and reason that a market collapses or gets saturated is greed. There is a lot of money to be made on every side of every transaction. Realtors, mortgage brokers or lenders, title and escrow, appraisers, everyone involved, gets paid, and gets paid well for their time. With the increase in demand over the last 4 years, the attractiveness of joining the real estate workforce has gotten even more attractive, and is relatively easy to get started.
On the mortgage side, there are many types of fraud that exist. Some of the most common forms of fraud are:
Pushing Appraisal Values
This is a basic form of fraud. Lenders are relying on an appraiser to come to a decision on the value of the property without "heat" or "pressure" from a seller, buyer, mortgage broker, or real estate agent. That "pressure" can cause them to inflate the value, for fear of losing future business from the parties involved. In the case of the market in 2004, the market was appreciating every day and you didn't have to really worry about the value. In 2007, however, home prices are flattening and possibly coming down, and this "pressure" can hurt the people that are financially banking on the appraiser, the lender.
Faking or Altering Income of Asset Documentation
This is the technology age. Creating fake forms of income or asset proof is out there, available to people who make a living in fradulent circles. Borrowers that have a credit score, makes a certain amount of income, and deserve a certain rate, are shopped around. There are two possibilities, they are faking documentation to get into a better program, or they are pulling a "bait and switch" type scheme getting the borrower to go with them, and then switching the terms upon the loan signing. Both cases are forms of fraud and are not just unethical, but are illegal.
Giving Cash-Back on Purchase Transactions
One of the more common types of fraud is when a buyer will get cash back after buying a home. This is common form of fraud in which the appraiser is certifying a value of the property, and that extra out of escrow cash-back is distorting that value, and the lenders investment.
This is not when a person buys a home and improves it and sells it the next month for a profit -- that is just good business -- this example is when someone buys a property, sells it to a friend for a profit, who sells it to another friend for a profit, and sells it again to another friend for a profit. This is an evil type of fraud, because each person along the way makes a killing, and the final lender is the one left with the bill.
Fraud is happening every day, that is nothing new. When people can make 3-5 points on a transaction (in California that is up to $25,000 on a normal transaction!) and all you need is a decent credit score, mortgage brokers can make a killing, and in the long run, the person that is left holding the bag is the bank.
By Diane Tuman
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