Changing Times, Changing Fraud

It was certainly a sign of the times that a panel discussion recently presented to California real estate attorneys and brokers was titled "Changing Times/Changing Fraud." The panel took place at the Legal Affairs Forum of the California Association of Realtors® (CAR), held in conjunction with CAR Business Meetings, February 3 – 6, 2009, at Indian Wells, California. Panel members included California Real Estate Commissioner, Jeff Davi, two district attorneys, a D.A. investigator, and Realtors® who have been involved with community efforts to combat real estate fraud.

As the economic environment changes, so do the types of fraud. Regrettably, bad guys are adaptive organisms too.

As the real estate bubble was enlarging and money was flowing freely, real estate frauds tended to be related to inflated appraisals, straw buyers, and phony escrows. The victims of the frauds were primarily financial institutions. Now, with the bubble popped and mortgage delinquencies on the rise, the nature of real estate frauds has changed, and the victims are mostly people.

Currently, the predominant frauds have to do either with foreclosure "rescues" or loan modifications. The former may include scams that involve actual transfers of property (e.g. "avoiding foreclosure" by transferring ownership to a third party and then renting it back), but the most common schemes involve the direct payment of money to the "rescuer."

According to the Department of Real Estate, loan modification scams are "the fraud of the moment." Typically, these involve up-front payment for services – most often never performed – that are alleged to result in a modification of the homeowner’s mortgage loan. It is now illegal in California to charge fees in advance for loan modification services, but it is not illegal everywhere. In any event, the fact that collecting advance fees for loan modification services is illegal is no deterrent to the scammers.

Not all loan modification scams involve payment for alleged services. One ruse is to "counsel" the homeowner not to have any contact with the lender, but rather to leave all contact to the alleged loan modifier. This includes making the payments. The borrower is told to send the payments to the loan modifier who will, in turn, send the payments to the lender. Or not.

The California Department of Real Estate web site, contains an advisory regarding foreclosure rescue and loan modification scams. (At the web site go to the press release section and then to "consumer alerts".) The advisory contains a 17 point list of "Signals of Fraud/Red Flags to Watch Out For". Even though this is a California site, the advice it contains would be useful throughout the country.

How bad is this, really? The Department of Real Estate currently has approximately 2,000 investigations open with respect to loan modification fraud. In November of 2009, the California State Bar announced that its Loan Modification Task Force was investigating almost 250 lawyers, having received more than 1,250 complaints. State Bar investigations are up 69 percent over 2008. Moreover, Commissioner Davi estimated that this is liable to go on another 24 – 30 months. With Notice of Delinquency filings up over 50% from December 2008 to December 2009, he just may be right.

One sobering fact that the fraud panel made clear was that, by and large, local law enforcement agencies are not well geared up to investigate real estate fraud. That is generally left up to the Department of Real Estate; but the amount of fraud currently taking place is simply too much for the Department to handle. Local districts attorney need help and funding to take on the work that needs to be done.

It is as if a perfect storm has occurred for the perpetrators of scams. With continuing increases in mortgage delinquencies, there is a target-rich environment for the crooks. And this is a time when both local and state enforcement agencies are strapped for staffing and funding. It’s not a pretty picture.

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