Mortgage Fraud: How a “Straw Buyer” Scheme Works

Mortgage fraud is an epidemic that continues to be around and it can take form in many different ways (foreclosure rescue schemes, illegal flipping, etc). One form of mortgage fraud is a “straw buyer” scheme. This is how it works:

The participants

The most important piece to this scheme is the buyer. We’ll call him “Mr. A” who, although having good credit, normally would not be able to qualify for a mortgage loan because of insufficient income.

Next you have agent “X” who is looking to make a big commission and begins to make false promises to the buyer, “Mr. A.”

Alongside the agent, is mortgage broker “Y” who will go to any extent to qualify the buyer, even if it means falsifying documents.

Many times other parties will also be involved in a “straw buyer” scheme. These others culprits could be the agent’s assistant, the notary public, the appraiser, the title/escrow company, the insurance company, the lender’s underwriter and others.

Last but not least is the seller, “Mr. S,” who is looking to sell the house fast and at the highest price possible.

Putting the scheme into action

Agent “X” convinces the buyer, “Mr. A,” to buy a home and offers him thousands of dollars as compensation for the use of their name and credit. According to the victim’s stories, the going rate seems to be between $2,500 and as high as $5,000.

The promises normally made by agent “X” are that he will resell the property at a much higher price and the profits would be spit 50-50 with the buyer or that the buyer will be removed from the mortgage in less than six months. Perhaps one of the most common ways to convince a buyer has been to offer them monetary compensation for helping a “poor soul” with bad credit buy a home. Sometimes the “poor soul” happens to be the buyer’s family member, the agent’s assistant and even the agent’s own family member.

Buyers involved accept because they see a monetary compensation and because they are led to believe that they won’t have to pay the mortgage.

After “Mr. A” accepts the deal, mortgage broker “Y” will gladly step in and qualify the buyer by falsifying loan and income documents. Once the buyer is qualified, agent “X” is able to convince “Mr. S” to sell the home by presenting them with the opportunity of a lifetime.

Often times the agent will present the seller an offer much higher than the listing price and ask the seller to kickback the overage in order to make repairs to the home. The repairs are never done and the agents or third parties end up keeping the money.

Once the seller, “Mr. S,” accepts the purchase offer and mortgage broker “Y” has approved the loan with the help of his/her friendly underwriter, the next step is signing the documents.

At the document signing, buyers make a fatal mistake of not paying attention to several important documents like the final closing statement among others. The final closing statement details all the costs and disbursement of monies involved in the transaction.

Agent “X” and mortgage broker “Y” with the help of the notary, who often times is a friend or relative to the agent/mortgage broker, play a game I call “shuffle-the-papers” to prevent suspicions.

The end result

The buyer sings the documents, agent “X” along with mortgage broker “Y” walk away with fat commissions on top of the kickback from the seller, everyone else gets paid and they are all one big happy family. The happiness, however, ends when the lender begins to foreclose on the property because no payments have been made as originally promised by agent “X.”

During the foreclosure process is when another set of scam artist most likely will appear. These scam artists will claim to be “foreclosure experts” and that they can stop foreclosure. The reality is that the only way to stop foreclosure is to get caught up with the mortgage payments or repay the loan in full (ie: selling or refinancing the home).

At the end, the buyer’s credit is ruined and the property being foreclosed upon has a negative ripple effect on the neighbors and the community around it.

If you have been a victim follow these instructions to report mortgage fraud.

[Update:] FBI Sacramento: “Straw Buyer in Stockton is Sentenced but Gets A Break”

**If anybody has a story about mortgage or real estate fraud, please feel free to leave a comment with your experience**

Comments

3 Responses to “Mortgage Fraud: How a “Straw Buyer” Scheme Works”

Sixteen (Former) Su Casa Agents Face State Disciplinary Action & Possible Loss of License : San Jose Real Estate : My Home and My Money on July 10th, 2008 4:21 PM

[...] “straw buyer” schemes are illegal but very lucrative for the parties involved, some agents and brokers have put their freedom, reputation and license on [...]
What is Wrong with Buying One Today and Losing One Tomorrow? : San Jose Real Estate : My Home and My Money on July 17th, 2008 6:07 PM

[...] walking away from a home may not be illegal in certain situations, purchasing a home under false pretenses is. Lenders are not all stupid and they will look that much closer to these types of transactions. And [...]
Carlyn Mccabe on July 28th, 2010 8:03 PM

I am a victim of a foreclosure rescue Scam,it was a leAse buy back scheme. The proposed agreemnet was sell your home,pay rent for 1 year, crdit repair,a cash out from the sale,within 1 year purchase back property,refinance at a lower rate.

They would also set yp an escrow account for any hardships you may endure and the rent would be set up in an escrow account.

This was all a Scam,no reserves at closing the rent escalated,the cash out was menial and many received no cash at all.The Straw Buyers have declared BANKRUPTCY,WE ARE ABOUT TO BE EVICTED AFTER LOSING 150,000 EQUITY AND PAYING 2900 A MONTH RENT.
The FBI is involved however it is embarrasing and horrible for all of involved.Lawyers do not want to take these cases on there is no money in it.
I do not know where this is going to end.

A word for all,if you are Facing Foreclosure,be careful who you deal with,there are laws that so called “RESCUERS” must follow including getting a bond in the state where the tranaction takes place and a 3 day recission period.

I experienced an unexpected death and change in my employment which led to my situation.I am in much more financial distress now,I paid 2900 a month rent with a promise of reserves,I am urging anyone facing Foreclsoure call your lender as long as it is not Ocwen FSB.