Fraudulent Mechanic’s Liens Thwarted

On August 16, 2011   /   Blog, Escrow, Title Insurance  

Unfortunately, REO properties are a prime target for fraudulent Mechanic’s Liens, since it is not uncommon they might need some repairs or work done and since there are so many different people involved in rehabilitating foreclosed properties for eventual resale.

Mechanics Lien Fraud

A fraudulent mechanics lien was filed repeatedly against bank owned properties.

Fool me Once…
One of our sister companies had a sale transaction wherein Federal National Mortgage Association (FNMA) was the seller as the property was an REO bank owned property. The title report reflected a Mechanic’s Lien payable to Anna Moskovyan for painting. Moskovyan was contacted for a payoff statement and lien release. The payoff amount was shown on the settlement statement, however, FNMA stated they were not aware of any work being performed on the property by Moskovyan. Since this transaction was so close to closing, FNMA approved the payment and did not dispute the invoice or lien. Moskovyan came to our offices and picked up her check in exchange for a release of her lien.

Something’s Fishy…
Shortly afterwards an officer, Paula, from another sister company noticed Mechanic’s Liens appearing on all the title reports wherein FNMA was the seller. Paula did some further investigation and discovered, upon closer examination, it appeared the lien was exactly the same – simply recorded over and over again against different REO properties owned by FNMA. This is when the following warning was sent to her co-workers:

Mechanic’s Liens were recorded on FNMA properties in our area. The exact same lien, for the exact same amount, for the exact same service, was found recorded against several properties. We’ve checked with FNMA and the Listing Agent and this woman who signed this Mechanic’s Lien had not been contracted with to provide any services; the properties in question were not painted and were never scheduled to be painted. If you receive a title report or a supplemental report with a Mechanic’s Lien, let us know immediately so that we can get this addressed before you try to record. The agent in this particular case has had six of his FNMA listed properties compromised in this manner, and he has no idea who this person is.

We are not sure how wide-spread this is and whether it has gone to surrounding counties, however, it will likely disrupt recordings in our area for a while, and we need to keep our eyes open for them.

Once our offices confirmed FNMA had not contracted with Moskovyan to perform work on its properties, the operations obtained an indemnity on each transaction in which a fraudulent Mechanic’s Lien was filed with the county recorder and proceeding to close without paying the lien holder. The listing agent reported the fraudulent liens to the police department, and a case number was assigned.

Be Aware
If this lien or similar liens appear on your title report, do not take the lien at face value. Do some investigating and contact the seller and listing agent to make sure any lien affecting a property is, in fact, a true lien and not fraudulent. This could end up saving the customer and Our Company from a potential lawsuit.

The sad part of this tale is how it illustrates anyone can take a document to the County Recorder’s office, pay the appropriate recording fee and have it recorded against any property. The county does not check for validity of a lien, just that the document is in the proper format. The integrity of our public records system is broken down with every fraudulent document recorded. This only emphasizes the importance of title insurance and what a vital role Our Company plays in the American dream of home ownership.

Questions or comments? Please leave a share below!

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The Anatomy of a “Cash Back” Mortgage Fraud Scheme…

On August 8, 2011   /   Blog, Escrow  
Cash Back Mortgage Fraud Scheme Busted

A cash back mortgage fraud scheme puts the loan at a greater risk because it originates with negative equity in the property.

In March 2011, seven people were arrested and indicted in a mortgage fraud scheme. For approximately two years the defendants had perpetuated their scheme in more than 18 transactions. The indictment says they “knowingly and willfully devised, and intended to devise, a scheme and artifice to defraud lenders … to obtain money from lenders by means of material facts and fraudulent pretenses, representations, and promises, and by intentional concealment and omission of material facts.”

Here’s an example of how the scam worked.
The loan officer lured in a straw buyer by telling him he would be paid $10,000 for every house he purchased without having to put any money down, along with additional money when the homes were resold. Sounds great, right? The ring leader would remodel the house and rent it out. After two years, the house would be resold to the renter. The rent payments were applied toward the mortgage payments.

The straw buyer agreed to lend his name and credit to a transaction. The parties closed on the purchase of one property on a Wednesday for $550,000. The straw buyer obtained a mortgage for $495,000. The loan application contained the following material false statements:

  • Inflated monthly income
  • Inflated bank account balances
  • Inflated assets

The lender wired $502,041.34 to the escrow/title company. The escrow/ title company issued a check in the amount of $144,861.78 to a shell company the ring leader owned. This disbursement was not disclosed to the lender on the HUD-1. The straw buyer was given $9,700 cash in a paper bag by the loan officer after closing.

On Thursday the ring leader withdrew $66,500 from her bank account and converted it to a cashier’s check. The cashier’s check was provided to the escrow/title company as the down payment and closing costs purporting to be from the straw buyer and not third party funds.

Did you notice the timeline? The file closed before all the funds were in. This is what facilitated the scheme. The $144,861.78 is released to the ring leader who deposits the funds into her account so she can turn around and provide the down payment check on behalf of the buyer. No one is out any cash up front.

The perpetrators were indicted on 14 different charges. Their scheme qualified them for almost $13.5 million in fraudulent loans and received over $2,907,452 in ill-gotten gain from the proceeds of these loans and real estate transactions.

Here are some of the other details from the indictment:

Straw Buyer Mortgage Fraud

A “cash back” scheme is one variation of mortgage fraud. In a “cash back” scheme, the perpetrator of the scheme offers to purchase a property for more than the

seller’s asking price and submits a contract to the seller for the inflated price. The seller agrees to the sale because they are generally receiving the full asking price.
Often a “straw buyer” is used to facilitate the “cash back” scheme. Generally, a straw buyer is someone recruited by the perpetrator to take out a mortgage and purchase a house in their name. The straw buyer normally does not live in the house or have the intent to reside at the house.

A Uniform Loan Application, also known as Form 1003, is prepared for the straw buyer. A lender uses this form to record relevant financial information about the applicant who applies for a mortgage. Misrepresentations are made to qualify the straw buyer for a mortgage. In signing the loan application, the straw buyer acknowledges that “the information provided in the application is true and correct.”

This scheme could have never been pulled off without the escrow/title company. The indictment goes on to identify the role of an escrow/ title company in a real estate transaction:

Generally, a straw buyer is someone recruited by the perpetrator to take out a mortgage and purchase a house in their name.

A title or escrow company is used in which the subject property is deposited for safekeeping under the trust of a neutral third party (escrow agent) pending satisfaction of a contractual contingency or condition. Once the conditions are met, the escrow agent will deliver the property to the party by the contract.

After receiving the loan documents facilitating the buyer and seller signing, escrow agents prepare a final HUD-1 wherein details of the actual receipt of lender funds and fund disbursements are listed for the records of the lender, seller and purchaser. The escrow agent is required to disburse funds according to what has been indicated in the HUD-1 settlement statement.

The escrow agent received the down payment from the ring leader in transaction after transaction and never disclosed them as third party funds. The disbursements were also hidden since the ring leader was paid out of the escrow file without being disclosed to the lender on the HUD-1. The escrow/title company who handled these closings is now closed.

A cash back scheme puts the loan at a greater risk as the loan originates with negative equity in the property.

All of this information was crucial to the lender because a “cash back scheme puts the loan at a greater risk as the loan originates with negative equity in the property.” To summarize, “the co-conspirators artificially inflated the sales contract prices … the defendants concealed from the lending institutions by intentionally withholding from the lender that payments were made to unrelated third parties to the transactions or omitting on the HUD-1 that at the close of each sale a portion of the loan was paid to an unrelated third party to the transaction. Additionally, in some transactions, the parties failed to disclose to the lender that the straw buyer or purchaser of the property received cash back from other members of this conspiracy for the use of straw buyer’s credit to purchase the property.”

Moral Of The Story
All receipts and disbursements must be completely and accurately disclosed on the HUD-1 and to the lender. Making disbursements to individuals or entities who are not a party to the transaction is completely unacceptable. Seller proceeds should be disbursed to the seller only and not their LLC or members of their LLC.

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Domestic Partnership Law in Washington State

On August 7, 2011   /   Blog, Title Insurance  

Domestic Partnership Law in Washington State took effect  Thursday, June 12, 2008.  This law does not create a legal relationship that is equivalent to marriage, but does create property rights that previously applied only to married persons.

Domestic Parnerships Washington

Domestic Partnership Law in Washington State

Who can enter into a Domestic Partnership?
Two people of the same sex of any age over 18 and capable of consent or two people of the opposite sex, at least one of whom is over 62 years of age.

Almost every statute that addresses rights of married persons relating to real property has been amended to also apply to State Registered Domestic Partners.

This includes:

  • Community property rights including automatic presumptive community interests
  • Homestead rights
  • Inheritance rights
  • Dissolution in Superior Court

Domestic Partnerships are established in Washington by simply filing with the Washington Secretary of State’s Office.

Useful links:

DomesticPartnerships
Frequently Asked Questions
Domestic Partnership Declaration.pdf

More Resources:
Seattle City Clerk’s Office – The City of Seattle’s Domestic Partnership Registration program allows unmarried couples in committed, on-going family relationships to document their relationships. Couples may consist of a man and a woman, two men, or two women.

Domestic Partnership Registration is voluntary, and does not create any new or different legal rights or responsibilities, or any contractual relationships or obligations between those registered.
http://www.seattle.gov/leg/clerk/dpr.htm

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