Momay's Blog

Fraud is a crime of deliberately deceiving another to obtain property or services from him. Loan fraud occurs when you (or a real estate agent, appraiser, mortgage broker, attorney, closing agent, others) make false statements in order to qualify you for a loan that's larger than you would be entitled to under the lender's guidelines.

Loan Fraud can occur in following ways:

• Any false statement made to a lender is loan fraud.

• Rebates and credits to any individual as a result of a real estate transaction must be disclosed on the settlement statement.

• An inflated appraised value for the property that is collateral for the loan.

• False information about the borrower's creditworthiness.

• False statements about who will live in the property.

• Undisclosed rebates to any third party.

Guidelines to avoid Loan Fraud

• Do not make any decision in hurry. Compare the prices of real estate or property before buying or purchasing.

• Do your homework before beginning the loan process so that you don’t fall prey to unscrupulous lenders.

• Be careful about disclosing things like your need of cash due to medical, unemployment or debt problems. You are very vulnerable in these cases.

• Do not let anyone convince you to borrow more money than you know you can afford to repay. If you get behind on your payments, you risk losing your house and all of the money you put into your property.

• Double-check that the interest rates and loan amounts all add up at closing. Sometimes a lender will try to sneak a different rate in, hoping you won't notice. Make sure that everything is correct.

• Do not sign any false statement about which you do not know.

• Donors and recipients commit loan fraud when they falsify a gift letter so take care for that.

• If you don't need to refinance, don't do it. It only strips your home of equity and costs you a lot of money in closing costs.

• The key to avoiding fraud is in being educated, asking a lot of questions and understanding that the lender is not your friend. Be friendly, but be cautious.

As a mortgage broker, I have the pleasure of seeing quite a number of potential loan transactions. I used the word "potential," because not all of them work out. Actually, there are quite a few turkeys in with the swans!

A common scenario is a refinance or a purchase where the investor comes to me with something like: "Man, this is the BEST property in the area, it's worth $5 Million Dollars, and I'm buying it for $3 Million! I need a 90% loan and I need it NOW!" OK ... so I've exaggerated just a bit. In reality the value of the property will probably be accurate for the market, but I'll still get the request for the high loan to value.

Until recently, I probably couldn't have gotten a 90% loan on a commercial property except in the limited case of a Small Business Administration guaranteed acquisition loan. First, because no one offered a 90% loan on commercial property and second, because the property most likely wouldn't have supported the debt service.

The big change in that scenario has been the advent of the "small balance commercial lender" in the last couple of years. They blend commercial and residential underwriting methods to get higher LTVs. I'll save an article on this kind of lender for later because I want to focus on the reason why a conventional commercial lender doesn't really care how great of a deal the investor is getting in a particular property. It's because there is a very basic difference in philosophy between lender and investor.

An investor is concerned with maximizing the return on his equity. Whether through leverage, adding value by making improvements, or adding value through improving a property's cash flow, the goal is to make as much money on the equity investment as possible. The return he receives is commensurate with the risk he takes with his equity investment

A lender is concerned with something entirely different: Getting paid back! A lender approaches a loan as an "investment," as well. In fact, in the loan business we often call our lenders "investors." But these investors approach their investment from the standpoint of managing their risk in return for an acceptable rate of return: The note rate on the loan. The property that the investor views as a growing asset the conventional lender views solely as security for the loan. (Again, I'm not talking about private lenders who might have other motivations).

So when you hear an investor say something like: "I don't understand why they didn't give me the loan! The property is worth SO much and they can always take it back if I don't pay!" Well, the reality is that the lender doesn't want the property back ... they just want their money back, as agreed.