WHAT RECEDING WATERS REVEAL: FRAUDS ARE EXPOSED
BY THE DECLINING REAL ESTATE MARKET

As an old-time land fraud prosecutor, I was often frustrated by the effects of a positive market like Arizona’s – on the perception of a fraud. In other words, the Arizona market, so strong and robust, had a tendency to cover up frauds – especially in complex cases that could take many years to get to trial. Out-and-out deception claims as to land value, viewed five to eight years later (taking into account detecting the crime, reporting it, investigating it, trying it) seemed more defendable as the market had time to catch up to the con man’s imagination.

But these days, the Federal government is stepping up enforcement of mortgage frauds involving inflated prices for real estate, at least in part, because their “bare roots” have been exposed by a receding market. It is said that federal criminal laws governing inflated prices for real estate (See 18 USC §1014) lie in two areas: (1) “fraud for housing” -- which involves a borrower falsifying information to obtain a loan he would not otherwise qualify for, or, (2) “fraud for profit,” (the focus of this article) which is often committed by groups of people who employ means to abuse the system in the purchase of real estate – through skimming out equity, use of straw buyers, flipping property, using false appraisals, or utilizing price inflation schemes. The FBI’s website at http://www.fbi.gov/page2/dec05/mortgagefraud121405.htm displays an interesting photo of a home in Detroit, inflated by flipping, that sold for $25,000 one day, and $250,000 the next. You would not want to have been the buyer or the lender.

Or, apropos of this article, you would not want to even be associated with this transaction. These “fraud for profit” types of offenses involve 80% of prosecutions under 18 USC §1014. They vary, of course, but a typical price inflation scheme might involve an agent listing a property who receives an offer much higher than the listing price (unjustified by the market). This buyer might request that the extra money go to the buyer, or a third party – like extra compensation for the buyer’s broker, to a construction company for improvements to the property, or to a company to establish an equity sharing program.

The offer discloses that the buyer will obtain a mortgage loan to finance the transaction, and the buyer may claim that the lender has approved the arrangement, that funds will be paid through escrow with everything properly documented. The scheme, once the offer is accepted, may include certain real estate professionals, or not include them, in many variations. A loan officer may be creating false documents, appraisers might inflate their valuations, or the buyer could be a “straw party” or completely unaware.

When the deal closes, those who have engineered the fraud usually disappear with the extra money. The lenders are not always so innocent about these transactions, and the buyers are not always guilty. The properties usually fall into foreclosure, because, even if the buyer is unaware, the extra “weight” of the money absconded with produces a monthly payment the buyer cannot make. There are endless variations (and twists) of these frauds, as unlimited as human ingenuity.

Interestingly, it is not a defense to this federal crime that the lender knew, should have known, or was in any way chargeably aware of the arrangement by which the price is inflated. Lenders’ knowledge on this point is irrelevant to this statutory crime. See United States v. Niro, 338 F2d 439, 441 (1964). The rationale seems to be that even if lenders are involved and sign off on the substantially higher price, the U.S. Government, who insures them, is harmed. See United States v. Bush, 559 P2d 72, 75 (1979). “Fraud for profit” in connection with mortgage price inflation can criminally convict a real estate professional even if the lender is an active participant, let alone merely consents.

The market will not protect these schemes for the next several years, and there are already pressures to more prolifically prosecute all those involved. Several realtor associations have excellent resources that can serve as a checklist for those who wish to professionally protect themselves from these frauds, or to report them. At this time, in this market, both are a good idea.

By Frank L. Murray
STOOPS, DENIOUS, WILSON & MURRAY, P.L.C.

Frank Murray has been practicing law in Arizona for over thirty years and he continues to practice in the field of commercial litigation and fraud-related theory at the law office of Stoops, Denious, Wilson & Murray. He can be reached at (602) 263-8861.