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FIRM ARTICLES
May 3, 2006
Real Estate Fraud: State and Federal Fraud Laws
By Brian Barrido, Attorney at Law and Jay Mykytiuk
Anyone who has bought, sold, or shopped for a home this millennium knows firsthand that housing prices have undergone a dramatic and unprecedented increase. In the last two years alone, the price of a home rose 32% in Nevada, 23% in California, and 23% in Washington, D.C. One unfortunate by-product of this red-hot real estate market has been an increase in certain consumer and professional practices that come under the large umbrella known as real estate fraud.
Couples trying to get into their dream houses and real estate insiders trying to tap into massive profit potential have frequently and sometimes unknowingly broken state and federal fraud laws. Generally, fraud is a deliberate misrepresentation which causes another person to suffer damages, usually monetary losses. Examples of fraud in the real estate context include a borrower who exaggerates his financial situation to qualify for a loan, or a real estate professional that misrepresents the value of a property in order to turn a larger profit. Often it involves a combination of both.
Fraud for Housing
As home prices have skyrocketed, many buyers have found that, based on their income and assets or a poor credit rating, their dreams of owning a home have grown increasingly out of reach. Especially in hot real estate markets, potential homeowners often worry about whether they will ever be able to afford a home. Out of desperation, many borrowers, often with the help of loan originators, misrepresent their financial circumstances in an effort to get into a home before they are further priced out of the market. These misrepresentations are commonly known as fraud for housing.
Typical acts of fraud for housing involve providing false information on a home-loan application. Often, loan officers and consumers may work together to manufacture W-2s or credit scores, submit bogus financial and tax documents, or fake employment verifications. Not only are these buyers risking fines and jail time, but may also be drowning in a mortgage payment they cant really afford.
Home buyers could also face fraud charges for so-called "straw buyer" transactions. This real estate transaction involves a buyer with bad credit who finds a stand-in with a better financial position to purchase a home. The stand-in fills out the mortgage paperwork and obtains the property, then relinquishes the deed to the true buyer. While this process may be simply the means to an end of home ownership, it also constitutes real estate fraud.
For borrowers who have been untruthful on their loan documents, being detected is easier than they probably think. The IRS can access mortgage documents in an audit. If a borrower said he made $40,000 a year on his tax forms, but claimed an income of $80,000 on his mortgage application, this discrepancy would be readily apparent. Discovery would likely mean paying back taxes and penalties, and could possibly mean criminal prosecution for Fraud.
Fraud for Profit
Real estate investors and professionals are also at risk of criminal prosecution for certain business practices. In a 2005 report, the Federal Bureau of Investigations Financial Crimes Section has indicated that its main focus in the real estate fraud area is on illegal activity known as fraud for profit. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and, like it sounds, involves real estate insiders who run afoul of fraud statutes in their pursuit of financial gain.
The most common activity that may land real estate investors and professionals in hot water is known as flipping. Flipping involves buying a house, holding on to it for a short time, and then selling it at a higher price then one paid for it. Often this process involves buying an undervalued house, fixing it up, and putting it back on the market at a higher price. By itself, this process is not per se illegal. Buying low and selling high is still considered good old-fashioned capitalism. But when investors, mortgage brokers, loan officers, and appraisers get together to paint a better picture of a homes worth, fraud for profit is often perpetrated.
There are many variations of illegal flipping, but it often includes inflating appraisals, gifting down payments, drawing up false W-2's, or writing inaccurate credit letters. The FBI has specifically targeted property flippers. As the industry has become more concerned with fraudulent practices, those engaged in flipping have come under closer scrutiny. Making large profits on quick home sales is certainly still permissible. However, real estate professionals that conduct business with anything less than complete candor may increasingly find themselves targets of fraud investigations.
The Risks
Would-be homebuyers who get caught being creative (Fraud) with their loan applications, will likely have to pay back any money they received, and may even spend time in prison. While to date, prosecutions of borrowers have been rare, the FBIs increased efforts to combat real estate fraud may result in more charges filed against individual homebuyers. The much more common targets of fraud investigations have been real estate investors, mortgage brokers, and appraisers who have engaged in questionable business practices.
Currently, most real estate fraud cases are prosecuted under federal law. Federal statutes include: False Statements on a Loan or Credit Application; Mail Fraud; Wire Fraud; Bank Fraud; and a host of others. In recent years Congress has dramatically increased the penalties for knowingly making false statements for the purpose of influencing the action of any insured banking institution on a loan or certain other types of financial transactions. The current federal penalties for this crime are a maximum of 30 years imprisonment and/or a fine of $1 million.
States have also begun to get tough on mortgage fraud / Fraud for Profit. A new law in Georgia increases the penalties for residential mortgage fraud. Those convicted can be sentenced one to 10 years in prison and be fined up to $5,000, while those found guilty of multiple frauds can be imprisoned for three to 20 years and be fined up to $100,000. Other states have considered similar provisions amid growing concerns with real estate fraud.
Whether you are a home buyer who stretched the truth on a loan application in order to buy that dream house, or a real estate professional who massaged numbers to increase profit, you may have committed real estate fraud. A skilled criminal attorney may be able to help you avoid a stiff financial penalty or jail time. More importantly, knowledge of state and federal fraud laws may help you avoid needing an attorney at all.