Real Estate Fraud - A Growing Problem

I contemplated naming this post "How to Steal a Building" but didn't want to hear the lectures that I am putting ideas into people's minds. I read an article in the New York Daily News titled "It took 90 minutes for the Daily News to 'steal' the Empire State Building." The newspaper wanted to demonstrate the loopholes that exist in many local government systems for recording deeds, mortgages and other transactions, which is the systems frequently do not require clerks to verify information.

The deed recorded by the Daily News included the original "King Kong" star, Fay Wray, as a witness and the notary on the deed was bank robber "Willie Sutton." The grantee on the deed was "Nelots Properties LLC", Nelots being "stolen" spelled backwards.

It's not that difficult to obtain a notary stamp and if the deed is in proper format, I doubt most clerks in any recorders/registrar office would question it. Con artists swipe buildings right out from under their owners. Armed with the fraudulent deed, they take out a large mortgage and simply disappear, leaving a huge headache for the property owners, lenders and bureaucrats.

The FBI states that financial institutions filed 31% more Suspicious Activity Reports involving mortgage fraud in 2007 than in 2006. Nationwide, lenders' losses total in excess of $813 million .

The best point to verify and check for forgeries and frauds is with the lenders and title companies. I spoke with a contact that I have at a local title company. In the case of a mortgage transaction, if the buyer is a company, the title company requests for all sorts of verification, such as copies of the articles of formation, good standing certificates, authorizing resolutions, incumbency certificates and a copy of any bylaws or operating agreement. However, except for the articles of incorporation/organization and a good standing certificate, these documents are internally prepared and could also be fraudulently created. It's even more difficult to verify when dealing with individuals.

A title agent or loan officer needs to know the customer and to listen to his/her gut, as the red flags may be evident. One red flag is the mortgagor being in an inordinate hurry to get the deal done. We've all experienced customers or clients that want things done 'yesterday.' However, we should listen to our instincts when the customer appears to be pushing a deal to close rapidly for no logical reason and dig a little deeper into the transaction.

At the end of the day, when a fraud like this occurs, the lender makes a claim on its title policy for the fraud and the title insurer covers the loss. That's why we pay for the title insurance, it can be worth its weight in gold. The buck stops at the underwriter's desk and 2008 has not been a good year for title insurers as mortgage fraud has been on the increase. I wonder what effect this will have on our title insurance premiums in the future?

To read the complete Daily News article, click here.

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