Foreclosure 'Rescue' Schemes Cost Millions

MBA (9/9/2008 ) Palaparty, Vijay
Foreclosure 'rescue' schemes cost lenders more than the house: because of such fraud, lenders lose millions of dollars as well, according to Ari Karen, partner at Venable LLP, Washington, D.C.
Karen noted that the public tends to hear more about victimized sellers, rather than the banks themselves; often, lenders find out late that a scheme has taken place.

“When some borrowers get into these foreclosure 'rescue' schemes, they don’t always tell the lenders what they are doing, purporting what they are doing is a straight sale,” Karen said. “Lenders don’t know the previous borrower is still staying there and that it is not a straight purchase of a house.”

Karen said lenders, despite due diligence, make loans to borrowers who submit false information; the results are losses totaling millions of dollars. Karen recently represented a lender in a fraud case that incurred losses because of a foreclosure "rescue" scheme. No mortgage payment was made on the loan and the person who conducted the closing was also the title agent involved in the transaction.

“When monies went through, they were never secured against the house,” Karen said. “They just stole they money, though we were later able to recover it.”

Karen said in foreclosure schemes, lenders are often harmed more than the first sellers. “Furthermore, the first sellers are not always innocent victims either—despite their desperation, at least some will understand that they are playing a game,” he said.

Despite the potential losses, lenders can find ways of recovering funds. “The myth that lenders can’t do anything about it is not true,” he said. “Because of the way the scams are orchestrated, there is money that could be recovered through the title insurance policy, malpractice policy (if the closing agent is also an attorney) or even money that is still in transit that has yet to be electronically disbursed.”

Karen said fraud orchestrators are often repeat offenders. “They are like cockroaches—they do it over and over again because they get a rush out of it,” he said. “On the flipside, we see two things—public stories mainly focus on the sellers’ side and everyone is against lenders. True, it’s not in every case though that the sellers are wrong. There are people who get desperate but there are those who understand they are making a deal with the devil.”

Karen also said that it is too difficult and complicated for lenders to detect such fraud before it occurs. “Lenders depend and rely on various parties to safeguard themselves but these people are the same individuals instigating fraud in some cases,” he said. “It’s along the lines of rampant internal fraud in companies.”

Another problem with this type of fraud is that it is being assumed as general fraud, which it’s not, Karen asserted. “It’s a discernable situation that has different motivations, but many do not acknowledge that. That being said, there are opportunities to recover some of the losses in this type of fraud where perpetrators can be identified.”

“I am not advocating claims against title insurers or anyone in particular, but only against those who are involved and fully aware of the nature of the transaction and perpetrating fraud,” Karen said.