In little-noticed proceedings earlier this year, 11 people pleaded guilty in a federal court in northern Virginia to a scam that fleeced banks out of millions of dollars.
According to the charging documents, the defendants were involved in overlapping conspiracies in which they would systematically alter the terms of real estate closings so lenders would send more money than they actually needed to. The thieves would then pocket the difference.
The case shines some light on perhaps the shadiest side of mortgage fraud. Shady because very few people know about it, and of those who do, few are willing to talk about it.
Settlement fraud, aka escrow or closing fraud, doesn't occur very often, says Steve Gottheim of the American Land Title Association, the trade group for people who review and insure titles and handle the lion's share of real estate closings.
"It's extremely rare," Gottheim says. "Less than one half of 1 percent of all real estate transactions involve any type of fraud." But it does happen, he concedes.
Andrew Liput of Secure Settlements, a company that vets otherwise unsupervised closing professionals on behalf of lenders (who deliver billions into the hands of closing agents with little or no protection against fraud), estimates that 15 percent of the $4 billion lost by lenders to mortgage fraud last year -- some $600 million – occurred at the closing table.
We're not talking about illegal or even questionable flipping arrangements, or even straw buyers. Those schemes are counted elsewhere. Rather, we're talking about nickel-and-dime cases where the closing sheet you sign and the one sent to the lender are different, and the closing agent keeps the difference.
Maybe they change the amount of a single line-item closing cost, or perhaps two or three. You might pay $10 more here than you should have, or $25 more there. Or maybe the sales price you actually paid is lower than the amount the lender is asked to fund. Thieves can do wonders with Wite-Out.
Often, the difference is pocket change compared to the hundreds of thousands of dollars involved in the overall transaction. But alter enough settlement documents and pretty soon you're talking serious money.
Last year, for example, a South Florida closing agent was charged with falsifying HUD-1 settlement statements in 32 separate closings and stealing more than $3 million.
Big money is also lost when the closing agent fails to pay off a seller's lien and takes off with the money. The seller receives his due -- the difference between the selling price and the mortgage or mortgages he had on the property -- but the old lender gets nothing. And until that loan is actually paid off, the new lender -- your lender -- doesn't have a first position mortgage.
An already disbarred Massachusetts lawyer was sentenced last year to 51 months in prison for failing to pay off existing liens and diverting more than $3 million into his own accounts. And Liput has "seen several cases" in the last six months in which nefarious title agents doctor their reports so the prior liens remain invisible.
Generally in cases of closing fraud, it's the lender who's on the hook. As long as you purchase owner's title insurance at settlement, or at least what's called a "closing protection letter," the lender will bear the brunt of the loss, says ALTA's Gottheim. But even if you decline to buy your own policy, he says, you'll "get some ancillary benefits from the lender's policy."
"Ninty-nine percent of the time when escrow funds are taken, the lender or the title insurance company bears the risk," Gottheim says. "And in many states, title agents buy into what's called 'crime bonds.'"
The lender's policy, which you pay for at closing, protects the lender against fraud and defects in the title. An owner's policy, which protects you and guarantees that the title insurance company will work on your behalf to correct problems, should cost about $250 when issued simultaneously with the lender's policy. The closing protection letter is sometimes free; other times, there's a small fee.
Your real headache comes when you go to sell your property, or perhaps refinance, and find out there's an existing mortgage or two on it that have never been paid off. If that happens, it could hold up your sale, perhaps delaying the deal for so long that your buyer decides to drop out and find a house elsewhere.
Here are some basic steps to take to protect yourself against this kind of "back-end" fraud:
-- Obtain your loan papers early, and then make sure the numbers line up with the documents you are given at closing.
-- Shop for a trustworthy professional. Don't be steered. Call your state regulator to make sure the agent's license is current, and ask if there have been any complaints lodged against him. But even then, be careful. Liput says "nearly all the bad actors" his firm has unearthed were licensed, and were members of a trade association.
-- Ask for a color ID, and look for some kind of seal on the door or stationary that shows the agent has been vetted by an independent third party. In many instances, charlatans set up bogus companies that don't really exist. They just hang out a shingle and start doing business. Then, before you know it, they split, only to set up shop under another name somewhere else.
-- When interviewing closing agents, ask how long they've been in business, if they are insured and if there have been any claims against them. You'll also want to know if they've ever been sued or lost their licenses. All of this is public information and can be discovered with what Liput calls a little "basic ground-level investigation."
-- Finally, to protect yourself from being manipulated, schedule the closing a few days in advance of your move. If something smells fishy, walk away. You have every right to stop the show at any time.
-- If you feel the need, hire an attorney to represent you at the settlement table. Even if the title pro you pick is legit, he represents the lender's interests, not yours.