Having been in the business of insuring mortgage companies against risk for more than a century, the folks at First American Title Insurance Co. have seen their share of rogues who try to illegally exploit the inner workings at the lending process. But a recently uncovered scheme may just take the cake.
In a scam the authorities have labeled "shotgunning," property owners apply for home equity loans with multiple lenders at the same time. In one case, a would-be borrower applied with three different lenders over a 48-hour period. Because the lenders did not all report into the same credit bureau, none were aware the same owner had simultaneously applied elsewhere as well.
Fortunately, First American noticed the attempted sham when it received multiple title orders on the same property and notified the lenders of the suspicious activity before they funded the loans. The owner was not deterred, however. A few days later, the title company noticed two more orders on the same property with two new lenders and was able to alert them in time to avert a loss.
Lenders weren't so lucky in dealing with a ring of con artists who managed to obtain ten mortgages totaling more than $1 million on a Chicago area condominium with a market value of roughly $125,000, according to FirstAm's valuation model.
The loan applications were made over a three-week period via lender websites and call centers, not in person. And because of the delay between the dates the loans were closed and then dates the liens were filed in the county courthouse, none of the lenders knew of the other liens when they were making their underwriting decisions.
Lenders take it on the chin in cases like these, but legitimate borrowers also pay a price because lenders recoup these costs in the form of higher loan rates and fees, just like retailers add the cost of shoplifting to the prices they charge everyone.
Borrowers have a lot more at stake in another form of shotgunning, this one involving multiple sales of the same house. In this case, the same "owner" -- who may not be the rightful owner at all - "sells" the same property simultaneously to several unsuspecting buyers.
When each buyer uses a different lender and title company, this highly orchestrated scheme is "virtually impossible to detect," says Jeffrey Taylor, managing director of Digital Risk in Dallas. Ultimately, of course, it's the title companies that "take it in the shorts," but buyers also pay dearly in the form of massive litigation and lost opportunities.
Authorities believe the Chicago scheme is being repeated over and over again by a group of Eastern European mobsters commonly known as the Russian Mafia. They use the sham as an exit strategy when they decide to leave the United States and return to their homeland.
After living here long enough to develop solid credentials and credit records, they buy the houses or condos using all cash obtained by illegal means. Then, after living in them free-and-clear for a couple of years, they apply for a bunch of loans based on the equity they have in their houses.
"It's the 'fraud of the year'," says Paul Dorman of First American's Lenders Advantage Equity Division. "They can pull in excess of a million dollars out of the home, enough so that they can live a good life back wherever they came from."
Title companies can spot some of the bogus loans through their own market share. But even with a 20-25 percent share of the title business on home equity loans, a company like FirstAm is "missing a more significant share of the market," says Dorman;
The FirstAM executive reports that the title business is trying to put a stop to this and other schemes by forming a consortium in which applications for title searches are run through each other's systems. That way, multiple applications on the same property can be spotted in advance rather than after the fact.
