Utah Bar Journal

Many Utah attorneys represent clients or have friends or acquaintances who may be tempted to engage in practices or invest in ventures that constitute mortgage fraud schemes or who may be the victims of such schemes. Thus, it is important for attorneys to understand mortgage fraud in order to help their clients and acquaintances avoid getting into trouble as perpetrators or victims of mortgage fraud. This article will address various forms of mortgage fraud schemes, the relevant statutes, available recourse for the victims of mortgage fraud, and tips on how not to become a victim of or an inadvertent participant in mortgage fraud.

II. Description of Mortgage Fraud
Though one may commit mortgage fraud by a single act, mortgage fraud usually involves a combination of bad acts. These acts may include use of inflated appraisals or false buyer information to inflate mortgage loans above the property value or beyond the ability of the buyer to repay, and taking unfair advantage of foreclosures and other financial distress situations. For example, an appraiser, usually acting in concert with another person, may provide an appraisal to the lender which contains a higher value than the property’s actual worth; or a perpetrator may provide false buyer information to a mortgage lender or the seller of a distressed property by using a straw buyer or a stolen identity. The perpetrator’s profit is then secured through property flipping or equity skimming. In any event, perpetrators of mortgage fraud usually target distressed properties to take advantage of the owners’ dire financial situations. Mortgage fraud schemes come in many creative guises, often combining two or more of the acts described above.

A. Property Flipping
Property flipping occurs when property is purchased, fraudulently appraised for a higher value, and then sold at the inflated price. In property flipping schemes, loan documents and buyer information, as well as the appraisal, may be falsified. Further, since such a scheme usually requires several participants, profits from the scheme are shared among several parties, which may include any party that is part of the process.

B. Straw Buyers
Straw buyers are loan applicants who are used to obtain home loans but who do not intend to occupy the properties they are buying. The purpose of the straw buyer is to use the straw buyer’s personal information and credit score to obtain a mortgage for a higher value than the property is actually worth, and the straw buyer will misrepresent his or her intention to live in the home on the loan application. Straw buyers may be knowing participants in the scheme; they may also believe they are simply investors, not knowing the true nature of the scheme; or they may believe they are helping people with poor credit obtain a mortgage who, without the straw buyer’s personal information, would not be able to qualify for the mortgage.3 Straw buyers may be approached by “friends” or acquaintances in the community and told of a creative means to make money. Assurances of the legality of the structure are often given by the perpetrators. Straw buyers may receive a flat fee to use their credit or a percentage of the final sale proceeds. They enter into contracts (or oral understandings) as to these payments which may aggregate a group of properties and a group of straw buyers. Such contracts may constitute investment contracts.

The straw buyer purchases the property according to whatever scheme the perpetrators are running. If the straw buyer is not aware of the scheme, thinking instead it is just an investment, the straw buyer may receive a fee from the perpetrator, but any other promises made by the perpetrator, such as paying the mortgage or dividing profits from the property with the straw buyer, may not be fulfilled, especially if the straw buyer’s cooperation was fraudulently obtained. If the straw buyer knows of the scheme, profits may be split with the straw buyer. In some cases the straw buyer will be issued a promissory note for the excess loan proceeds by the perpetrator who promises high monthly interest payments (did someone say ponzi?). An alternative to using straw buyers is using stolen identities. In such schemes, the personal information of the person whose identity has been stolen is submitted with a loan application to secure the loan, and there is actually no straw buyer, duped or not.

C. Equity Skimming
Another form of mortgage fraud involves equity skimming. The basic scheme begins with a property in foreclosure. The skimmer contacts the property’s owner and offers to help the owner improve his credit and avoid the foreclosure. The skimmer promises to make the mortgage payments by renting or selling the property and sharing the profits with the owner. The owner agrees to quitclaim the property to the skimmer. The skimmer then rents the property, collects a deposit and rent, but does not pay the mortgage. The property is then foreclosed, with the mortgage still under the owner’s name, and the tenants are evicted.4 In a similar scheme, the skimmer promises to help the owner stay in the home, and the owner quitclaims the property to the skimmer, stays in the home, and pays rent to the skimmer. The skimmer does not pay on the mortgage, the mortgage is foreclosed and the victim loses the property. In almost every case, such quitclaims in and of themselves are direct breaches of the underlying mortgage.

In a variation of these skimming schemes, the skimmer requires an upfront fee from the owner before assisting with the mortgage and credit.5 In yet another version, the skimmer convinces an investor to purchase a home for a specific price but to obtain a loan for more than that price. The skimmer promises to provide the investor with a fund from the excess to pay the mortgage payments, and to invest the rest of the excess in a promissory note issued by the skimmer, or stocks, bonds, mutual funds, or other securities, usually with a high return and often controlled by the skimmer. Once the investor purchases the property and gives the excess funds to the skimmer, the skimmer may simply disappear, but in any event does not give any money to the investor.6 The skimmer may initially make the high monthly interest payments in order to provide the skimmer with a referral source for additional victims. Such payments, however, almost always dry up, as all ponzi schemes eventually do. These descriptions are not exhaustive, as equity skimming seems to provide a limitless set of possible forms. The commonality is that the skimmer makes promises to help the owner or investor but does not perform (or only performs for a short time), leaving the owner or investor with an unpaid mortgage (far in excess of the real value of the related property) and facing foreclosure, while the skimmer keeps any money acquired for his own personal use.

III. Criminal Liability
Mortgage fraud in general is not specifically addressed by either federal or Utah statute. This does not stop prosecutors from bringing charges against perpetrators, nor does it prevent the victims of mortgage fraud from filing civil suits. A perpetrator’s criminal liability is derived either from other fraud statutes or statutes that address specific types of mortgage fraud. Perpetrators who run mortgage fraud schemes may be charged with wire fraud, mail fraud, bank fraud, conspiracy, making false statements in loan applications, money laundering, or equity skimming.

A. Criminal Liability under Federal Statutes
Wire fraud is defined as devising or intending to devise a scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, and transmitting or causing to transmit over wire, radio, or television communication in interstate commerce, writings, signs, signals, pictures, or sounds for the purpose of executing the scheme or artifice. See 18 U.S.C. § 1343. Wire fraud may be punished by a fine, up to twenty years of imprisonment, or both. If the wire fraud affects a financial institution, the person may be fined up to $1,000,000, and imprisoned for as many as thirty years, or both. See id.

A person commits mail fraud under 18 U.S.C. § 1341, (i) who devises or intends to devise any scheme or artifice to defraud or to obtain money or property by means of false or fraudulent pretenses, representations, or promises and (ii) who places in or takes from any post office or authorized depository for mail for the purposes of executing such scheme or artifice, any matter or thing whatever to be sent or delivered by the Postal Service or other interstate carrier. The punishment for mail fraud is a fine, imprisonment of no more than twenty years, or both. If the fraud affects a financial institution, however, the person may be fined up to $1,000,000, imprisoned for up to thirty years, or both. See 18 U.S.C. § 1341.

Bank fraud is committed when a person “knowingly executes, or attempts to execute a scheme to defraud a financial institution, or to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody of, a financial institution, by means of fraudulent pretenses, representations, or promises.” See 18 U.S.C. § 1344. Bank fraud is punished by a fine of no more than $1,000,000, imprisonment of up to thirty years, or both. See id.

Conspiracy occurs when “[a]ny person who attempts or conspires to commit any offense under [Chapter 63, which includes the above referenced fraud statutes,]…, the commission of which was the object of the attempt or conspiracy.” See 18 U.S.C. § 1349. The penalty for conspiracy is the same as the offense which was the object of the conspiracy. See id.

It is also illegal to make false statements on a loan application or to willfully overvalue property under 18 U.S.C. § 1014. The penalty for doing so is a fine of up to $1,000,000, no more than 30 years of imprisonment, or both. See 18 U.S.C. § 1014.

Under 18 U.S.C. § 1957, anyone who “knowingly engages or attempts to engage in a monetary transaction in criminally derived property of a value greater than $10,000 that has been derived from specified unlawful activity” has committed money laundering. It should be noted that Section 1957(c) specifically states that the prosecution does not need to prove that a defendant knew that “the offense from which the criminally derived property was derived was specified unlawful activity.” Money laundering may be punished by a fine, imprisonment for no more than ten years, or both. See 18 U.S.C. § 1957(b)(1). “T]he court may impose an alternate fine…of not more than twice the amount of the criminally derived property involved in the transaction.” See 18 U.S.C. § 1957 (b)(2).

Equity skimming, illegal under 12 U.S.C. § 1709-2, occurs whenever a person, with intent to defraud, purchases a one-to four-family dwelling subject to a loan in default that is secured by a mortgage or deed of trust insured or held by the Secretary of Housing and Urban Development or guaranteed or made by the Department of Veterans Affairs, fails to make payments under the mortgage or deed of trust, regardless of whether the purchaser is obligated on the loan, and applies or authorizes the application of rents from such dwellings for his or her own use. See 12 U.S.C. § 1709-2 (2006). The penalty for equity skimming is a fine of not more than $250,000, not more than five years in prison, or both. See id. If the property is subject to a mortgage note made for supportive housing of the elderly or if the note is held or insured by a multifamily mortgage credit program, the fine may be increased to $500,000. See 12 U.S.C. § 1715z-19 (2006).

B. Criminal Liability under Utah Law
Under Utah law, mortgage fraud may, under appropriate circumstances, be treated as securities fraud, and involved realtors, appraisers and mortgage brokers may, in addition, face sanctions by their licensing divisions. In Utah, it is illegal for a person, in connection with the offer, sale, or purchase of any security, directly or indirectly to employ any device, scheme, or artifice to defraud; make any untrue statement of a material fact or omit a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. See Utah Code Ann. § 61-1-1. The typical “security” involved in mortgage fraud is an investment contract. See Utah Code Ann. § 61-1-13()(x)(K) & R164-13-1(B)(1). Additionally, in some schemes, the perpetrators issue promissory notes, another security under the statute.

The perpetrators of an equity skimming scheme may be charged with a second degree felony if they knowingly accepted money representing equity in a person’s home. See Utah Code Ann. 61-1-21(2)(b). If the property sought is worth more than $10,000, the crime is punishable by no less than three years and up to fifteen years in prison. See Utah Code Ann. § 61-1-21(c). To the extent securities are involved, a perpetrator may face the entire array of state and federal securities fraud charges and remedies as well.

IV. Civil Liability
In addition to criminal charges that may be brought against perpetrators of mortgage fraud, there are also civil options open to the victims. In addition to recovery of damages reflecting monetary losses incurred, victims who are left holding a mortgage to a property for which they do not have a legal title may seek to recover the title.

The Utah Supreme Court has held that a deed that is fraudulently obtained belongs to the original owner. In Doyle v. W. Temple Terrace Co., 152 P. 1189 (Utah 1915), Harry Lawrence purchased a parcel of real property at a tax sale and obtained a tax deed for the property. Id. See also Doyle v. W. Temple Terrace Co., 135 P. 103, 104 (Utah 1913). He then conveyed the property to Franklin Lawrence, who initiated a proceeding to quiet title in his name. Lawrence obtained service by publication by saying Doyle, the prior owner of the property, was not a Utah resident. The district court quieted title in Lawrence. See id. On appeal, the Utah Supreme Court concluded that action was predicated on fraud because Doyle was indeed a Utah resident. See id. The court said, “[The defendant’s] tax deed was void upon its face, which was well known. In order to overcome that defect a decree quieting title in its predecessor was obtained by fraud.” Id. at 1183. The district court set aside the finding for Lawrence because the judgment quieting title in Lawrence’s name was based on fraud, and the Utah Supreme Court agreed. See id. at 1181; see also 135 P. at 107. Thus, a deed fraudulently obtained rightfully belongs to the original owner.

Courts have also recognized this principle specifically with mortgage fraud schemes. In Martinez v. Affordable Housing Network, Inc., 123 P. 3d 1201, 1203 (Colo. 2005), Martinez, the victim of an equity skimming scheme run by Affordable Housing Network, Inc. (AHN), was able to recover title to his property. AHN contacted Martinez because Martinez’s property was distressed. Id. AHN promised to help Martinez with the mortgage if Martinez would enter into an option agreement providing that AHN could buy the property for a fee “equivalent to the amount needed to cure the mortgage deficiency.” Id. At AHN’s request, Martinez quitclaimed the home to AHM as “‘protection’ should the homeowners abandon the property once AHN cured the mortgage default.” Id. Martinez decided to refinance without AHN’s assistance, but AHN sold the home to a third party. See id. at 1203-04. Despite the third party’s argument that it was a bona fide purchaser, the Colorado Supreme Court held that Martinez could recover title because the quitclaim deed was fraudulently obtained, and the third party was on inquiry notice that fraud may have been involved. See id. 1205-06, 1209.

The rule that a deed fraudulently obtained should be returned to the party from whom the deed was fraudulently obtained is stated by several treatises. A leading treatise on property says, “A deed procured by fraud may be either void or voidable.” 11 Thompson on Real Property, Second Thomas Edition § 94.07(l) (David A. Thomas, ed.). American Jurisprudence states, “A deed may be set aside for fraud where the grantor knows the contents of the deed but was induced to execute it by fraudulent representation of the grantee or someone in privity with the grantee.” 13 Am. Jur. 2d Cancellation of Instruments § 14 (2000). Thus, a victim of mortgage fraud who has transferred the property to one of the perpetrators may sue to recover the deed.

Because mortgage fraud may be deemed to involve securities fraud, the victim may have the right to seek rescission of the fraudulent transaction. See Utah Code Ann. § 61-1-22 (2005). Rescission damages (e.g., return of investment, plus interest from time of investment, plus attorneys fees and potential treble damages) are especially valuable to a victim because the victim may be able to sue the individual principals, id. § 61-1-22(4)(a) (2005), and avoid having to go through any shell companies that may be dissolved or in bankruptcy.

V. Avoiding Mortgage Fraud
Avoiding involvement in a mortgage fraud scheme is easier than dealing with the consequences of such schemes. Victims of mortgage fraud may be seduced into these schemes with promises of high returns from investments. Clients should be reminded that if a deal sounds too good to be true, it probably is. Clients should be counseled to obtain referrals and confirm licenses of the mortgage professionals with whom they may work. Before engaging these professionals, one should also do one’s own homework by checking comparable sales, just as an appraiser would do, to verify the property’s value. Also, one should always read and re-read any documents one is asked to sign; if one does not understand those documents, one should check with an attorney. Clients should also be advised to make sure that there are no blanks on the documents, and that their personal information is correct. If anything on the documents is missing or wrong, clients should not sign the papers. The Division of Securities and the Division of Real Estate both have help lines and are available to give their input on proposed opportunities as well. These basic tips can help keep those targeted by mortgage fraud perpetrators from becoming victims or unwitting accomplices.

1. See http://www.fbi.gov/publications/fraud/mortgage_fraud06.htm

2. See http://deseretnews.com/article/1,5143,695221873,00.html

3. See Indictment of Bradley Grant Kitchen, et al at 6-7 (Dec. 5, 2007) (http://www.mortgagefraudblog.com/images/uploads/UtahIndictment.pdf) (describing what straw buyers were told); Indictment of James Roy Martin, et al at 3-4 (Sep. 20, 2007) (http://www.mortgagefraudblog.com/images/uploads/CAGalloIndictment.pdf) (describing the false representations made to straw buyers and the fraudulent actions taken on their behalf); Indictment of Cornelius Robinson, et al at 5 (Jan. 8, 2008) (http://www.mortgagefraudblog.com/images/uploads/TXrobinsonIndictment.pdf) (describing the “flip” of which the straw buyers would be a part).

4. See Indictment of Mark Neusch and Michael Davis (Mar. 30, 2006) (http://www.mortgage fraudblog.com/images/uploads/UT_Neusch_Indictment.pdf).

5. See Press Release, Office of the United States Attorney Southern Dist. of Cal. (May 31, 2005) (http://www.usdoj.gov/usao/cas/press/cas50531-1.pdf).

6. See Press Release, State of Utah Dep’t of Commerce Div. of Securities, Equity Skimming Scam Yields Criminal Charges (Mar. 3, 2006) (http://www.securities.utah.gov/press/hurst.pdf).

7. See 18 U.S.C. § 1343.