spotting fraud in real estate transactions fraud in real estate transactions chapter 31 2 foreign...

SPOTTING FRAUD IN REAL ESTATE TRANSACTIONS

J. CHRISTOPHER VARLEY Alamo Title Company

1602 N. Loop 1604 W., Suite 101 San Antonio, TX 78248

State Bar of Texas 30TH ANNUAL

ADVANCED REAL ESTATE LAW COURSE July 10 – 12, 2008

San Antonio

CHAPTER 31

J. Christopher Varley Alamo Title Company

1602 N. Loop 1604 W., Suite 101 San Antonio, TX 78248

210-495-5200 210-495-7527

[email protected]

BIOGRPAHICAL INFORMATION EDUCATION B.A. in Political Science, The University of Dayton (1972) J.D. St. Mary’s University (1975) PROFESSIONAL ACTIVITIES Assistant Prosecuting Attorney

Mahoning County, Ohio 1977 through 1980 Commercial Escrow Officer Alamo Title Company 1981-1982 Assistant City Attorney – Real Estate Section City of San Antonio 1982-1984 Commercial Escrow Officer Alamo Title Company 1984 to present Member: State Bar of Texas Member: San Antonio Bar Association

Spotting Fraud in Real Estate Transactions Chapter 31

TABLE OF CONTENTS

I. BEWARE OF CASH TRANSACTIONS ............................................................................................................... 1

II. KNOW THE PARTIES .......................................................................................................................................... 4

III. BE CAUTIOUS WITH DOCUMENTS SIGNED OUTSIDE OF YOUR OFFICE ............................................... 6

IV. DOUBLE CHECK THE RECENT TITLE HISTORY AND BE SUSPICIOUS OF A RECENTLY RELEASED DEED OF TRUST OR MECHANIC’S LIEN CLAIM .......................................................................................... 6

V. BEWARE OF LENDER PAYOFF STATEMENTS THAT YOU DID NOT ORDER ......................................... 6

VI. BEWARE OF THE USE OF A POWER OF ATTORNEY ................................................................................... 7

VII. BEWARE OF THE FLIP TRANSACTIONS ......................................................................................................... 8

VIII. BEWARE OF THE SO-CALLED “SILENT SECOND” ...................................................................................... 8

IX. BEWARE OF HOMEOWNER IN DISTRESS RECUE SCHEMES .................................................................... 8

X. BEWARE OF WHAT YOU THROW AWAY .................................................................................................... 12

APPENDIX ................................................................................................................................................................... 13


1

SPOTTING FRAUD IN REAL ESTATE TRANSACTIONS

When I was asked to make this presentation and

reviewed Business and Commerce Code §27.011, I was

1 BUSINESS AND COMMERCE CODE § 27.01. FRAUD IN REAL ESTATE AND STOCK TRANSACTIONS.

(a) Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a

(1) false representation of a past or existing

material fact, when the false representation is

(A) made to a person for the purpose of

inducing that person to enter into a contract; and

(B) relied on by that person in entering into that contract; or

(2) false promise to do an act, when the false

promise is

(A) material; (B) made with the intention of not

fulfilling it; (C) made to a person for the purpose of

inducing that person to enter into a contract; and

(D) relied on by that person in entering into that contract.

(b) A person who makes a false representation or

false promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for actual damages.

(c) A person who makes a false representation or false promise with actual awareness of the falsity thereof commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.

(d) A person who (1) has actual awareness of the falsity of a representation or promise made by another person and (2) fails to disclose the falsity of the representation or promise to the person defrauded, and (3) benefits from the false representation or promise commits the fraud described in Subsection (a) of this section and is liable to the person defrauded for exemplary damages. Actual awareness may be inferred where objective manifestations indicate that a person acted with actual awareness.

(e) Any person who violates the provisions of this section shall be liable to the person defrauded for

thankful that in over 25 years in the title insurance industry, I have not personally been aware of any fraudulent activity in a closing. Fortunately, we are advised by underwriting counsel on a regular basis of the more common schemes that are being attempted in Texas and around the country. Additionally, I have been helped by and give great thanks for her help in this presentation to Lisa A. Tyler, National Escrow Administrator for the Fidelity National Financial Title Insurance Group. Lisa advises all of the escrow officers around the country for all of the brands, Alamo Title, Chicago Title and Fidelity National Title of examples of attempts to perpetrate some sort of fraud. Obviously fraud has been around since there has been a market for the sale and purchase of real estate. The establishment of the Office of the County Clerk for each county was an early attempt to prevent fraud in real estate transactions by providing a place for the recordation of real estate documents and therefore provide a public office so that the county real estate records could be checked to prevent multiple sales2. When I first started as a commercial escrow officer in 1981, the most common scheme was the use of large sums of cash, presumably obtained by some illegal means, to buy real estate. Real estate became the perfect vehicle to “launder” otherwise illegal funds. Buying real estate for cash, holding it for a period of time and selling it, even at a loss, provided a great opportunity to use funds derived from drug sales or other illegal activities and turning those funds into a large sum of money that would be otherwise considered from a legitimate enterprise. This leads to the first red flag: I. BEWARE OF CASH TRANSACTIONS To combat this type of fraud, the federal government enacted several statutes that made it difficult to use of funds from illegal activities to purchase real estate. We are all now familiar with the requirement to obtain a F.I.R.P.T.A (Foreign Investment Real Property Tax Act 26 U.S.C. § 1445(A)) Affidavit that while not enacted to prevent laundering of illegal funds but rather to make certain a

reasonable and necessary attorney's fees, expert witness fees, costs for copies of depositions, and costs of court.

2 PROPERTY COCE § 13.002. EFFECT OF RECORDED INSTRUMENT.

An instrument that is properly recorded in the proper county is:

(1) notice to all persons of the existence of the instrument; and

(2) subject to inspection by the public.


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foreign seller of U.S. real estate paid taxes, it has become a standard fixture in real estate closings and probably has reduced certain types of fraud as there is a traceable id number. Additionally, 26 U.S.C. §6050I and 31 U.S.C. 5331 require the reporting of the receipt of large amounts of currency. Specifically, anyone who received $10,000.00 in cash must file a Form 8300 Report of Cash Payments over $10,000.00 in a Trade or Business if the currency or cash is received and the form must be filed within 15 days of the receipt. I believe that most title companies that act as a settlement agent do not accept cash except in small amounts of a few hundred dollars or less. Certainly the reporting requirements must be met if we were to do so, but the more pressing issue is the safeguarding of the funds if we took the cash and we refuse to undertake that responsibility. Therefore, most individuals that may want to try to launder funds have caught on to these requirements and have moved to other methods of laundering their illegal funds. Cash has always been hard to duplicate or counterfeit but with modern technology, the U.S. Government is being forced to change the face of all of the most popular bills in circulation so as to make it more difficult to duplicate. However, a method of counterfeiting that is becoming more popular is the use of counterfeit cashier’s checks. Alamo Title in San Antonio has had someone trying to use a counterfeit cashier’s check and I understand that the use of counterfeit cashier’s checks have been attempted, unfortunately successfully, several times at various Fidelity National family companies around the country. According to Lisa Tyler, our escrow coordinator, one common scheme is for a buyer and a seller to open a For Sale by Owner (FSBO) transaction wherein the buyer will purchase the property for all cash. The buyer will come to the closing with a cashier’s check. The check is deposited and within 24 hours disbursements are expected to be made. (Several years ago, the definition of good funds was changed by the Texas Department of Insurance (TDI) to include a cashier’s check3. These were considered by TDI and

3 P-27. Disbursement From Escrow or Trust Fund Accounts. This Rule shall implement Art. 9.39A, Texas Insurance Code.

A. Definitions

1. "Good funds" means:

other banks as the equivalent of cash or at least the same as collected funds.) The seller in this scenario will have given instructions to have the net proceeds wired to an account. Within as little as three (3) days but it could take up to two weeks, the bank will send notification that the cashier’s check was fraudulent and we or you, if you are the settlement agent, are left to track down the seller to get the proceeds back. Locally, we have had the experience that because of the increasing use of fraudulent cashier’s checks, some banks are not accepting them for immediate credit but rather will place a hold on the escrow account for the cashier’s check to clear. The sophistication of printers and scanners are making the duplication of a cashier’s check easier. There are some ways to try to verify the legitimacy of a cashier’s check especially if it is drawn on an out of state bank. The routing numbers provided on the check can be an indication of a check’s legitimacy:

• The nine-digit number between the colon brackets on the bottom of a check is the ABA routing number (ABA number) of the bank on which the check is drawn;

• The last four digits of the ABA number in the top right had corner should match the first four digits on the lower routing number;

• The first two digits on the ABA number indicate in which of the 12 Federal Reserve Districts the bank location the check is drawn from.

• For example, I have attached a map of the federal reserve system with the numbers assigned to the various Federal Reserve Banks and I have attached a marked up copy of what to look for in a genuine and fraudulent cashier’s check. (See Appendix)

a. Cash or wire transfers; b. Cashier's check. For purposes of this

Rule, a cashier's check is defined to mean a check that is (1) drawn on a financial institution; (2) signed by an officer or employee of the financial institution on behalf of the financial institution as drawer; (3) a direct obligation of the financial institution; and (4) provided to a customer of the financial institution or acquired from the financial institution for remittance purposes.


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Because of the possibility of counterfeit checks and the possibility that the bank where we deposit our escrow funds may be reluctant to provide immediate credit for this check, our family of companies may limit the disbursement of funds in a sale transaction if the funds tendered are with a cashier’s check and the disbursement is expected immediately by wire transfer. Specifically, if we receive a cashier’s check, we may not be willing to fund the transaction by wire transfer until that check has cleared and the full amount of funds have been credited to our account. Our funding may be by a check and not a wire. We and others are requesting the use of wired funds into our account if we are to be expected to wire out funds the same or next day. The FDIC which insures banks has a very good web site, www.fdic.gov that you can access for more information about their efforts to combat fraud. They have a service that will require you to register and once registered, they will send you an e-mail whenever a bank reports either stolen or counterfeit cashier’s check in circulation. Our company does subscribe to this service and an example of such an e-mail follows:

From: FDIC Subscriptions [mailto:[email protected]] Sent: Monday, May 12, 2008 2:57 PM To: Martinez, Sherrill Subject: SA-98-2008: Counterfeit cashier’s checks bearing the name Pine Island Bank, Pine Island, Minnesota

Special Alert

TO: CHIEF EXECUTIVE OFFICER (also of interest to Security Officer)

SUBJECT: Counterfeit Cashier's Checks Summary: Counterfeit cashier's checks bearing the

name Pine Island Bank, Pine Island, Minnesota, are reportedly in circulation.

Pine Island, Pine Island, Minnesota, has contacted the Federal Deposit Insurance Corporation (FDIC) to report that counterfeit cashier's checks bearing the institution's name are in circulation.

The counterfeit items display the routing number 091903967, which is assigned to Pine Island. The items are markedly dissimilar to authentic cashier's checks and display check numbers in red print. The

counterfeit items display the following security statement embedded within the top border: "FOR SECURITY PURPOSES, THE FACE OF THIS DOCUMENT CONTAINS A COLORED BACKGROUND AND MICROPRINTING IN THE BORDER." A security statement is also shown along the bottom border between two padlock icons. The words "CASHIER'S CHECK" and an indemnity bond statement are in the top center. The bank's logo and name (underlined) are in light green in the top-left corner. The bank's name and the phrases "Payable Through Pine Island Bank, Pine Island, MN, For Inquires call 1-800-373-0868" are on the left side. (Note: The telephone number shown is not associated with the bank.) The words "AUTHORIZED SIGNATURE" and "COUNTERSIGNED" are shown below two signature lines, respectively, in the lower-right corner. The word "REMITTER" appears in the lower-left corner.

Authentic cashier's checks have ornate scroll borders and a white swirl design inside the top-left corner. A security padlock icon and a vertical security statement are centered within the right border. The bank's logo, name, street address, P.O. Box, city, state and telephone number 507-356-8328 are centered in the top portion. The security statement "THIS DOCUMENT HAS A MICRO- PRINT SIGNATURE, AUTHENTIC WATERMARK, AND CHLOROSTAIN PAPER; ABSENCE OF THESE FEATURES WILL INDICATE A COPY" appears below the written dollar-amount line. The phrase "TWO SIGNATURES REQUIRED IF OVER $5000.00" appears above two signature lines in the lower-right corner. The word "REMITTER" appears in the top-left corner.

Copies of a counterfeit item and an authentic check (VOID) are attached for your review. Be aware that the appearance of counterfeit items can be modified and that additional variations may be presented. Any information you have concerning this matter should be brought to the attention of:

Bookkeeping Department Pine Island Bank 128 S. Main Street P.O. Box 68 Pine Island, Minnesota 55963 Telephone: (507) 356-6666 Fax: (507) 356-2046

Information about counterfeit items, cyber-fraud incidents and other fraudulent activity may be forwarded to the FDIC's Cyber-Fraud and Financial Crimes Section, 550 17th Street, N.W., Room F-4004, Washington, D.C. 20429, or transmitted electronically to [email protected]. Questions related to federal deposit insurance or consumer issues should be submitted to the FDIC using an online form that can be accessed at http://www2.fdic.gov/starsmail/index.asp.

SA-98-2008 May 12, 2008


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For your reference, FDIC Special Alerts may be accessed from the FDIC's website at www.fdic.gov/news/news/SpecialAlert/2008/index.html. To learn how to automatically receive FDIC Special Alerts through e-mail, please visit www.fdic.gov/about/subscriptions/index.html.

Sandra L. ThompsonDirector Division of Supervisionand Consumer Protection

Attachment (not available electronically)

NOTE: As a security precaution, the FDIC does not post to its Web site electronic images of fraudulent items or authentic checks that have been counterfeited. This is to avoid attempts by others to use these instruments to facilitate additional fraud. Financial institutions can view images of the fraudulent items and authentic checks (marked as VOID) using the FDIC's free, secure Web site, FDICconnect. (See more information about FDICconnect at http://www.fdic.gov/news/news/financial/2006/fil06032.html.) Printed copies of each Special Alert and its attachment(s) may also be obtained from the FDIC's Public Information Center (telephone: 1-877-275-3342 or 703-562-2200; fax: 703-562-2296; or e-mail: [email protected]).

Distribution: FDIC-Supervised Banks (Commercial and Savings)

The FDIC does not send unsolicited e-mail. If this publication has reached you in error, or if you no longer wish to receive this service, please unsubscribe.

Obviously, the use of counterfeit cashier’s checks is not only an issue for the real estate industry but for the banking industry as well.

Once you get past the money issues, the next red flag would be to

II. KNOW THE PARTIES Identity theft is currently a major issue for all of us. The use of stolen or fraudulent identities is becoming an increasing tool for commission of fraud in real estate as well. The attempt can be very basic such as having someone show up purporting to be the individual involved using a fake id or an elaborate scheme in which the true owners of the property are not involved in any way. Since the notary has to have a good source of identification (See CIVIL PRACTICE & REMEDIES CODE §121.005)4, our company has 4 § 121.005. PROOF OF IDENTITY OF ACKNOWLEDGING PERSON.

instructed our escrow officers to ask for and check the identification of the parties early in the signing process. If there is to be an issue, you might as well find out about it very soon. An escrow officer in Austin did ask for and received a “Texas Driver’s License” from a gentlemen that identified himself as one of the parties to the transaction. As she looked at the purported Texas driver’s license, she noticed that it appeared to be genuine but something seemed odd. While the parties were discussing other issues, she noted what was odd. The purported driver’s license stated that it was issued by the “Department of Driver’s License’s” instead of “Department of Public Safety”. She commented on this and very abruptly, the individual stated that he had left something in his car and left not even attempting to retrieve the fake driver’s license. This is perhaps an easy process if all of the individuals that may appear before you as a notary are from Texas and have a current Texas Driver’s License, however, knowing what to look for in an out of state driver’s license is difficult. I would recommend that you consider buying the ID Checking Guide5 This is a guide that is published by Drivers License Guide Company, 1492 Oddstad Drive, Redwood City, CA 94063. Ordering information 800-227-8827 or www.idcheckguide.com and it is a very useful source of information of what it a correct ID as issued by all 50 states, D.C., the U.S. Territories and

(a) An officer may not take the acknowledgment of a written instrument unless the officer knows or has satisfactory evidence

that the acknowledging person is the person who executed the instrument and is described in it. An officer may accept, as satisfactory evidence of the identity of an acknowledging person, only:

(1) the oath of a credible witness personally

known to the officer; or (2) a current identification card or other

document issued by the federal government or any state government that contains the photograph and signature of the acknowledging person.

(b) Except in a short form certificate of

acknowledgment authorized by Section 121.008, the officer must note in the certificate of acknowledgment that:

(1) he personally knows the acknowledging

person; or (2) evidence of a witness or an identification

card or other document was used to identify the acknowledging person.

5 © 2008 Drivers License Guide Co. (Used with permission)


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Canada. It provides information about the description of the license, validation, how it is numbered, and the term. An example for Texas is attached in the Appendix. It is interesting when you browse through the Guide that the licenses vary greatly from state to state. In Texas, the driver’s license is issued for a period of four (4) years and it can be renewed online at least once. In some states it can be for a much longer period of time. Consequently, the image of the person on the driver’s license may be different from the person sitting in front of you because they have changed in four or eight or longer years. You just have to check.

Some attempts at forgery can of course be humorous if they were not involved in crime. (See Appendix) Knowing the parties however, may be difficult. Recent scams that have been uncovered involve situations were the real owners of the property are not at all involved and all of the parties are fraudulent. One such scam reported by Merritt L. Hopson, Title Services and Regulatory Compliance Officer for Chicago Title involved the refinance of absentee-owned property and it included both improved residential and commercial properties. In most of the cases, the true owners of the property resided out of state. The scheme was:

The Refinance Scheme The perpetrators of this scheme assume the identity of the real property owner and obtain a physical mailing address (always a "mail drop location") in the community near the residence of the real property owner. They then contact a mortgage broker or lender as well as a title agent to originate and close the new loan using the identity of the real owner. In most cases the properties are owned free and clear of any liens or mortgages of record. After receiving loan approval from a mortgage lender, the perpetrator then contacts the title agent and request they either transmit the closing documents to a "free e-mail address" or the mail drop address. After the executed closing documents have been returned to the title agent, the perpetrator provides written instructions for the agent to wire the loan proceeds to bank accounts held outside the United States, mostly in Eastern European countries. Investigation reveals these accounts are opened with fraudulent

identification and that the entire amount of the loan proceeds are quickly withdrawn in cash.

At or about the same time the perpetrators are trying to refinance the victim's property through one lender and title agent, they are attempting to borrow a similar amount from a different lender using the same property as collateral. A different title agent is used for this second loan. It is important to note that both refinance closings occur at or about the same time (in the gap) so neither settlement agent is aware of the other closing until after the funds have been disbursed and the money has left the country.

Similar Characteristics

1. All contact with the perpetrators is by

telephone or e-mail. There is NO personal contact. They will refuse to attend a closing or come by the office to pick up a check.

2. They are requiring the settlement agent to execute a letter agreeing that they will wire the proceeds from the closing to bank accounts held outside the United States.

3. All contact addresses provided are "mail drop box" locations.

4. All telephone numbers provided are pre-paid cell phones and are untraceable.

5. All identification provided are fraudulent driver's licenses and do not bear the likeness or resemblance to the identity theft victim.

6. The proceeds from each of the closings exceed $300,000.

With today’s acceptance of the internet and use of e-mail, there is an increasing request of title companies to accommodate parties who may be unwilling, too busy or traveling to come to the closing and therefore, the request goes, “E-mail me the documents, we will print them, sign, get them notarized and send them back.” Years ago, we would have tried to accommodate, assuming that this was not a violation of the lender’s closing instructions even helping to identify where they may find a notary. Not today! Today, the next red flag is:


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III. BE CAUTIOUS WITH DOCUMENTS SIGNED OUTSIDE OF YOUR OFFICE

Obviously, the lender may have specific instructions about this and these instructions need to be followed, but there are times when it is legitimate for the parties to sign outside of your office. We are often asked to arrange for a “courtesy” closing at another title company outside of state. This may or may not be feasible. If not, we have to be careful of the security of the documents that are sent and who is the notary so that all requirements of signing before a notary in the state in which they are signed are met and also that the notary is legitimate. If someone was attempting to perpetrate a fraud and was going to sign documents outside of your office, providing a fake notary would be part of the process. We believe that we should have the ability to dictate who the notary is as we are the ones guaranteeing the validity and priority of the lien in the case of a Mortgagee Policy. I do not know of any national database of notaries for the U.S., so it is difficult to verify if the notary is legitimate. Checking with the state licensing department for notaries is one way to check, but that is time consuming and still may not really answer if the notary’s signature and seal was forged. Therefore, I would recommend that you investigate a bonded or insured notary service if you need to arrange for signings outside of your office. There are a number of such services available. One that I have used is Bancserv, Inc. They are bonded, have services available all across the U.S., generally available any day of the week and with reasonable cost. Contact: www.bancserv.net . Even with this service available, the best practice is to have the signing done at your office in front of your notary employee. Not all forgeries or fraudulent documents are just for identification. It is a difficult time now in real estate as loans are harder to get for some, prices are falling and some are desperate to sell their house or to obtain cash through some sort of Home Equity financing. Therefore, the next red flag: IV. DOUBLE CHECK THE RECENT TITLE

HISTORY AND BE SUSPICIOUS OF A RECENTLY RELEASED DEED OF TRUST OR MECHANIC’S LIEN CLAIM

Forging currency or a cashier’s check can require an elaborate and somewhat sophisticated printer. Creating a fraudulent release of lien can be done with a typewriter (for those who remember what a typewriter is) or any basic word processing system. It is not at all difficult for someone to review the real estate records in Bexar County. Our County Clerk, Gerald Rickoff, has established a very good and easy to navigate web site (www.countyclerk.bexar.landata.com) that allows anyone to review the real estate records of

Bexar County. It does require a registration, but once registered, you can review all of the real estate records going well into the last century. Finding a form of a release of lien from a particular lender would not be difficult so that someone could easily print and reproduce what would appear to be a valid release of lien. Because this has happened with too much frequency, we and most title companies will note6 in Schedule C of the commitment any instruments affecting the property filed within the last 12 or 24 months. This is to provide the lender in the case of a refinance or home equity loan some information about the recent history of the property so that they can compare what the borrower may tell them. In the case of a sale, the new lender knows that this may be a “Flip” transaction and will therefore watch the appraisal of the property more closely. Additionally, this can require a question by the title insurance company to the lender that purportedly has very recently been paid off as to the legitimacy of the release. This would be true of a release of a recorded Affidavit Claiming a Lien filed by a mechanic or materialman or a release of lien that is not recorded but brought to the closing so that it can be recorded. Another closing red flag is: V. BEWARE OF LENDER PAYOFF

STATEMENTS THAT YOU DID NOT ORDER

Again, in these difficult times, a seller may be tempted to tamper with a payoff statement from their lender in the hope that the correct amount would not be caught until after they have received their net funds. We and most other title companies want to be the ones ordering the payoff statement from the existing lender or at least have it addressed to us so that we can, after tendering the payoff, demand the release of lien for recording. This is especially true in the case of a short sale which is a sale transaction where the selling price is LESS than the outstanding balance on the loan. The lender may agree to accept the lower amount because the value of the home may have dropped. We have not experienced significant value reductions in San Antonio and for the most part the rest of Texas, however, California, Florida, Nevada and several mid-west states have experienced reductions in values in excess of 20% from last year. Without the short sale cooperation of the existing lender, the sale would not be completed.

6 We will have language something similar to:

The following note is for informational purposes only:

The following … affecting the herein covered land were recorded within twenty-four (24) months of the Effective Date of this Commitment:


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In this scenario, it is very important to fully know and understand what the lender will accept in exchange for a release of lien. Consider the following: Short Sale with a Flip More and more institutional lenders are refusing to negotiate a short payoff amount on their loan when the property is being flipped.

Short sales occur during a recessive market because of fire, flood or other damage to the property, or when the property was originally built in a great neighborhood that has since dropped in value or experienced an increase in crime.

Most lenders realize that a consumer would only know about his/her option to negotiate a short sale if they were informed of that option by a real estate investor. It is likely if the seller is working with an investor, there is more value to the property than originally disclosed. In other words, for an investor to be involved in the sale, the investor has to be able to turn a profit. If the investor is able to sell the property for more money to a bona fide purchaser, then the property was of a higher value to begin with.

The majority of lenders now put the following phrase on the face of their short payoff statements: "This transaction is between the Seller and Buyer as indicated on the certified HUD-1. Any unauthorized title transfer or change of Buyer(s) will be a violation of this demand, making it immediately null and void."

In order to monitor compliance with short pay terms, the loss mitigation team is employed by the short pay lender to check the public records after closing to confirm the property owner's name matches the buyer's named on the final settlement statement. Non-compliance results in a return of the funds to the escrow holder and a refusal to release the lien of record. This means that the escrow holder has an obligation to notify the payoff lender when the transaction involves a flip of the property simultaneously to a new buyer.

Susan Miedema, a manager for Ticor Title Company in Highland, IN., was savvy enough to realize she had a similar situation occurring in a recent real estate transaction.

An investor appeared at her office to open a new transaction. The investor admitted to Susan the existing lender (Countrywide Home Loans) would not accept a short payoff if the property was to be vested in a corporation or flipped at closing. The purchase and sale agreement was executed by the property owner as seller, and the investment firm as buyer for all-cash. In accordance with the terms of the short payoff letter, the investor could not hold title in the name of his company, and could not flip the property through a double escrow.

Desperate to put the deal together, he found a straw buyer to take title. He structured a double-escrow, wherein the straw buyer would take title and then turn around and deed the

property to the investor's Company. Susan, with the guidance of her underwriter, refused to close the transaction. The moral of this scenario is to follow the short sale lender’s instructions carefully. Another closing red flag is: VI. BEWARE OF THE USE OF A POWER OF

ATTORNEY There are many times when the use of a Power of Attorney for a real estate transaction is justified. The use must be questioned, however, so that it can be determined that it is not being used to perpetrate some sort of fraud. Since the legislature has created the Statutory Durable Power of Attorney (PROBATE CODE § 490) and the form for the same is readily available, these can be instruments of fraud. We and other title companies will require that we are given the original to review and record7. Obviously, we question the parties as to why they want to use the POA. If it is purely for convenience such as they are too busy to come to a closing or will be out of town, then we can avoid the use of the POA by using the notary service like BancServ, Inc. If the principal has now become disabled, we will require some evidence of this fact. If the principal has died, the POA of course is meaningless. Through the years, I have had several attempts to use a POA for someone who has died. In all of the instances, I believe that the individuals did not know that the authority granted by it ceased after the principal died. Again Lisa Tyler provided an interesting scenario that also raises the issue of the use of a Power of Attorney and Elder Fraud. The scenario is as follows: Quarter-Share Timeshare A daughter conspires to sell her timeshare investment to her ailing mother without her sibling's knowledge, but is stopped short.

A "timeshare" is a right, shared with others, to occupy a unit of accommodation for a period of time on a regular basis for a number of years. A "quarter-share" timeshare is three-month interval ownership, with a rotating schedule.

7 § 489. RECORDING DURABLE POWER OF ATTORNEY FOR REAL

PROPERTY TRANSACTIONS. A durable power of attorney for a real property transaction requiring the execution and delivery of an instrument that is to be recorded, including a release, assignment, satisfaction, mortgage, security agreement, deed of trust, encumbrance, deed of conveyance, oil, gas, or other mineral lease, memorandum of a lease, lien, or other claim or right to real property, shall be recorded in the office of the county clerk of the county in which the property is located.


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Timesharing can be in a single building, an apartment block or even on a boat.

Marie Logie, an escrow officer in South Lake Tahoe, was handling the sale of a quarter-share timeshare. In her transaction the daughter was selling her timeshare to her mother. The file had been open for quite some time, and without warning from the parties or the lender, Marie received loan docs.

Her transaction was a high-value quarter-share timeshare, the sales price was $600,000 and the loan amount was $449,250. As soon as she received the loan documents, the mortgage broker started pressing Marie to prepare the settlement statement and to have the buyer sign (via e-mail) the same day with funding and closing the next day.

Marie prepared the settlement statement and sent it to the buyer, then proceeded to verify how the buyer was going to hold title when reading through the loan documents. She noticed the seller was signing with Power of Attorney (POA) for the buyer and immediately called her title officer. The title officer told Marie to hold off closing the transaction until she received additional information. The first party Marie contacted was the lender. Much to her surprise, the lender acknowledged and approved the use of the POA by the seller for the borrower.

Marie requested a copy of the POA document and by the end of the day, she received it along with a letter from a doctor stating that the buyer was unable to understand and sign documents.

Marie sent both documents to her title officer. Upon review of the POA, she saw the buyer's son was also named as her attorney-in-fact. Marie let them know that the only way she could proceed would be if the buyer's son, not a part of this transaction, signed on behalf of his mother. Instead of scheduling a signing with the buyer's son, the mortgage broker called Marie back to ask if the incompetent buyer could now sign the documents which caused her even greater concern for fraud.

Desperate times are causing some people to take desperate measures including possible fraud on their own relatives. Another scheme that was very popular in recent years and there was even a television show about it called “FLIP THIS HOUSE”. The next red flag: VII. BEWARE OF THE FLIP TRANSACTIONS Not all flips are fraudulent, but this is a type of transaction that we are very skeptical of and will review closely. It is a concern, because the recent purchase may or may not have been followed by improvements. If so, then a new appraisal of a higher value may be justified. If not, why would the price increase a significant amount in a very short period of time? Most lenders now want to see the information

about recent sales and/or refinances that we and other title companies put in Schedule C. This will help them spot any questions about the appraised value. Also, if there are improvements that have been recently made, have they been paid for? A question about the “improvements” and contractor(s) is warranted to determine if there are any outstanding liens possible that may not be made known until after you have closed and funded. Another form of fraud that is more difficult to determine is payments between the buyer and seller that have taken place outside of closing. The next red flag: VIII. BEWARE OF THE SO-CALLED “SILENT

SECOND” This involves a 2nd lien in favor of the seller and this is often not recorded at the time of the closing but rather several days or weeks later. This 2nd lien is not disclosed to the lender and it usually conceals the fact that the seller has provided the down payment to the buyer. If not disclosed then it will have an impact on the loan to value ratio and be in direct violation of the lender’s loan documents. One way to determine if this has happened is to order a subsequent title search to see if the parties did record a 2nd lien post closing. While not always part of a “Silent Second”, we have had requests to prepare two (2) separate settlement statements for the same transaction, one will show all of the financial details of the transaction and will not be sent to or otherwise shared with the lender and one that will not show all of the details and this is the one to be sent to the lender. We do not prepare multiple statements for the same transaction. All of the funds passing through the escrow for a particular transaction need to be reflected on the settlement statement. As all of us know, the market has taken a turn in recent months and a new fraud scheme is emerging. It is one where an owner is approached by someone willing to help them “save” their home. The next red flag: IX. BEWARE OF HOMEOWNER IN DISTRESS

RECUE SCHEMES Unfortunately, many who are falling behind on

their mortgages are desperate for help and when approached by someone who promises to help them for a fee, they accept and may have created very difficult problems for themselves. The website for the Federal Trade Commission (www.ftc.gov) provided the


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following8 which is a very good breakdown of the types of scams now circulating:

Foreclosure Rescue Scams: Another Potential Stress for

Homeowners in Distress

The possibility of losing your home to foreclosure can be terrifying. The reality that scam artists are preying on the vulnerability of desperate homeowners is equally frightening. Many so-called foreclosure rescue companies or foreclosure assistance firms claim they can help you save your home. Some are brazen enough to offer a money-back guarantee. Unfortunately, once most of these foreclosure fraudsters take your money, they leave you much the worse for wear.

Fraudulent foreclosure “rescue” professionals use half truths and outright lies to sell services that promise relief and then fail to deliver. Their goal is to make a quick profit through fees or mortgage payments they collect from you, but do not pass on to the lender. Sometimes, they assume ownership of your property by deceiving you, the homeowner. Then, when it’s too late to save your home, they take the property or siphon off the equity. You’ve lost your home to foreclosure despite your best intentions.

If you think you may be facing foreclosure, the Federal Trade Commission (FTC), the nation’s consumer protection agency, wants you to know how to recognize a foreclosure rescue scam. And even if the foreclosure process has already begun, the FTC and its law enforcement partners want you to know that legitimate options are available to help you save your home.

How the Scams Work

Foreclosure rescue firms use a variety of tactics to find homeowners in distress: Some sift through public foreclosure notices in newspapers and on the Internet or through public files at local government offices, and then send personalized letters to homeowners. Others take a broader approach through ads on the Internet, on television, or in the newspaper, posters on telephone poles, median strips and at bus stops, or flyers or business cards at your front door. The scam artists use simple and straight-forward messages, like:

“Stop Foreclosure Now!”

“We guarantee to stop your foreclosure.”

8 http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre42.shtm

“Keep Your Home. We know your home is scheduled to be sold. No Problem!”

“We have special relationships within many banks that can speed up case approvals.”

“We Can Save Your Home. Guaranteed. Free Consultation”

“We stop foreclosures everyday. Our team of professionals can stop yours this week!”

Once they have your attention, they use a variety of tactics to get your money:

Phony Counseling or Phantom Help

The scam artist tells you that he can negotiate a deal with your lender to save your house if you pay a fee first. You may be told not to contact your lender, lawyer, or credit counselor, and to let the scam artist handle all the details. Once you pay the fee, the scam artist takes off with your money.

Sometimes, the scam artist insists that you make all mortgage payments directly to him while he negotiates with the lender. In this instance, the scammer may collect a few months of payments before disappearing.

Bait-and-Switch

You think you’re signing documents for a new loan to make your existing mortgage current. This is a trick: you’ve signed documents that surrender the title of your house to the scam artist in exchange for a “rescue” loan.

Rent-to-Buy Scheme

You’re told to surrender the title as part of a deal that allows you to remain in your home as a renter, and to buy it back during the next few years. You may be told that surrendering the title will permit a borrower with a better credit rating to secure new financing – and prevent the loss of the home. But the terms of these deals usually are so burdensome that buying back your home becomes impossible. You lose the home, and the scam artist walks off with all or most of your home’s equity. Worse yet, when the new borrower defaults on the loan, you’re evicted.

In a variation, the scam artist raises the rent over time to the point that the former homeowner can’t afford it. After missing several rent payments, the renter – the former homeowner – is evicted, leaving the “rescuer” free to sell the house.

In a similar equity-skimming situation, the scam artist offers to find a buyer for your home, but only if you sign over the deed and move out. The scam artist promises to pay you a portion of the profit when the home sells. Once you transfer the deed, the scam artist simply rents out the home and pockets the proceeds while your lender proceeds with the


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foreclosure. In the end, you lose your home – and you’re still responsible for the unpaid mortgage. That’s because transferring the deed does nothing to transfer your mortgage obligation.

Fraudulent foreclosure “rescue” professionals use half truths and outright lies to sell services that promise relief and then fail to deliver.

Bankruptcy Foreclosure

The scam artist may promise to negotiate with your lender or to get refinancing on your behalf if you pay a fee up front. Instead of contacting your lender or refinancing your loan, though, the scam artist pockets the fee and files a bankruptcy case in your name – sometimes without your knowledge.

A bankruptcy filing often stops a home foreclosure, but only temporarily. What’s more, the bankruptcy process is complicated, expensive, and unforgiving. For example, if you fail to attend the first meeting with the creditors, the bankruptcy judge will dismiss the case and the foreclosure proceedings will continue.

If this happens, you could lose the money you paid to the scam artist as well as your home. Worse yet, a bankruptcy stays on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job.

Where to Find Legitimate Help

If you’re having trouble paying your mortgage or you have gotten a foreclosure notice, contact your lender immediately. You may be able to negotiate a new repayment schedule. Remember that lenders generally don’t want to foreclose; it costs them money.

Other foreclosure prevention options, including reinstatement and forbearance, are explained in Mortgage Payments Sending You Reeling? Here’s What to Do, a publication from the FTC. Find it at www.ftc.gov.

You also may contact a credit counselor through the Homeownership Preservation Foundation (HPF), a nonprofit organization that operates the national 24/7 toll-free hotline (1.888.995.HOPE) with free, bilingual, personalized assistance to help at-risk homeowners avoid foreclosure. HPF is a member of the HOPE NOW Alliance of mortgage servicers, mortgage market participants and counselors. More information about HOPE NOW is at www.995hope.org.

Red Flags

If you’re looking for foreclosure prevention help, avoid any business that:

• guarantees to stop the foreclosure process – no matter what your circumstances

• instructs you not to contact your lender, lawyer, or credit or housing counselor

• collects a fee before providing you with any services

• accepts payment only by cashier’s check or wire transfer

• encourages you to lease your home so you can buy it back over time

• tells you to make your mortgage payments directly to it, rather than your lender

• tells you to transfer your property deed or title to it

• offers to buy your house for cash at a fixed price that is not set by the housing market at the time of sale

• offers to fill out paperwork for you

• pressures you to sign paperwork you haven’t had a chance to read thoroughly or that you don’t understand.

If you’re having trouble paying your mortgage or you have gotten a foreclosure notice, contact your lender immediately.

A similar type of rescue scheme is being attempted but using a different term, a “Foreclosure Trust” with the following details provided by Lisa Tyler: What is a Foreclosure Trust? A common scheme perpetrated on distressed homeowners is when a foreclosure rescue company convinces owners to transfer their property into a trust wherein the homeowner holds a percentage of interest, usually 51 percent. An investor holds the 49 percent ownership interest and acts as the trustee of said trust.

In this new scheme the trustee promises to assist the distressed homeowner if the homeowner brings his/her current loan and sets up a payment plan with the trustee, in the promise that the deal will repair the homeowner's credit without making him/her move. When all is said and done, the trustee ends up selling the property right out from under the homeowner after having stripped all of the equity and the home from him/her.

Where do we come in? Recently one of our offices received what appeared to be a sale transaction. The sale was written up on the standard local Association of Realtors® contract which outlined all of the terms and conditions. The Realtor represented both the buyer and the seller in the transaction. Attached to the contract were four items that were cause for concern because they were submitted by a company that wasn't even a party to our transaction. The Foreclosure Trust addendum included: estimated closing costs, the Retainer Agreement and Instructions to Escrow.


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The addendum disregarded several pertinent sections of the contract. It stated that 1099-S and FIRPTA reporting might or might not be necessary. The buyer and seller would be transferring title into a Grantors' Revocable Real Estate Trust. Instead of a Preliminary Title Search the addendum called for a Lot Book and Lien Search. No title insurance would be issued.

The estimated closing costs outlined the monthly payment plan that the owner was entering into with his/her co-trustee, which included a monthly service fee to Foreclosure Trust. According to the worksheets, the owner had about $25,000 equity in his/her home. The trustee would pay $18,000 for his/her beneficial interest in the trust, which would be deposited with Foreclosure Trust.

The Retainer Agreement was between the owner and Foreclosure Trust. It stated that the owner was retaining the Foreclosure Trust Company to coordinate and arrange the creation of a revocable trust and secure a trustee. The agreement called for a nonrefundable retainer fee of $1,000 and $350 for the preparation of documents. These fees were to be paid up front, out of escrow and taken from the initial earnest money deposit.

The Instructions to Escrow were our biggest concern. First and foremost, they were deposited by an administrator of Foreclosure Trust. They were not signed by nor agreed to by the actual parties to our escrow, but they were addressed to the escrow agent. The instructions themselves were also disconcerting. They stated:

1. No reference will be made to the word "SALE" anywhere in your instructions.

2. Since this transaction is not the sale of real property, but is simply the transfer of the seller's property to the seller's family trust, you are hereby instructed not to create 1099s for any parties to the escrow.

3. The term "sales price" should not appear anywhere in your documents. The term "transfer values" should be used instead.

4. Since there is no sale of real property, the terms "seller" and "buyer" will never be used. "Investor" will instead be used for the seller and "resident" will be used for the buyer.

5. Escrow agent is authorized to accept changes or modifications to terms set forth in the escrow instructions from Foreclosure Trust personnel only. The real estate agents have been so informed.

6. Escrow holder is authorized and instructed to prepare a grant deed into the trust. There will be no documentary transfer tax. Escrow holder is instructed to record said deed as an accommodation only with no liability on their part. The transfer is exempt from reassessment.

7. Escrow holder is instructed to obtain a Limited Assurance Guarantee.

8. Escrow holder is not to be concerned with property or liability insurance on the subject property.

9. Escrow holder is instructed to charge a flat fee of $750.

10. The commission for this transaction is limited to $495.

11. Buyer will deposit any additional funds required.

Another scenario circulating in Orange County, CA with the same result that the distressed borrower/seller will end up losing their home anyway:

RS, a company out of Orange County, Calif. advertises "Your Future is Secure." They offer services to homeowners facing foreclosure, by promising to payoff the seller's existing loan and allow the seller to stay in their home for 12 months – rent free.

What's the catch? The homeowner has to have at least 25 percent equity in the property AND they have to agree to sell their property to an RSI arranged investor.

The investor puts down a small down payment (if any) and the costs are all deducted from the seller's proceeds at closing.

The balance of the seller proceeds are assigned to RS at closing, as advance payment of rent for 12 months. During the 12-month period, RS promises to help the homeowner build their credit back up with a special program, at the end of which, the homeowner "refinances" their home and receives all the proceeds back.

Does this sound too good to be true? It is!

o How can the property owner "refinance" when they have conveyed their interest to an RS arranged investor?

o How does the property owner know the investor (or investor's estate) would be willing to sell the property at the end of the 12-month period?

o How does RS know what the property value will be at the end of the 12-month period?

o Will the borrower be able to obtain financing in an amount to cover the previous sale price in order to payoff the new financing and receive their initial proceeds?

Unfortunately, there will be more schemes developed. I suggest that you visit the web site of the Federal Trade Commission on a regular basis to learn of the new developments in this area. Finally, a lot of the fraud that is perpetrated is based on identity theft. This theft is done in many ways and has become a significant national problem. All of us may from time to time acquire what is very sensitive personal information about our clients. This leads to the final red flag:


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X. BEWARE OF WHAT YOU THROW AWAY Digging through the trash bins of an office building may not seem like a likely means of getting valuable information, but it is. If you or your client has a reason to obtain personal information, do not throw this information in the trash. Information such as social security numbers, date of birth, place of birth, recent addresses, nicknames, driver’s license numbers, bank account numbers, marital history are all valuable to someone who is intent on assuming someone else’s identity. If you handle loan closings, prepare documents for a lender or represent a lender, then you know that the Residential Loan Application, Form 1003 contains all of this information. If you have it and do not need it, shred it; do not throw it away in the trash. If not otherwise required, our residential escrow files do not retain this information, even if it is presented with the loan papers for signing at closing.


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APPENDIX Information concerning the Federal Reserve System and cashier’s checks:

This is a map of the make up of the Federal Reserve System. So in our example above, if a check is drawn

on a bank in Texas such as Frost Bank, the ABA number should begin as 11 and in the case of Frost Bank,

the first three numbers in their ABA number are 114.

This is a replication of what would be a fraudulent cashier’s check. The bank has a location in San

Francisco, CA and therefore, the ABA number should begin with a 12. The ABA number on this check

begins 026 which would indicate that the check was issued by a New York bank. Additionally, the ABA

number in the upper right hand corner does show 12. These should match. Knowing that it takes several

days for the check to go through the banking channels, the check could be a very good copy of an original

check, with the amount and the payee changed and the ABA number at the bottom purposely changed to

delay the verification after deposit. The ABA number might be the correct number for a legitimate bank,

just not the one that purportedly issued the check so that it may take several days before it is discovered to

be counterfeit.


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This is an example of what a good cashier’s check should indicate. The bank location is in Arizona so the

ABA number should begin as 12 which is what it does in routing number at the bottom and the upper right

hand corner of the check. Not all cashier’s checks have the box in the upper right hand corner, but it is at

least worthwhile to look at the check to see if there are any obvious signs that it is not legitimate.

Example of information provided by the ID Checking Guide

follows:9

9 © 2008 Drivers License Guide Co.


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16

Front cover of the I.D. Checking Guide


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Example of how not to create a fake ID


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USEFUL WEBSITES

• www.fincen.gov (USA Patriot Act)

• www.irs.gov (Cash reporting, 1099, FIRPTA)

• www.fdic.gov (Fraudulent Cashier’s checks)

• www.ftc.gov (Foreclosure rescue schemes)

• www.nationalnotary.org (Notary regs for all states)

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