Are You At Risk From House Finance Fraud?

A house finance fraud is one which involves the provision of false or misleading information to a homeowner, bank or other lending institution for financial gain. These frauds appear to be on the rise in New Zealand and they are becoming increasingly elaborate.

Who Is At Risk?

Those at risk include the following:

• Individuals who wish to own their own home, but either do not have enough money for a deposit or have a poor credit history and therefore find it difficult to obtain a loan;
• Homeowners struggling with mortgage repayments and other debts;
• Purchasers of investment properties or parents wishing to assist family members to purchase a home;
• Banks and other lending institutions.

Types Of Housing Finance Fraud

There are many types of housing frauds, including:

• Mortgage fraud;
• House equity fraud; 
• Buy back schemes; and 
• Disposing of property by falsely assuming the true owner’s identity.

One of the more common frauds is mortgage fraud. This occurs when false information is given to a bank or lending institution in order to secure a loan to purchase a property. There are several ways it can be perpetrated.

Example A

An agreement for the sale and purchase of a property, containing an inflated purchase price, is
submitted to the bank (often accompanied by a “valuation”). The bank, relying on the valuation, may lend up to 80% of the false and inflated purchase price. The surplus funds after the house has been purchased are then used to pay the initiator of the scheme. Although the borrower is now able to purchase a house, he or she may struggle with the mortgage payments on the higher amount borrowed.

Example B

Using a false valuation, the purchaser of a property may elect to immediately on sell it for a price much greater than that shown in the mortgage application. The new buyers are duped into believing the house value is correct because they have been provided
with a copy of the false valuation. The person committing the fraud makes a profit because they have used that false information to convince the bank and the new buyers that the house is worth more than it is.

Example C

A fraudster may follow the same procedure outlined in Example A. However, he or she deliberately defaults on the mortgage repayments. The bank then attempts to sell the house at mortgagee sale but finds that it is not worth as much as they were lead to believe. As the bank has advanced more than the property is worth, the bank will suffer a loss. The
fraudster has long since pocketed the difference between the amount loaned and the sale proceeds.

All of the above schemes are fraudulent if the promoter of the scheme makes any false representations to the participants or knowingly supplies false information in order to raise finance. In cases where the fraudster has falsely assumed the homeowners identity, the homeowners house may be sold without their knowledge. Other homeowners are tricked into transferring their home to the fraudster, believing that the fraudster is obtaining finance on
their behalf.

The Penalty

If the homeowner/borrower is aware of the fraud then they and the promoter of the scheme may be convicted of fraud which carries with it the possibility of a jail sentence. A real estate agent found to be involved in a fraudulent scheme (by providing a false sale and purchase agreement) risks cancellation of his or her licence.

How To Identify Potential Fraudulent Schemes

Schemes such as those listed above often prey on those who are desperate for finance. The schemes may be advertised in newspapers or be promoted through church or cultural groups. Scheme organisers often appear to be legitimate professionals and may state they are associated with recognised institutions or use a professional front person to give the appearance of credibility. The homeowner or borrower is not encouraged to seek independent
legal advice and may be asked to sign numerous documents without any explanation as to the effect of those documents.

To avoid becoming a victim of a fraud and risking the loss of your home, you should bear in mind the following:

• Never sign any document unless you fully understand it.
  
• Read all documents and ask questions if you are not sure.
• Never be persuaded to include false information on any loan application, regardless of time pressures.
• Never leave any signature lines blank.
• Before signing a loan agreement, check the monthly repayments are not higher than you had expected.
  
• Always seek independent legal advice.