November 2010 Vol. 3, No. 9
 

Underwriters' Bulletin

Claims Corner

Fraud

Mortgage Rescue Fraud
Originally published in the August 2008 issue of the ATG Casenotes and Underwriters' Bulletin

What are the circumstances that could give rise to a mortgage rescue fraud? Consider this scenario:

An owner of a piece of mortgaged real estate finds him/herself in financial distress and unable to make the monthly mortgage payments. A third party investor (the rescuer) offers to buy the distressed owner's house and rent the property back to the owner. The rescuer typically purchases the property for a price that is much less than the actual value of the property and sets the rent at an amount close to the amount of the monthly mortgage payment. The rescuer assures the distressed owner that once the owner is in a better financial position, he or she will be able to buy the property back. Unfortunately, that day does not usually come because the amount needed to buy the property back is usually very large.

ATG has received numerous claims involving alleged mortgage rescue scams resulting when we insure the transaction between the party in distress and the rescuer. The rescuer typically takes out a mortgage that is insured by ATG. After the transaction closes, the party who was in distress may file an action against the rescuer claiming that the deed was invalid for a number of reasons, including that the owner did not know that he or she was given a deed, but thought it was a mortgage. The insured lender is usually named in the suit. Typically, ATG does not have liability to the insured owner because coverage is excluded as a matter that the insured created, suffered, or assumed. However, ATG may have liability to the insured lender because the rescued party is still in possession and ATG insured that the lender is in first lien position. The complaint questions the first lender's priority.

Closings that involve mortgage rescue fraud can be difficult to spot. However, as an attorney at the closing there are a few things that you can do to help ATG avoid having claims like these. Look for the following red flags in any real estate transaction, but especially those where the seller is in financial distress:

  • The seller is in a difficult financial situation and his/her mortgage may be in — or headed for — foreclosure.

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  • The seller plans to remain in the property after the closing. Obviously, there are legitimate situations where the buyer will allow the seller to remain in the property; however, it is something to look at more closely.

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  • The purchase price seems too low. One possible indication of a low purchase price would be a seller who has lived in a property for awhile and the amount paid for the property is virtually the same as the mortgage that is being paid off.

These claims can be difficult to prevent, but if you are aware of the red flags, you may be alerted to a potential rescue scam before the file closes. There are situations where a mortgage rescue might not be a problem (e.g., a cash deal). However, the transaction should be reviewed carefully. If you become aware that the transaction involves a mortgage rescuer, you must contact an ATG Staff Attorney immediately for guidance,legal@atgf.com, 217.403.0020, or 312.752.1990.. Thank you for your cooperation on this matter. Please contact the ATG Underwriting Department with any questions or concerns.

© ATG|Casenotes/Bulletin 1011_v3n9

[Last update: 10-11-10]

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