How fraudsters are swindling homeowners and how you can protect yourself
It’s a typical weekday in Knoxville and a woman, we’ll call her Amy, (not her real name) answers an unexpected call from an unknown number. The caller announces they are a representing a local lending institution, calling to inform Amy that she is delinquent and foreclosure proceedings are being instigated due to nonpayment. Amy calmly replies that the caller must have the wrong number, “My mortgage is with another company, and it’s perfectly current.” The caller acknowledges, “Yes, we are aware of your first mortgage, but we are the second mortgage holder, and that loan is severely in default.” Amy replies that there must be a mistake.
As Amy would soon find out, the calls were coming for a reason: she was a victim of real estate-related identity theft.
It sounds like a nightmare, nothing any of us would like to experience. But the scenario above? It’s a true one that was shared by a local mortgage broker. He experienced multiple cases of attempted fraud involving real estate during his 20-plus years in the industry. And when he shared the above story, I knew I wanted to learn more and find out how we can protect ourselves from this form of fraud.
An Unheard of Attempt at Theft
About six months prior to Amy’s call, the parties associated with the nonpayment issue above sat around a closing table ready for a refinance: the title company’s closing agent, the mortgage broker, and the borrowers, Amy and Frank (again, names have been changed).
The HUD-1 closing statement was reviewed and signed, as was the promissory note and associated documents. “The Deed of Trust was presented, and the closing agent asked for proper identification in order to notarize the instrument,” the broker recalls. “The woman dug through her purse for what seemed an eternity until her face began to flush.”
“Oh no,” the woman emotionally exclaimed, “I have left my ID in my other purse. I will run home and get it.” The title agent inquired about how long it would take. “I should be back in 2 hours,” she replied. The thought of staying at the office until 7:30 p.m. or 8:00 p.m. on a Friday night led the closing agent to allow the Deed of Trust to be signed, the broker says, with the promise from the woman that she would bring her identification to the disbursement after the mandatory three-day rescission period. She is told that it must be presented prior to the disbursement. All parties agreed that this was a good and helpful plan.
Three business days passed and she returned, but the closing agent’s assistant wasn’t aware of the deal, and disbursed the funds. But there’s one important detail missing here. “This woman was not Amy,” the broker says they eventually found out. “She was Frank’s mistress and accomplice, and the two were attempting to steal the equity from the family home and flee to another state.”
When the real Amy eventually found this out after receiving that fateful call, she called her attorney. She had her suspicions that her husband was having an affair, but she never dreamed he would take out a loan on their home and then run off with another woman.
Tenancy by the Entireties
In the story the mortgage broker described, Amy owned the home with Frank in fee simple, the “highest and most complete form of real property ownership,” according to the American Bar Association. More specifically, they owned the home in a fee simple form called tenancy by the entireties. Cornell Law School’s Law Information Institute explains that this form of shared ownership of property is only available to married couples where both spouses have “undivided interest in the property.”
What this means is that neither one of them can act alone in placing a loan on the property, hence why Frank needed a “stand-in” for Amy at the refinancing proceedings. It was a complicated mess for sure. The new second mortgage holder would not have been able to get Amy or her kids out of the home. Since Amy was not part of that refinancing effort, the new lender would have eventually found out that they had not properly perfected the lien.
But it doesn’t mean it never harmed her. “Amy likely had difficulty selling or refinancing in the future,” the broker says. Needless to say the lawsuit no doubt took time and money to unravel this fraud attempt.
Is Your Property Safe?
So what does this story really show us? Basically, that real estate identity theft is alive and well in the world. And there are things to keep an eye on as a homeowner to ensure you don’t fall victim to it.
For Amy, her identity was forged by someone she knew, but that is often not the case. Today, so much of what we do throughout the process of purchasing a home, including essential paperwork, is done online. And as we all know, that is not without its risks. According to the Federal Trade Commission, the top cyber crime reported by victims last year was phishing, the process by which a fraudster pretends to be a reputable individual or company with the intention of gaining personal information about another.
Once this sensitive information is collected, these individuals can then turn around and use your stolen identity to attempt to sell your property, despite the fact it doesn’t belong to them. They could also use your identity to secure loans using your equity lines. And if you are a homeowner who has more than one property or one that is free and clear, there’s more of a chance for you to be the target of this.
Although nothing is better than having your home paid for, experts say it might be a good idea to keep a home equity line of credit (HELOC) so there is a cloud on the title to discourage fraudsters. The Consumer Financial Protection Bureau explains that this line of credit basically allows you to borrow against your home equity. But the real benefit here is having an active lien on your property making it harder for someone to try to take advantage of you.
Also, if you are the person buying a home, realtors will advise you to always use a title company and purchase title insurance. If the person you are buying from doesn’t actually own the property, or there is an unexpected lien, then the title company will undoubtedly make you aware of that.
Although we refer to a loan on real estate as a mortgage, Tennessee actually has promissory notes secured by Deeds of Trust. Is it possible for someone else to record a deed of trust on your property? It is unlikely, but possible. The registrar of deeds relies on a properly executed and notarized document. And title searchers rely on the recorded history of legal instruments on your property.
Nick McBride, Knox County Registrar of Deeds, is strictly regulated as to what he can accept and deny in the way of instruments to record. “If it meets the statutory requirements, we have to record it, even if it seems suspect,” he says. But he continues, “My staff and myself have been highly trained to be on the lookout for this type of malfeasance, and we alert the proper authorities and the property owner anytime we have suspicions.”
Bottom line is the burden still lies on the property owner, but McBride assures us, that to his knowledge, this type of problem has yet to reach Knox County.
As referred to in our last issue, considering a trust could be one way to keep your equity safe, as it might be more complicated for someone to forge the required documents like the memorandum of trust or a copy of a complete trust. And that trust also protects you personally from creditors and even the IRS.
Again, a simple HELOC would be better than nothing. But if nothing else, you can simply take the time to pay a visit to the Register of Deed’s office every now and then to ensure your home information has remained unchanged.