I have seen a lot of property flipping fraud, both perpetrated by and against buyers of new homes. The common thread among these cases is a fraudulent appraisal with inflation of the condition and value of a home. While perpetrators of the property flipping fraud may have a copy of the fraudulent appraisal, recruited straw borrowers and victims of property flipping fraud seldom do.
The question then remains how to detect appraisal fraud and property flipping scheme in your mortgage audit without having the actual appraisal in hand; and trying to identify parties involved in the fraud. This is extremely important so that when you are suing to recover losses, you properly identify who was responsible and who was not.
One common sign of property flipping within mortgage audits is a loan amount that is ‘maxed-out’ for that type of loan. This would indicate that a loan originator or other knowledgeable party with lending experience probably had a hand in the fraud. While Fannie Mae and other Government loan limits are widely published, subprime loan limits and pay option arm loan limits are programs that are no longer available and are much more difficult to find, unless one was a loan originator at the time and generally remembers them, or knows specific places to look. Loan to values also play a role in detecting property flipping, but require an auditor with mortgage experience to typically detect in their mortgage audit.
A second common sign of property flipping within mortgage audits is a huge down payment, above and beyond the capabilities of a ‘typical’ borrower for that type of loan. This is an indication that the escrow company was involved as such large amounts of money may never have changed hands. Other indications are amended title reports and title policies, which may have altered or removed relevant information such as past property transfers. The huge down payment means that the new purchase price is huge as well, which is likely identical to the unknown and inflated appraised value. It typically is easier to spot this evidence of property flipping in your mortgage audit if you have read hundreds of title reports.
A third common sign of property flipping within mortgage audits is online listing information and databases. A property listing describing the home as ‘unfinished’ or ‘needing extensive repairs’ with a mortgage to a lender that did not typically provide construction loans is another strong indication of appraisal fraud in the property flip, with the appraiser likely hiding both the condition and value of the property. Other sources may reveal more about the parties involved.