Mortgage fraud is pervasive. This is the first of a series of blog posts describing different types of mortgage fraud and the flags that can help anyone involved in the real estate and financial sector identify them.
One fraud seen with increasing frequency is forged mortgage satisfactions. A major example of this type of fraud occurred in 2005 in Greenwich, Connecticut. A respected real estate developer owned a number of commercial properties. It turns out that to generate more cash flow, he was routinely forging mortgage satisfactions of mortgages encumbering properties he owned. He would go to a bank for a loan on one of his properties. A title search would be ordered. It would show no mortgage encumbering the property in some cases. In other cases, there would be a mortgage encumbering the property, but by the time a contin was run, it would have been satisfied. (A “contin” is a search run before closing to see if there are any changes since the date of the original search). No mortgages showed up because the developer signed and recorded forged releases. He would use a lost or stolen notary stamp for the acknowledgement of the purported signature of the bank officer.
The developer would pocket all of the loan proceeds. In one case, he placed four mortgages on a single property, using forged releases. Each lender thought it held the first and only mortgage. This scheme went on for some time. The developer continued to make debt service payments on each of the mortgages.
The fraud was eventually discovered by an experienced lawyer, who was a title company employee. There were two pending title orders with her office. Each transaction was a bit unusual, which caused her to scrutinize the documents more carefully. The first red flag was that the mortgages encumbering these properties had recently been satisfied with no apparent source of payment. Usually, with commercial properties, a mortgage is paid off when the property is sold or refinanced.
The employee pulled copies of the releases and studied them closely. Her first observation was that both releases had been notarized in Connecticut, even though each of the banks was based in NY. That alone would not have alerted her to the fraud. But, the next thing she noticed was that the same person notarized both releases, even though they were made by different banks. Armed with that information, the employee called the FBI. There were millions of dollars of losses in this case. Fortunately for the lenders, a lot of that loss was absorbed by the title insurers.
What Happens to Competing Mortgages in Fraud Cases?
The holder of the mortgage that is fraudulently discharged is an innocent victim. Likewise, the holder of the mortgage that is subsequently put on the property is an innocent mortgagee for value that believes it is in first position. As between two innocent parties, the first mortgage recorded would retain its priority notwithstanding the forged release. Were it not for the title insurance, the second lender would have suffered a total loss.
Red Flags Indicating Mortgage Fraud
• A release recorded shortly before a closing, with no apparent source of payment
• A release signed in the borrower’s state, not in the lender’s state
• A cash-out loan transaction following the release
• Misspellings and sloppy draftsmanship
• An assignment or modification of the loan is recorded after the release
Forged mortgage releases are only one of the many types of mortgage fraud perpetrated by wrongdoers. Forged deeds are also not uncommon.
When all is said and done, the best defense against title and mortgage fraud is to be alert and to work with attorneys and title professionals who are alert and experienced.