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June 2010
At this time, I would like to cover two very timely topics. First is about the financial markets, followed by mortgage fraud and fiduciaries. Financial MarketsMay 2010 was the worst May performance for the Dow Jones Industrial Average since 1940. On the other hand, both 30-year and 15-year term mortgage rates remain relatively steady at just below 5.0%, something that hasn't occurred for over 20 years. Are you confused? Welcome to the club. We are in the midst of unchartered territory in the financial history of our country, not to mention the world. This Time Is Different: Eight Centuries of Financial Folly. David Stevens, head of FHA, was quoted on Bloomberg News (May 24, 2010), "Loans guaranteed by the Federal Housing Administration, the U.S.-owned mortgage insurer, may be involved in more home-purchase transactions than borrowing financed by Fannie Mae and Freddie Mac." At the Mortgage Bankers Association conference, he said, "This is a market purely on life support, sustained by the federal government." How much of this trouble is psychological and how much is economic? The answer is probably more a function of perspective. Ronald Reagan is known for stating: "if your neighbor is out of work, it is a recession. If you are out of work, it is a depression." The bottom line is that until the unemployment numbers improve, there is no hope for an overall recovery. Our economy is contracting, generating a cash flow crisis. That means less spending, which means less taxes going into the coffers, which mean less available cash for necessary infrastructure and quality of life issues. A general cash flow crisis is occurring, both in the home, in business, in the governments around the world and around the local communities with no end in sight. Where is the catalyst, where is the ignition switch? I believe it lies in real estate. Go back to the first part of this letter. Mortgage rates are at unprecedented lows, at least for a generation. Sometime soon the ignition switch will kick on and people will realize the good value available from investing in real estate. I know I have used this Will Rogers before, but it is true: "Buy land. They ain't making any more of the stuff." Of course, he also said: "Everybody is ignorant, only on different subjects." Mortgage Fraud and Fiduciaries:A fiduciary cannot have a conflict of interest. A fiduciary will be liable to account if proven to have acquired a profit, benefit or gain from the relationship by one of three means.
Therefore, it is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where his fiduciary duty conflicts with another fiduciary duty, and not to profit from his fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest. Why am I bringing this up now? Read the following excerpt from the FBI's Financial Fraud Report to the Public, Fiscal Year 2008: The FBI investigates mortgage fraud in two distinct areas: fraud for profit, and fraud for housing. Fraud for profit is sometimes referred to as "industry insider fraud" and the motive is to revolve equity, falsely inflate the value of the property or issue loans based on fictitious properties. Based on existing investigations and mortgage fraud reporting, a high percentage of all reported fraud losses involve collaboration or collusion by industry insiders. Although there are many mortgage fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders. The FBI is engaged with the mortgage industry primarily in identifying fraud trends and educating the public. Some of the recent mortgage fraud schemes encountered by law enforcement include equity skimming, property flipping and mortgage-related identity theft. Common equity skimming schemes involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors. Law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers, and shell companies, along with industry insiders to conceal their methods and override lender controls. Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially valued properties are then repurchased several times for a higher price by associates of the "flipper." After several sham sales, the properties are foreclosed on by victim lenders." In these stressful economic times, quick fix schemes are increasing; opportunists abound. It is most important to be vigilant in the settlement process. That's when the transaction comes alive. One of our underwriters issues almost daily warnings including the following example: "We have learned that another (unnamed) title insurance underwriter has, either directly or through agents, received counterfeit checks in 9 states, all of them drawn on Canadian banks. There were 2 additional transactions where the (counterfeit) checks were drawn on Dover Federal Credit Union in Delaware. All of the transactions involved the following common facts:
These scenarios share the common fact that the closing office receives a check for an amount greater than the earnest money deposit and later receives a request that the excess funds be returned. It appears that the perpetrators are disbursing multiple fraudulent cashier's checks to catch a few unsuspecting offices who will disburse prior to collecting the funds. NEVER disburse any funds unless you have received a wire or you have confirmed that good funds have been received. Moral of the Story: Wired funds are the best form of payment." The old catchphrase remains: "If it sounds too good to be true, it usually is." We in the settlement services industry are on the front lines of this phenomenon. We are the fiduciaries to every transaction; the independent eyes and ears. We must follow the instructions of the lender (and of the title commitment)! THIS is why it is important to have the perspective of experience and trust from your counsel and your settlement service provider. Read. Enjoy. Use the news. Check out the Title Village website updates.
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