BLOG VIEW: There's good and bad news for lenders when it comes to real estate owned (REO) deed fraud as we head into the third quarter. CoreLogic's Sam Khater blogs that REO inventory is increasing mainly due to the fact that foreclosure procedures have improved considerably since the pre-2010 ‘robo-signing’ scandal. Other media outlets are reporting that foreclosure inventories continue to decline with the stabilization of the U.S. economy. Improving processes and decreasing volume mean cost savings to lenders in need of shelter from the current wave of lending regulations and federal lawsuits reducing profits.
However, with the good news comes the bad: Increased fraud. John St. Lawrence, claims counsel for Old Republic National Title Insurance Company/The Fund, writes in a recent article that ‘zombie’ properties, lengthy foreclosure time periods and increased REO inventories are forming a ‘possessorship vacuum’ that creates an opportunity for forged deeds and fraud.
As a veteran of the title industry and 18-year real estate attorney, I see fraudsters improving their methods to continue to profit from weaknesses in real estate procedures. St. Lawrence's article instructs attorneys to be vigilant when representing buyers in transactions with quitclaim deeds – but the new choice for fraud is the less-scrutinized special warranty deed, which also is frequently used in legitimate REO sales.
Fraudsters traditionally use quitclaim deeds since there are minimal transfer tax costs. However, with county recorder offices under increased pressure to stamp out quitclaim deed fraud, it's not unusual for a county to notify a homeowner that a quitclaim deed has been filed on a property. This, in turn, has forced many fraudsters to pay the higher recording fees associated with special warranty deeds in the hope of going undetected for a longer period of time.
Unfortunately for REO servicers, the homeowner typically has little interest in hiring a lawyer to defend the stripped ownership interest since the home has been foreclosed. The fraudsters use the time delay between their recording the fraudulent deed post certificate of title and its discovery by the servicer to profit from the property through rental or resale to an unsuspecting buyer.
In some cases, to bolster the appearance of validity, the fraudster sets up a shell company holding multiple properties transferred into its name with forged special warranty deeds. Then the shell company presents itself to potential tenants and buyers as an institutional owner that has bought large numbers of REO properties for profit. The shelter of the special warranty deed and corporate name make the fraud appear more believable.
So what preventative steps can be taken by servicers to stop this wave of sophisticated fraud? The good news is, in my opinion, servicers can support a three-step approach with minimal cost, as follows:
1. Ease of reporting by law enforcement and neighborhoods;
2. Deed reviews by REO property management teams; and
3. Underwriter awareness efforts for their agents.
The frontline defense against fraud is the police and neighborhood watch groups. It is not uncommon that the police are called due to suspicious residents in homes that have been vacant. Neighborhood communities that have suffered under high foreclosure rates have been active in protecting their neighborhoods and trying to rebuild. Fraudsters rarely go through an association approval process or pay past due association fees. Not only that, when police are notified of suspicious activity by a neighbor or an association, many times the complaint is diffused when the fraudster produces an illegitimate deed or lease. This, in turn, results in the police citing it as a civil matter.
In a certain deed fraud case that took place in 2013 in Miami, several dozen fraudulent deeds were filed before the perpetrators were investigated – and by then the culprits had disappeared, leaving tenants facing eviction and unsuspecting buyers without a home. The police and the county had been notified, but there was no intervention until it was too late. Indeed, the fraudsters' actions were bold and blatant.
If the servicers had been made aware of the fraud, they could have stepped in before the damage was done. Servicers can provide local communities and police with a toll free number to report suspicious activity – and, as in the Miami case, one call can stop the fraud dead in its tracks.
These fraudulent transfers typically occur at the beginning of the year or property tax season to allow a fraudster the longest amount of time to make money before the tax bill becomes due and the servicer realizes the name change. Servicers should be vigilant during this time of year to watch for this scam and make sure their REO property management team has the tools to verify property deeds. Most counties post deeds online so they can be viewed free of charge. What's more, a copy can be downloaded, making this review inexpensive.
Finally, servicers should encourage title insurance underwriters to keep their agents informed on how to detect fraudulent deeds to eliminate re-sales. Fraudulent deeds tend to have similar features that make them suspect, including the following:
- Notary from state different than the property;
- No scrivener listed;
- Missing or incomplete acknowledgements; and
- Minimal transfer taxes.
With underwriters' losses and lawsuits since 2008, agent awareness has been the key to decreasing this type of fraud and improving compliance for the title industry.
In this regard, underwriters can be strong allies to the REO industry in reducing fraud by forged deed.
Renee Marie Smith, Esq., is president of Smith Title Services and an expert on foreclosure fraud. She is also author of the My Guru book series, including the My Short Sale Guru's Guide. She can be reached at email@example.com.
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