Detecting Fraud and Forgery in Real Estate Transactions Claire T. Manning Chicago Title Insurance Company Columbia, South Carolina 800-922-8814 [email protected]

Real Estate is an important asset and often the subject of fraud and forgery

The public land records relied upon in conducting title examinations are far from perfect.

Fraud and forgery associated with documents recorded in the land records, are sometimes difficult to detect.

Therefore … title insurance is needed

In recent years, all title insurance companies have experienced an increase in title claim losses.

Fraud and Forgery • 4-5% of claims made • 20% of losses paid

Factors contributing to fraud and forgery fraud

• Increase in fraudulent real estate schemes • Relaxation of underwriting standards caused by the frenzy in refinance activity • The general depreciation of real estate prices

Most claims, including fraud and forgery claims are preventable

“Red Flags” in the land records or at closing should increase the real estate professional’s level of scrutiny.

Short Story Mary was a young, single mother in desperate need for quick cash to help with day-to-day living expenses. John, a good friend of Mary’s brother, coincidentally appeared in Mary’s time of need and represented himself as an experienced financier. Because for John’s high-level contacts in the lending industry, Mary was reassured that her lack of employment and bank account would not be a negative influence on her ability to obtain a loan secured by a mortgage on the home her parents had left her. John introduced Mary to a friend of his who was employed with a local lender and assisted with the loan application process. The lender, obviously anxious to assist Mary with a 12 percent interest rate and a 21 point loan, began the

A title search revealed the fact that the last conveyance of record was to Mary’s mother and father. The title company required deeds from the parents to Mary.

The plot becomes confused when it was discovered that Mary’s mother had died a year earlier, her father had been deceased for nearly four years. Nevertheless, Mary, with the assistance of John, was able to produce a warranty deed from the mother and a quitclaim deed from the father. The deeds contained a recent notary acknowledgement even though both deeds were dated in 1995. Both deeds were recorded (eight years after the alleged execution), the loan funded, and the title insurance policy issued.

Mary soon defaulted on the loan. Prior to the foreclosure, Mary’s siblings (who were the heirs to the property) filed an action challenging the validity of the deeds and the mortgage. The assignee of the mortgage, as successor under the title policy, tendered the defense of the litigation to the title company and counsel was retained. Lender’s counsel filed a third party action against the notary who witnessed the signatures on the deeds.

Red Flags: •Eight-year old deeds from the parents •Intra-family transfers (including transfers between spouses) •Quit-claim deed (as opposed to warranty deed) •Individual who appears with original documents signed by others

Each individual involved in the real estate closing process needs to develop a sixth sense to look beyond the obvious and take issue with the more subtle “red flags” that arise.

Motivations for forgeries • Financial gain • laziness

The absentee property owner

Unimproved property owned by nonresidents

The absentee spouse Where one spouse “volunteers” to obtain the signature of the other spouse, significant red flags are raised

Domestic litigation

The unseen party

The unusually rushed closing

Techniques to protect against fraud and forgery in real estate transactions

One Real estate professionals should be vigilant to any “red flags” raised in closing situations. Being called paranoid should be considered a compliment! Use a critical eye and develop an inquiring mind! Use common sense!

Two Real estate professionals should not hesitate to investigate signatures with witnesses and notaries. Honest witnesses and notaries will not mind!

Three

In these days of the Internet, it is often possible to check names, addresses and telephone numbers of parties instantaneously.

Four Real Estate professionals should not hesitate to ask questions of lenders, mortgage brokers and others involved in closings. Everyone involved in a closing (with the exception of the “bad guys”) should be interested in eliminating fraud and forgery and should cooperate when questions are raised.

A technique that is sometimes used is to mail a letter to the address of the property involved or to the address where the tax notices are mailed. The real property owner may be alerted to a scheme involving his or her property.

Five

Six Real Estate professionals should not let any party’s demand for haste result in a failure to examine the “red flags”

Seven Notaries should be encouraged to secure their seals

Eight Notaries should be encouraged never to acknowledge signatures by telephone.

Nine Real Estate professionals should involve and cooperate with law enforcement authorities.

Ten Powers of attorney are often suspect. The use of a power of attorney, alone, should raise a red flag.

Eleven Signatures on closing documents should be compared with signatures in the chain of title. (A current seller has most likely signed a prior mortgage. These signatures can be compared.) Pay attention to “shaky” signatures of aged persons and persons of failing health, particularly if later signatures are more youthful.

Jane Doe

Twelve Pay attention to spelling. Forgers often misspell their victims’ names or sign them differently, like with or without middle initials, with or without designations such as “Sr.”, “Jr.”, “M.D.”.

Thirteen Original documents should be examined. Examining photocopies is no substitute. Examining originals makes it easier to tell whether the signature was done smoothly, by the experienced hand of the true signatory or, instead, in a series of movements with the pen being lifted or the pressure being reduced as each stroke is accomplished. Tracings are also easier detected by examining originals.

Fourteen Mortgage satisfactions of record by institutional lenders should be compared to suspect mortgage satisfactions that appear at closings. Institutional lender often stick to the same forms and same signatories. Variations should raise red flags.

Fifteen Mortgages satisfied outside closings may raise red flags. Although individuals often pay off mortgages in the normal course, according to a normal payment year mortgage is paid every month for years and then is suddenly satisfied, not in connection with a closing, the real estate professional should pay particular attention to the satisfaction.

Sixteen Make telephone calls to signatories to ask if they have actually signed documents.

Another short story Sam Wheeler is a seller of mobile home and land packages. He markets mostly to firsttime buyers, and he advertises the lowest up-front costs in the industry. Sam tells closing attorneys that buyers have made down payments prior to closings, ranging from $3,000 to $5,000.

. . .continued Sam asks the closing attorneys to show the amount the borrowers paid in his office on line 303 of the HUD-1 Settlement Statement as “cash from borrower”. The problem was that the funds were never paid. The seller, buyer and lawyer signed the HUD-1 as if it was factually correct. These individuals face federal charges.

Flip transactions Two closings in one day . . .Steve Tyler buys a house for $55,000 from an elderly widow, Susan Jones, and sells it to a young couple, David and Myra Smith, for $80,000. David and Myra obtain a loan from ABC Funding. There are two sets of HUDs and two deeds.

We try to teach our attorneys not to handle flip transactions Typically, the clients expect the proceeds from the second transaction to be used to fund the first transaction. Often, the borrowers qualify for the loans with forged appraisals, employment verifications, and credit reports.

Red flags for flips • Properties closing at inflated prices. • Back to back closings of the same property (two sales or a sale and a refinance). • The same parties involved in numerous transactions

• Imposter borrowers and borrowers who don’t appear to be financially sound enough to purchase properties. • Brokers who appear not to be interested in following rules.

One last true story The owner of a company in Columbia which prepares closing packages for attorneys decides not to satisfy a mortgage with the funds available from the closings. Instead, she makes a copy of a similar mortgage satisfaction of record, forges a satisfaction for her mortgage and records it . . .

Bottom line. . . • There are many, many ways closing attorneys and others involved in real estate transactions can get into trouble with fraud and forgery situations. We must be vigilant!

The End