Utah once had the dubious distinction of being the penny stock fraud capital of the United States. Now it seems to be vying for top honors as a hotbed of mortgage loan scams, in the view of one Salt Lake-based mortgage lender.
"In my opinion, the mortgage industry is looking more closely at Utah than ever before," said Scott M. Quist, vice president and general counsel for Security National Financial Corp. He said he knows this because the company can sell a Utah mortgage for one interest rate and the same loan from, for example, California, for a lower rate.
Lynn Beckstead, president of the company's subsidiary, Security National Mortgage, agrees.
"Utah is the bottom of the bucket because we refinance more often and we have a lot of 'flips' and frauds that have created some price problems," said Beckstead. "We're paying about a 20th of a percent more in interest rates than the best-performing states."
Security National Mortgage is currently litigating a half-dozen fraudulent mortgages, and one Utah County resident is said to be awaiting sentencing on a complex mortgage scam in which Security National ended up owning the man's half-million-dollar residence.
Beckstead said this deal is typical of the kind of frauds he is seeing these days. Here's how this one worked:
A homeowner in Highland was trying to sell his home himself for $450,000 but was only getting offers well below that figure.
Then a man came along who told him he would give him his price plus about $50,000, but it would take a little work to put the deal together. It
involved a California man buying the house and then renting it back to the local man who wanted to live in the house but couldn't afford to buy it.
The catch was that the loan would be for $505,000, with the extra amount being ostensibly used for the down payment.
All the seller had to do was represent to the escrow office at closing that the buyer had, by mistake, sent him a $60,000 check as his down payment — it should have gone directly to the title company. He had deposited it in his own account, out of which he would write the title company the down-payment check.
The buyer, of course, hadn't sent the seller a dime. This was simply a ploy to cover the fact that the seller was making the down payment, not the buyer, intending to get the money back from the loan payout by Security National.
A mortgage company in California qualified the buyer, the deal was closed, the seller got $505,000 and then the California lender sold the loan to Security National, a common practice. The house had appraised at $565,000, so to Security National the $505,000 price seemed reasonable.
But when the lender tried to insure the property, it learned that the California "buyer" could not be found. He had used the Social Security number of a dead man to buy the house.
When the renter failed to make payments on the mortgage and the buyer was found to be non-existent, Security National went after the seller for fraud.
The seller, of course, claimed he was merely a victim of the scam artists . . . but he was a victim who had collected over a half-miller dollars by making false representation at the closing.
"That doesn't play in court, the 'Devil made me do it' defense," said Beckstead. "The seller had committed fraud by omitting information that would have affected the loan. He told us the buyer had given him the $60,000 check when that had not occurred.
The moral for home sellers who are willing to get "creative" in the current slow market for luxury homes is this: don't.
"What the consumer has to know is that these loans are priced and underwritten based on risk," said Beckstead. "If they give information that is false or deceptive, that alters the risk for the lender."
Another common practice these days is "flipping." It works like this:
Say a contractor has built a house and puts it up for sale at $135,000. A potential buyer says he wants the house but has no money for a down payment. The contractor says "no problem." There are mortgage lenders who will loan him the money for the down payment. It will be reappraised for $175,000 so there will be no problem getting a mortgage.
Then the buyer turns around and refinances the house, often the same day, for $140,000 ($5,000 goes for fees to the lender) then the mortgage company sells the loan to someone like Security National, who believes it is loaning $140,000 on a house worth $175,000.
Thus, the lender ends up making a 105 percent loan but doesn't know it. It has been defrauded — even if the buyer makes the payments.
Moral: If you, as a buyer, are asked to do two separate closings, one for the down payment and one for the main mortgage, beware.
The issue is further complicated by the fact that the old standard for mortgage loans — the buyer puts 20 percent down and gets a loan for 80 percent of the home's value — has gone the way of three-bedroom split-levels for $30,000.
"Now loans with only 5 percent or 3 percent down are common," said Quist, "And three years ago, you could get a mortgage for 125 percent of the home's value. That's how loose — or competitive — it's gotten."
E-MAIL: max@desnews.com