The Straw that Broke the Lender's Back

Cases of mortgage fraud have surged since the beginning of the housing boom, with con artists taking advantage of the time's lax lending standards in order to acquire property under false pretences. Despite more stringent lending practices being in place today, cases of fraud still exist, particularly those involving straw buyers.

A straw buyer is a person with good credit who applies for a home loan on a property that he or she never intends to occupy. Straw buyers are often employed when a person wanting to buy a home doesn't have good enough credit to qualify for a home loan themselves—or in other cases, they simply want to get much better loan terms than their credit score would allow.

Typically what happens is Mr. Scam Artist approaches Ms. Good Credit, and asks her to purchase a home on his behalf, using her good credit. He explains that he can't buy the home himself because he doesn't have sufficient credit, and that she wouldn't be responsible for any payments or upkeep of the property. In fact, he tells her, she won't have any responsibility towards the home at all, except for being the official borrower listed on the loan documents.

There are usually two reasons why Ms. Good Credit would want to help Mr. Scam Artist with his plan. Firstly, Mr. Scam Artist may promise to pay Ms. Good Credit in exchange for the use of her name and credit information. This may be an upfront amount of a few thousand dollars, or Mr. Scam Artist may agree to give her a portion of the proceeds when the house is eventually sold.

There's also the possibility that this set-up is part of a larger scam in which Mr. Scam Artist and Ms. Good Credit work together to find a dishonest appraiser to provide an inflated assessment of the property's value. Ms. Good Credit gets a loan based on this inflated appraisal, and then the three people involved share the profits.

If money isn't the motivating factor for Ms. Good Credit to become involved in this type of transaction, then a personal relationship usually is.

Oftentimes people will act as straw buyers for friends or family members, helping them to buy a home that they couldn't otherwise get financing for. In these situations, people assume that they're not doing anything wrong since their intentions are pure, but this is not the case. Regardless of her reasons to get involved, Ms. Good Credit is participating in mortgage fraud by falsifying information on her loan documents, and can face serious fines and jail time if caught.

Suppose that Ms. Good Credit agrees to the plan, gets a mortgage, and buys a home in her name on behalf of Mr. Scam Artist. If Mr. Scam Artist fails to make the mortgage payments, the bank will go after Ms. Good Credit to recoup their loss. In scams where both parties are involved in inflating the property appraisal, it's highly likely that Mr. Scam Artist will simply take his money and run, leaving Ms. Good Credit holding the financial bag.

In this scenario, both the straw buyer and the lender have been swindled, but the straw buyer will get no sympathies from either the bank or from federal officials. What she did was illegal, whether she knew it or not. Not only will the lender go after her for any monies lost, but she'll also face felony criminal charges for her participation in the scheme.

Unfortunately, straw buyer scams harm more than just a single person or lending company; they can result in inflated property values and an abundance of foreclosures, which in turn lowers the property values of neighboring homes. Frauds like these have a domino-like effect on the rest of the economy. If anyone approaches you to participate in a straw buyer scheme, say no and walk away.

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