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Welcome to the Deerwood Realty YouTube channel. I'm John Schink, founder and managing broker of Deerwood Realty in St. Louis, Missouri. Mortgage fraud—fascinating topic for me as a real estate agent and broker. We certainly don't want to be involved in fraud; it's not good for our careers, so I try to avoid it like the plague. Even though I don't know everything to be 100% sure I won't be involved in it, from what I know and what I've seen over my more than ten years in the game, I thought this was an interesting topic we could discuss.

I was first tipped off about this by a tweet here that says: "A pair of New Jersey loan officers arrested for mortgage fraud, systematically originating loans for investment properties while labeling them as primary residences to get lower rates. You can rest assured this is the tip of the iceberg. The only question is whether the DOJ has the will to unpeel the onion." I don't think they do.

Mortgage fraud isn't typically thought of in a way where someone is victimized, and it's unclear who the victims here might be—perhaps the taxpayers that subsidize the 30-year mortgage? For those of you who don't know, your primary residence typically gets the best possible mortgage rate. Let's say, for instance, today's 30-year fixed rate is around 7%. You can walk into a mortgage office and secure a fixed-rate mortgage for a primary residence at about 7%. For an investment property, it would be around 10% to 11% at a minimum.

Now, you might ask why there's a difference. It's assumed there's more risk involved because if an investor lives in the house, they're likely to not let it go into foreclosure. However, if things get tough and the tenant damages the property, they're more likely to abandon the property, which rationalizes the higher mortgage rates.

Does this happen in practice? We'll get to that. Let's see how this discussion unfolds.

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According to HousingWire, the DOJ has charged one of America's top loan officers in an alleged mortgage fraud scheme. Let's cover ourselves a bit here—first, I'm not going to talk about the guy's name because I don't know anything about it, and second, it's alleged. The trial hasn't happened, so innocent until proven guilty.

The article reports that two former New Jersey-based mortgage loan originators have been charged with conspiracy to commit bank fraud by the U.S. Attorney's Office, District of New Jersey. These loan originators were likely the first people you'd talk to at a mortgage company. They'd take your application and mostly handle the loan processing.

From 2018 to October of 2023, these individuals allegedly conspired and engaged in a scheme to falsify loan origination documents sent to mortgage lenders in New Jersey and elsewhere, including their former employer, to fraudulently obtain mortgage loans. They routinely misled mortgage lenders about the intended use of properties to secure lower mortgage rates.

Often, they submitted loan applications falsely stating that the listed borrowers were the primary residents of certain properties, when in fact, those properties were intended to be used as rental or investment properties. If you're buying a multifamily property like a duplex, intending to live in one unit and rent out the other, do you mark it as an investment property? What if your circumstances change after purchase? It's a gray area.

The alleged scheme also included falsifying property records and the financial information of prospective borrowers to facilitate mortgage loan approval. Every mortgage is a challenge—you have to fit into specific boxes, and there are so many odd rules that can hinder your ability to secure a mortgage.

These former employees appear to have coordinated their actions to benefit financially from these lower rates, but it's unclear if their clients would have pursued loans elsewhere had they not secured these rates. How do these cases impact public trust in real estate and lending? How might this influence future regulations and policies within the industry?

That's all I have for you today. Thank you for watching and listening, and I'll catch you on the next one.

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