10 Infamous Cases of Foreclosure Fraud

Not long ago, real estate investment appeared to be the ultimate opportunity. With housing prices soaring, low interest rates and favorable financing conditions encouraged a larger number of individuals to dive into homeownership.

However, like many situations where things seem too perfect, the real estate boom soon revealed its negative aspects. In 2008, the housing market collapsed as a huge number of homeowners began to miss mortgage payments or abandoned properties they could no longer afford.

Unfortunately, the mortgage crisis pushed many homeowners into foreclosure. After failing to make mortgage payments, lenders used their legal right to seize the homes. The foreclosure process is lengthy, stressful, and complex, and adds the risk of con artists and scammers creating fraudulent schemes that exploit those going through foreclosure [source: Miller].

Certain foreclosure scams target homeowners who are on the verge of losing their properties. Others focus on lenders, and some may even be unintentionally caused by banks dealing with an overwhelming number of bad loans. We will examine 10 of the most infamous foreclosure fraud cases in recent years, including those that made the news and widespread problems that put homeowners at risk.

10: Tax Relief ASAP

In 1999, the Federal Trade Commission (FTC) issued a high-profile ruling against Tax Relief ASAP, a company that claimed to help homeowners at risk of foreclosure modify their mortgages — for an upfront fee that, in some cases, surpassed $5,000. Instead of providing actual assistance, many of the financially struggling homeowners were given excuses, being told their cases were "too far gone to fix."

Approximately 1,455 homeowners fell victim to the scam, with many losing their homes to foreclosure as they waited for Tax Relief ASAP to deliver the promised services. The FTC managed to recover enough funds in a settlement to reimburse about 25% of the victims' losses, but it was unable to assist those who had already lost their homes to foreclosure [source: Waggoner].

This fraud case reveals a typical scammer's tactic: after identifying a group in a desperate situation, they promise a solution in exchange for an upfront payment. Rather than helping the clients who have already paid, these scammers often invest their time and money in advertising their services [source: Waggoner].

These scams can be difficult to spot due to their clever marketing and aggressive sales tactics aimed at pushing victims into financial traps. Always check a company's reputation with your local Better Business Bureau and be cautious of any company that asks for an upfront fee to help resolve your foreclosure issues.

9: The Ibanez Case

The foreclosure process is further complicated by the practice of lenders bundling and selling loans as mortgage-backed securities. When a lender issues a mortgage, it may sell it, along with the right to foreclose, to another bank, which might resell it again. This cycle of selling mortgages to other financial institutions can create confusion about ownership when a borrower defaults on their payments.

This situation occurred in a 2005 case involving U.S. Bank, Wells Fargo Bank, and a homeowner named Antonio Ibanez. The lenders, who had purchased Ibanez's mortgage as part of their mortgage-backed securities transactions, were unable to prove they had the legal right to foreclose on his home. Documentation proving their claim was lost in the chaotic shuffle of securities trading during the housing boom [source: Dayen].

The foreclosure process is designed with multiple steps and requirements to protect homeowners from the threat of powerful financial institutions seizing their homes without proper legal channels. While the banks involved in the Ibanez case did not intentionally engage in fraud to push the foreclosure forward, the gaps left in the process raise significant concerns. During the real estate boom, thousands of mortgages were bundled and sold as mortgage-backed securities. If even a small portion were transferred in the incomplete manner seen in the Ibanez case, it could create significant problems for financial institutions attempting to collect on foreclosures in the future.

8: Foreclosure Fee Inflation

In most foreclosure cases, lenders are required to serve homeowners with a summons informing them that legal action is underway to seize their property. This aspect of the process is receiving more scrutiny as judges question the methods used to deliver these summons.

A notable case of this issue occurred in Florida in 2010, when Pasco County Circuit Judge Susan Gardner began investigating the fees charged by legal service providers tasked with delivering foreclosure notices. While Judge Gardner believed the cost for serving a foreclosure summons should not exceed a few hundred dollars, reports showed providers were charging more than a thousand dollars in some instances [source: Behnken].

The law firms and legal service companies under the judge's examination defended their fees, arguing that they were necessary due to the complexities of modern foreclosures. With multiple names listed on some mortgages and the legal requirement to ensure all relevant parties are notified, these firms asserted that they were simply protecting the lenders by making sure every individual associated with the property received notice of the legal proceedings [source: Behnken].

The judge expressed concern that these service providers were exploiting homeowners under immense stress, knowing that any additional fees would be tacked onto the total judgment in the foreclosure case. Legal proceedings move quickly, and the associated costs can accumulate fast. This creates an opportunity for dishonest parties to take advantage and charge excessive fees.

7: Fractional Interest Transfers

One of the most dangerous forms of foreclosure fraud is known as fractional interest transfers. The Department of Justice (DOJ) reports that this scam is somewhat more prevalent in West Coast states and can have long-lasting consequences for both homeowners and lenders.

The specific details of fractional interest transfers can differ from one scam to another, but they all involve the homeowner transferring part of their ownership to a company that claims it can stop the foreclosure. Through deceptive actions, such as enlisting "straw owners" to take over part of the property and then filing for bankruptcy, the fraudster manages to stall the foreclosure. This service often comes at a cost, as the homeowner not only relinquishes a share of ownership but may also be required to pay a monthly fee [source: Limprecht].

Ultimately, these companies almost never succeed in halting the foreclosure. Their bankruptcy filings merely delay the process and sometimes even push an unsuspecting homeowner into bankruptcy. Investigations by the DOJ have shown that, in many instances, the companies running these schemes never actually aim to help their clients avoid foreclosure. Instead, they employ a series of questionable legal maneuvers to extract as much money from their victims as possible before the foreclosure concludes [source: Limprecht].

6: Accidental Foreclosures

For a homeowner, this scenario has to be the ultimate nightmare: After faithfully making payments on a home they can afford, they suddenly find that an unexpected error in the lending process has gone unnoticed, and the bank is now poised to take away their hard-earned home. In the chaotic aftermath of the housing crash, this has become a frightening possibility for some homeowners.

These cases are not about intentional fraud. In some instances, such as when Lender A transfers a loan to Lender B but the homeowner mistakenly sends payments to the wrong lender, the issue may stem from inadequate notification or the homeowner failing to track who holds the mortgage. In other cases, such as when a foreclosure results because an ex-spouse took out and defaulted on a home equity loan, these actions may border on fraudulent behavior.

A review of articles on this topic suggests that widespread issues with careless, incomplete, or confusing paperwork could lead to wrongful foreclosures. The key takeaway is clear: Homeowners must keep meticulous records of their mortgage dealings and work to build strong relationships with their lenders to catch minor errors before they snowball into major problems [source: Chittum].

5: Document Forgery

Many of the foreclosure frauds we've discussed thus far involve some type of document forgery. However, a more prevalent and notorious problem did not stem from direct fraud but from lenders struggling to manage the surge in foreclosures that followed the housing collapse.

In 2010, major banks such as Bank of America, JPMorgan Chase, GMAC's mortgage division, and PNC Financial temporarily stopped the foreclosures they were handling after several state courts ordered a review of mortgage documents [source: International Business Times].

The allegations of mishandling were mostly consistent across states: Investigators claimed that, to process thousands of mortgage documents each month in response to the increasing volume of foreclosures, banks instructed staff to “rubber stamp” signatures on documents. In some cases, investigators found that the same official’s name had been signed in various handwriting styles on different papers [source: International Business Times].

These quick measures taken by banks are in direct conflict with the foreclosure laws in most states, which mandate specific procedures to ensure that lenders thoroughly review a mortgage before initiating foreclosure. The consequences remain uncertain; although these actions are still being examined, as of early 2011, banks have been permitted to resume some foreclosures.

4: The Thorne Case

A fundamental principle in any legal matter is that individuals must be licensed to perform legal tasks for compensation. As banks face mounting mortgage defaults and an overwhelming foreclosure process, their attempts to reduce the burden can violate this essential rule.

In a 2011 case, Jonathan and Darlene Thorne claimed that their lender and its service provider hired unlicensed contractors to complete legal paperwork. Since the foreclosed homeowners ultimately bear these costs, the Thornes argue that this use of unlicensed contractors constitutes fraud [source: Field].

Should this case be decided in favor of the plaintiffs, it could reshape the entire foreclosure process. Companies assisting real estate attorneys with the overwhelming volume of foreclosure paperwork might face expensive restructuring, and those attorneys could lose their ability to quickly process foreclosures. On the flip side, a decision tightening the legal requirements for lenders and attorneys could force more thorough attention to foreclosure paperwork, potentially preventing inadvertent foreclosures from occurring [source: Curry].

3: The Ola Case

In 2011, a case emerged in Florida that highlighted one of the most ingenious -- and damaging -- frauds to arise from the housing crisis. Authorities claim that George Ola from Pasco County forged quitclaim deeds (documents transferring home ownership) to take control of several vacant foreclosed homes. He then rented these properties, pretending to be a real estate investor with a portfolio of homes that needed tenants [source: Linton-Smith].

Property managers grew suspicious after Ola repeatedly failed to make payments for services rendered on the homes. This triggered an investigation that uncovered the fraudulent deeds. While Ola could face jail time if convicted, many of his unsuspecting "tenants" now face the unsettling reality of needing to find new homes, as they never had any legal claim to the properties they rented [source: Linton-Smith].

The fraud in the Ola case is particularly damaging because it harms several innocent parties, such as property managers and tenants. With a large number of homes sitting vacant due to the housing collapse, authorities must remain extra vigilant to catch crafty fraudsters who aim to exploit the situation.

2: The Pines Case

Foreclosure is a distressing event that forces homeowners to leave their homes. The emotional toll of losing one's house can push individuals to act in extreme ways, and in one instance, it even led to criminal accusations against a foreclosure attorney.

In February 2011, attorney Michael T. Pines from Encinitas, California, was arrested on charges of violating a restraining order while attempting to prevent a home from being foreclosed. The lender had stationed security personnel at the property, a measure they attributed to Pines' controversial reputation as an outspoken foreclosure attorney [source: Amvona].

Authorities reported that Pines trespassed on the property, threatening a security guard, and returned the next day, escalating the situation with a violent altercation. A video posted on San Diego's 10News.com showed Pines telling a security guard that he would "precipitate an armed confrontation" over the property [source: Amvona].

The emotional strain of losing a home often leads to heightened tensions. However, there's a fine line between advocating for a homeowner and undermining the legal foreclosure process by resorting to unlawful behavior. Violent threats only exacerbate the already painful foreclosure process for all involved parties.

1: The ACORN Case

The 2009 incident highlighted a clash between emotion, civil disobedience, and the legal system over a foreclosed property. A protestor affiliated with the Association of Community Organization for Reform Now (ACORN) was arrested in Baltimore after allegedly breaking into a foreclosed home as an act of protest [source: Miller].

ACORN representatives reportedly anticipated some sort of response, such as an arrest, and their aim was to raise awareness about the increasing number of foreclosures. Their intention was to humanize the issue, showing that foreclosure results in families losing their homes, and they were concerned that the emotional toll of the process would be overlooked as banks and courts became overwhelmed with paperwork [source: Miller].

As of 2011, the U.S. continues to face a significant foreclosure crisis, with no clear resolution that protects homeowners while safeguarding banks' investments. The prevalence of fraudulent schemes involving criminal activity, careless officials, and overburdened staff only adds to the complexity, making actions like protests, arrests, and civil disobedience seem more justified. The foreclosure crisis is far from over, and both homeowners and lenders must stay vigilant for emerging scams.