Recording Mortgage Fraud

Mortgage fraud, which usually starts with a forged deed or a deed obtained by fraudulent means, is a burgeoning national problem. Many are hurt by scam artists that employ deed or mortgage fraud to steal land that does not belong to them. This is not a new problem. It does not take long for the greenest of title claims attorneys to become acquainted with the various methods that con artists use to steal real estate. Fraud is one of the few real estate growth areas in these recessionary times. Title companies pay out more money because of claims grounded in fraud than for any other reason. According to the American Land Title Association, title companies set aside $858 million in reserves in 2007 to cover claims payments to their insureds. Since fraud is the number one call on those funds, the increase in deed and mortgage fraud can readily be seen on the underwriters' balance sheets. (See, www.alta.org.) The title industry has good reason to complain and is definitely receptive to any efforts that reduce fraud in the real estate marketplace. The devil, however, is in the details.

Arduous Process

First, those of us in the business know that to have a deed or other instrument of title actually recorded is not a process for the weak-willed. The clerks in the City Register's office examine documents very closely before recording the documents. The City Register recently issued a report demonstrating that 5.01% of the documents that were rejected between April and September 2008 were rejected for incorrect cross references, and 5.98% were rejected because the acknowledgment was in the wrong form. (see “Top Ten Rejections Reasons,” April-September 2008, “Report of the City Register to the New York Land Title Association,” Nov. 15, 2008), Since the City Register's Automated Recording Information System (ACRIS) has been in operation, the title industry has been working diligently to reduce the number of errors. During the recent lamented real estate boom, because of the transactional volume and the document review process instituted by the Register's Office to protect the public records, it could take months between the time that a document would be submitted to the City Register for recording and the actual recording date. The delay, known as the gap period within the industry, was an open door for fraud. Properties could and were sold several times because of recording delays.

Assistance Needed

The process to record a document is so complex with so many checkpoints and so many “t's” that must be crossed and “i's” dotted that no one outside of the industry can do it without help. In fact, I would surmise that the Daily News reporter used a city help desk employee to assist him in recording his deed to the Empire State Building. The perverse result of this news story is that it is certainly going to become more difficult, more time-consuming, and more costly, even for the general public, to place their personal intra-family transactions in the public record without obtaining the assistance of attorneys or title companies.

The Daily News' attempt to steal the Empire State Building was not a one-day story. On the following day, politicians, not known to be a camera- and ink-shy bunch, got their turn. Universally, they decried the “loophole” that the City Register is not required to verify the information on a deed. The loophole was termed “outrageous.” The one thing that was missed in the 24-hour news cycle was that the City Register does indeed verify information on all instruments submitted to the office for recordation. Of the hundreds of thousand of papers that go through their hands each year, this one got by them.

The News also ran a story on how someone used the identification of a deceased man to steal property and then took out a mortgage on said property. This is an ancient modus operandi for which title companies have been paying claims for years. But the problem has very little to do with the ease of recording documents. Deed and mortgage fraud takes place outside of the recording process where scam artists provide false identifications and forged documents at the closing table and not inside the City Register's office where the documents are to be put to record. In these cases, title companies that did not detect the problems ended up paying the claims and they most certainly have a vested interest in tightening their procedures to cut the frauds off at the pass. Often, the title company is among the victims of the conspiracy among scam artists. The City Register should not be blamed for events that take place outside its offices. By the time the fraudulent documents reach the City Register's care, custody and controls office, the fraud is complete, the money is gone and the scam artists have disappeared.

Proposing Solutions

Now come the solutions. One lawmaker has proposed that to prevent the scams, the city should send a letter to homeowners to verify the transaction. (See “Deep Fraud Loophole in Pol's Sights,” Daily News, Dec. 5, 2008) Presumably, since the city would not know about the transaction until the deed is presented for recording, the city would have to dedicate staff and other resources to intercept the deed, send the letter, match the response if and when it comes back to the deed, and then record the deed. In order to prevent someone escaping with the money from the transfer, someone would have to hold the funds in escrow until the City Register's Office “green-lights” the deed for recording. This would change the entire concept of a New York closing where in return for the seller giving the buyer keys to the property, the buyer gives money to the seller. Would the seller now have to wait to until the City Register says “okay” to pack up and move to Florida? Would the new lender have to wait to pay off the existing mortgage until the city gives its blessing, thereby imposing additional interest costs on the seller? Would parties have to return to the settlement table weeks later to finally close the transaction? This is not the solution.

The call for more vigilance is indeed timely. But “tightening procedures” impose costs. The industry and those in power need to have a discussion about those costs of more vigilance before we as a society impose such costs upon ourselves. Why should we lose sleep over an incident where an investigator most likely deceived a city employee, imposed a cloud on a title and did it without paying the requisite true transfer tax? We care because the cost of the impending “tightening” will impose costs far outside of the industry. At bottom, of course, is that the Daily News did not steal the Empire State Building.

Conclusion

There is certainly a problem with fraud in the residential real estate industry. It is inescapable that deed and mortgage fraud contributed to the downturn in which we currently find ourselves. Fraud imposes harms and damages (in time and money), pain and suffering upon the innocent and endangers our very economic system. That is the very reason why it should not be taken lightly and should be prosecuted to the fullest extent to the law. Even the Daily News reported that one perpetuator of a deed scam went to jail for a year because of her illegal acts. Every claims attorney could tell you of cases where caught conspirators became guests of federal or state taxpayers. They can also, however, tell of many more suspects who got away. The fault, alas, does not lie with the Office of the City Register. It lies with human greed. The battle against that part of the population has been going on since time immemorial and will continue for the foreseeable future. Thank God for that. Otherwise, how would we sell newspapers?

“It is a tale ' full of sound and fury, signifying nothing.”
' Shakespeare, Macbeth, Act 5, Scene 5.

recent headline in the New York Daily News reported: “It took 90 minutes for [the] Daily News to 'steal' the Empire State Building.” (Dec. 2, 2008,
p.1) The Daily News managed to steal the iconic building by “drawing up a batch of bogus documents, making a fake notary stamp and filing paperwork with the city to transfer the deed to the property.” Id. The purpose of this exercise was to disclose “the loophole ' . The system ' run by the office of the city register ' doesn't require clerks to verify the information.” Id. In the reporter's own words, the article “shows how easy it is for con artists to swipe more modest buildings right from [under] the owners. Armed with a fraudulent deed, they can take out big mortgages and disappear, leaving a mess for property owners, banks and bureaucrats.” Id.

Scams and Forgeries

Mortgage fraud, which usually starts with a forged deed or a deed obtained by fraudulent means, is a burgeoning national problem. Many are hurt by scam artists that employ deed or mortgage fraud to steal land that does not belong to them. This is not a new problem. It does not take long for the greenest of title claims attorneys to become acquainted with the various methods that con artists use to steal real estate. Fraud is one of the few real estate growth areas in these recessionary times. Title companies pay out more money because of claims grounded in fraud than for any other reason. According to the American Land Title Association, title companies set aside $858 million in reserves in 2007 to cover claims payments to their insureds. Since fraud is the number one call on those funds, the increase in deed and mortgage fraud can readily be seen on the underwriters' balance sheets. (See, www.alta.org.) The title industry has good reason to complain and is definitely receptive to any efforts that reduce fraud in the real estate marketplace. The devil, however, is in the details.

Arduous Process

First, those of us in the business know that to have a deed or other instrument of title actually recorded is not a process for the weak-willed. The clerks in the City Register's office examine documents very closely before recording the documents. The City Register recently issued a report demonstrating that 5.01% of the documents that were rejected between April and September 2008 were rejected for incorrect cross references, and 5.98% were rejected because the acknowledgment was in the wrong form. (see “Top Ten Rejections Reasons,” April-September 2008, “Report of the City Register to the New York Land Title Association,” Nov. 15, 2008), Since the City Register's Automated Recording Information System (ACRIS) has been in operation, the title industry has been working diligently to reduce the number of errors. During the recent lamented real estate boom, because of the transactional volume and the document review process instituted by the Register's Office to protect the public records, it could take months between the time that a document would be submitted to the City Register for recording and the actual recording date. The delay, known as the gap period within the industry, was an open door for fraud. Properties could and were sold several times because of recording delays.

Assistance Needed

The process to record a document is so complex with so many checkpoints and so many “t's” that must be crossed and “i's” dotted that no one outside of the industry can do it without help. In fact, I would surmise that the Daily News reporter used a city help desk employee to assist him in recording his deed to the Empire State Building. The perverse result of this news story is that it is certainly going to become more difficult, more time-consuming, and more costly, even for the general public, to place their personal intra-family transactions in the public record without obtaining the assistance of attorneys or title companies.

The Daily News' attempt to steal the Empire State Building was not a one-day story. On the following day, politicians, not known to be a camera- and ink-shy bunch, got their turn. Universally, they decried the “loophole” that the City Register is not required to verify the information on a deed. The loophole was termed “outrageous.” The one thing that was missed in the 24-hour news cycle was that the City Register does indeed verify information on all instruments submitted to the office for recordation. Of the hundreds of thousand of papers that go through their hands each year, this one got by them.

The News also ran a story on how someone used the identification of a deceased man to steal property and then took out a mortgage on said property. This is an ancient modus operandi for which title companies have been paying claims for years. But the problem has very little to do with the ease of recording documents. Deed and mortgage fraud takes place outside of the recording process where scam artists provide false identifications and forged documents at the closing table and not inside the City Register's office where the documents are to be put to record. In these cases, title companies that did not detect the problems ended up paying the claims and they most certainly have a vested interest in tightening their procedures to cut the frauds off at the pass. Often, the title company is among the victims of the conspiracy among scam artists. The City Register should not be blamed for events that take place outside its offices. By the time the fraudulent documents reach the City Register's care, custody and controls office, the fraud is complete, the money is gone and the scam artists have disappeared.

Proposing Solutions

Now come the solutions. One lawmaker has proposed that to prevent the scams, the city should send a letter to homeowners to verify the transaction. (See “Deep Fraud Loophole in Pol's Sights,” Daily News, Dec. 5, 2008) Presumably, since the city would not know about the transaction until the deed is presented for recording, the city would have to dedicate staff and other resources to intercept the deed, send the letter, match the response if and when it comes back to the deed, and then record the deed. In order to prevent someone escaping with the money from the transfer, someone would have to hold the funds in escrow until the City Register's Office “green-lights” the deed for recording. This would change the entire concept of a New York closing where in return for the seller giving the buyer keys to the property, the buyer gives money to the seller. Would the seller now have to wait to until the City Register says “okay” to pack up and move to Florida? Would the new lender have to wait to pay off the existing mortgage until the city gives its blessing, thereby imposing additional interest costs on the seller? Would parties have to return to the settlement table weeks later to finally close the transaction? This is not the solution.

The call for more vigilance is indeed timely. But “tightening procedures” impose costs. The industry and those in power need to have a discussion about those costs of more vigilance before we as a society impose such costs upon ourselves. Why should we lose sleep over an incident where an investigator most likely deceived a city employee, imposed a cloud on a title and did it without paying the requisite true transfer tax? We care because the cost of the impending “tightening” will impose costs far outside of the industry. At bottom, of course, is that the Daily News did not steal the Empire State Building.

Conclusion

There is certainly a problem with fraud in the residential real estate industry. It is inescapable that deed and mortgage fraud contributed to the downturn in which we currently find ourselves. Fraud imposes harms and damages (in time and money), pain and suffering upon the innocent and endangers our very economic system. That is the very reason why it should not be taken lightly and should be prosecuted to the fullest extent to the law. Even the Daily News reported that one perpetuator of a deed scam went to jail for a year because of her illegal acts. Every claims attorney could tell you of cases where caught conspirators became guests of federal or state taxpayers. They can also, however, tell of many more suspects who got away. The fault, alas, does not lie with the Office of the City Register. It lies with human greed. The battle against that part of the population has been going on since time immemorial and will continue for the foreseeable future. Thank God for that. Otherwise, how would we sell newspapers?