Posted on: 23rd May, 2007 03:03 pm
I wanted to know how does a dual loan scam works, so that I could avoid if faced with such situation
Hi Jcohen,
Let us suppose you have a 30 yr frm of $350,000 with rate of 7.875% with no points from a bank and some broker approaches you with a proposal that you cancel this mortgage and take a new mortgage from him for the same amount & rate. He will also give you $1500 cash. For this he will make a loan for 9.5% which would be changed to a 7.875% loan after just 2 payments & will have no closing costs involved. The added payments would be of $400 and as per his calculations you would gain $1100 and also benefit from saving on closing expenses of approx $4000.
Now how does this offer is a scam?
If a lender is offering a frm with 7.875% of 30 yr. term with no points then he will pay four points on a 9.5% mortgage to this broker. Lender would know that he will be able to recover the four points within 3 yrs. time. But if by prearrangement as in this offer the loan is paid off within a short period of time lender will be at loss.
Lender pays $14,000 for this new loan (4 points X loan amount $350,000). If the mortgage is paid off after two payments then he will only get excess interest of something less than $1000, the difference in interest for 7.875% and 9.5% loans.
Broker in this transaction gets $14,000, out of which he pays you $1500 & also pays for the $4000 closing costs and makes a gain of $8500. If you were to agree to this scheme then you will be part of this scam.
David
Let us suppose you have a 30 yr frm of $350,000 with rate of 7.875% with no points from a bank and some broker approaches you with a proposal that you cancel this mortgage and take a new mortgage from him for the same amount & rate. He will also give you $1500 cash. For this he will make a loan for 9.5% which would be changed to a 7.875% loan after just 2 payments & will have no closing costs involved. The added payments would be of $400 and as per his calculations you would gain $1100 and also benefit from saving on closing expenses of approx $4000.
Now how does this offer is a scam?
If a lender is offering a frm with 7.875% of 30 yr. term with no points then he will pay four points on a 9.5% mortgage to this broker. Lender would know that he will be able to recover the four points within 3 yrs. time. But if by prearrangement as in this offer the loan is paid off within a short period of time lender will be at loss.
Lender pays $14,000 for this new loan (4 points X loan amount $350,000). If the mortgage is paid off after two payments then he will only get excess interest of something less than $1000, the difference in interest for 7.875% and 9.5% loans.
Broker in this transaction gets $14,000, out of which he pays you $1500 & also pays for the $4000 closing costs and makes a gain of $8500. If you were to agree to this scheme then you will be part of this scam.
David
some newer versions of this type of scam involve what is called successive refinancing. in such scams a borrower agrees with such broker to refinance every four months at higher rate & share the rebate money broker gets from the lender. for loans of bigger amounts the rebate amount comes out to be quite substantial. clever brokers spread these deals among many lenders so that the scam cannot be suspected.
For more info, check out http://www.fbi.gov/publications/financial/fcs_report052005/fcs_report052005.htm#d1
Regards,
Scott Miller