Subject To (SubTo) and Mortgage Fraud

[Ken M.]

If you read that as "SubTo IS Mortgage Fraud" go back to your 4th grade teacher and apologize for not listening in class about sentence structure.

Subject To is legal, when done legally.

The problem comes in when you fill out lending or tax forms and you omit information. Sure your SubTo mortgage doesn't show up on your credit report, but you still owe the money you took over when you did the SubTo. The government  demands that you list that on the forms. It is not an option. 

The form reads Click on to expand:

Prosecutors might file federal charges for bank fraud, loan and credit application fraud, wire fraud, or conspiracy to commit any of these crimes. They can also file federal racketeering charges under RICO (the Racketeer Influenced and Corrupt Organizations Act), especially in cases involving large-scale mortgage fraud schemes.

(18 U.S.C. §§ 1014, 1341, 1343, 1349 (2024).)

Loan application fraud statutes carry up to 30 years of prison time and $1,000,000 in fines. These penalties apply whether the defendant is the principal actor, attempted the offense, or conspired to commit fraud.

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You were smart enough to buy a property SubTo, don't be stupid enough to lie about it.

[Jay Hinrichs]

Quote from @Ken M.:

Quote from @Jay Hinrichs:

what are you talking about..  failing to list it on a loan applications for a new loan ?? 

Correct. And I recognize that you have done SubTo and lending longer than most people on BP have been alive.;-) But, thanks for giving me the entre' to 'splain to the new folks.

The loan application asks about **all properties**. So, if someone has a few "SubTo" properties, they have the debt of those properties and they have to make payments on them. It affects their debt to income ratio. Lenders look for the ability to repay money that they lend out. 

Since a large portion of loans are sold on the secondary market and backed by the US Government, the government rightly wants to know what their risk is. An underwriter needs that information to determine risk. If a "Morby method" student has a SubTo, it doesn't show on a credit report, so it is not readily apparent to the lender.

The lender has a right to know that information. It must be disclosed or it is possibly deception on a loan which is mortgage fraud. And that carries stiff penalties. Does it always get caught? No. But at the juncture of a bad economy and a lot of failed loans, the government rounds SubTo people up like cattle and looks at the failed loans to see who to prosecute.

And specifically, any singular SubTo can be prosecuted at any time at the federal or state level if not done legally and properly. Not going through escrow, (using table top closings), hiding the transfer by not recording and hiding the transfer in a land Trust can all be construed as intention to deceive. Taking advantage of people in foreclosure can be equity skimming and equity stripping, depending on the circumstances. And since it typically involves wire transfers it can be wire fraud and bank fraud. 

Even if the prosecutor doesn't get a conviction, the year and a half of court time and expenses of legal defense totally outweigh any short term benefit of getting an overpriced property by taking over someone's loan. (The "Morby Method") It's cheaper and faster and less painful to just to take a mallet and slam it into your knuckles and call it good.

The biggest threat on a SubTo is missing payments. That is an alarm bell alerting everyone a SubTo student doesn't want involved.

SubTo impacts the ability to take on more debt. Typically people who overpay for a property have a higher than necessary payment and don't understand risk, therefore are more likely to default. They typically are also the ones who want to get into real estate with no money, no credit, no income and no reserves because "it is so easy to get rich". That is the biggest lie. Some do very well, but most, simply waste their money, their time and take risks they can't begin to understand.

many times the lender though ( new lender ) will catch the sub to on the tax return.  As the new owner will be scheduling it and depreciating it and writing off interest etc.

List was the lawfare that one of the DA's went after Trump for ( on his application he said Mara Lago was worth 100 mil or somewhere around there)  And DA came back and said its worth 18 mil.. total BS right but they went after him for it.. so if they can do it him they certainly will go after someone on a sub to who is trying to hide their ownership.