Mortgage scam wreaks havoc on credit

Q: I am a mortgage consultant in California working with a client in Colorado who was a victim of a "real estate fraud" scam back in 2003. The person facilitating the fraud has since been indicted for the crime with the help of my client's testimony and is serving 14 years in prison.

My question is this: Given she was a victim of a legitimate mortgage scam, what recourse can she take if the first and second mortgages of the home associated with the fraud are still on her credit report?

The first mortgage was transferred from the original lender and subsequently closed as a foreclosure, and the second mortgage has been reported by the original lender who kept possession of the loan as a profit and loss. But they are still reporting the loan as unpaid with a balance due.

If a fraudulent account can be proven to the bureaus, are they obligated to remove it completely from the credit report?

A: You raise many interesting questions in your e-mail, and unfortunately, the answer is quite complicated. You might be right that in some cases, some borrowers would be entitled to a clean slate with the lender and their credit history.

But in many cases of mortgage fraud over the past few years, there hasn't been clear-cut fraud by a lender against a particular homeowner. In fact, some instances of fraud have benefited homeowners at the expense of the lenders that buy these loans.

If your client participated in the fraud and received some benefit, such as cash from a cash-out refinance or cash from a home equity loan or line of credit, she would not be entitled to have the information wiped clean from her credit history.

You might ask how a person can participate in a fraud and be a victim of it at the same time. Frequently, homeowners are promised cash back or other incentives to induce them to sign documents. The homeowner might have been promised a large rebate from the loan to refinance with that particular company. There are endless ways of trying to entice a homeowner to participate in a scheme that can ultimately defraud the end lender and the homeowner.

If the homeowner was able to refinance a prior loan in the scheme, the prior lender was paid off and the homeowner received a benefit in having the old loan paid off. It might have been part of a real estate fraud, but the new loans may still need to remain in place.

Your client might not have received the benefits she was promised and the new loan might have ruined her credit, but she did receive something of value: the release of the prior loan or loans that were on the property. She might have even received some cash from the transaction.

If the end lender participated in the fraud or was responsible for the fraud, your client would have an action against the lender. In that action, your client can allege the fraud and seek remedies and damages against the lender.

Of course, if the lender is now in jail, her chances of collecting are slim to none. As far as removing the information from her credit history, she may not be entitled to do that. She can file an affidavit with the credit reporting bureaus and provide documentation that would demonstrate that fraud was at the heart of the cases, and see what happens, or she can consult with an attorney who specializes in credit.

Q: I have a question relating to the capital gains tax exclusion on the sale of a home. It has to do with the "2 out of 5 years" time period. Suppose a couple has occupied a vacation home three days per week for the last 10 years. Are they eligible for the exclusion? I understand that the years do not have to be consecutive, but do the days?

A: In general, when you sell your home and it is your primary residence, you can exclude from federal income tax $250,000 (if you are single, or $500,000 if you are married) of the profits from the sale of the home. But you must have used the home as your primary residence for two out of the last five years.

In your case, you have indicated that the home was a vacation home and you didn't use it as your primary residence for two out of the last five years. You didn't even spend the majority of the week there, just less than half.

Because of this, you won't be able to exclude the gains from federal income taxes when you sell the property.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

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