- What's at Stake: Mortgage servicers facing total loan write-offs when specific undetected title changes occur.
- Forward Look: Prepare for title companies being asked to protect more and move faster.Overview bullets generated by AI with editorial review.
When a title insurance policy is obtained by the lender or borrower, the items which are covered are only until the time of the search.But many deceptions involving title affect ownership of the property, including what Default Analytics describes as shadow loan fraud; these occur after the loan closes and also
What shadow loan fraud is
This form of deceit takes place "outside of the main vision of the people that are looking for it," said John Boyd, the founding principal of Default Analytics.
It is the kind of deception that isn't seen by the originator through to the investor, he said, adding "It's really a danger that they're not even aware that lurks out there, kind of lurking in the shadows."
In a normal property transaction, the buyer acquires the property with a note
Most mortgage contracts have a due-on-sale clause; this can apply for other reasons as well, including the transfer of the title, Boyd said.
"What happens is the property owner transfers the deed, but doesn't bother to satisfy the corresponding note and mortgage, either with the lender's consent or without," Boyd said.
An
Bill Corbet, managing director of Blackfin Group's strategic consulting practice (Blackfin has a business relationship with Default Analytics), added the servicing ecosystem works on the premise the borrower and the property owner are one and the same, and have the same interests. Those could diverge with shadow loan fraud.
Why it is spreading?
Today, social media posters, particularly on YouTube, are "aggressively promoting how to acquire properties without engaging the existing lender," Corbet said.
Viewers are asking if such tactics are legal and the posters tend to skirt around actually answering the question, he continued.
"That's something very different than what we've seen before in the industry," Corbet said. "There are always creative bad actors out there, but now with social media, their ideas are getting spread literally to hundreds of thousands of people."
"Where we find ourselves now is with a lot of — we'll call it — nefarious activity going on, where individuals are coaching persons on how to acquire properties in creative ways," said
Social media is helping spread the word. People are learning how to convert an owner-occupied mortgage to an investment property, the title is transferred to a business and the noteholder is not aware of the change.
Why the industry has looked away
Sub two fraud historically has been "somewhat ignored," Boyd said, with the attitude being as long as the payments are being made, no one is being hurt.
"The movement of title has been an issue that the industry has dealt with over the years," Levonick said.
But in situations where the loan continues to get paid off after the title transfer, the industry has historically turned a blind eye because in a lot of cases it is an innocuous situation and the response has been "no big harm, no big foul," he said.
It typically happens when the property is placed in a living trust.
Boyd noted some sub two transactions have legit motivations behind them and everything works out fine and all parties benefit.
But when things go wrong, it becomes problematic.
"That's not the case," he said. "It damages the whole ecosystem when these transactions transpire."
For most lenders, title is the thing they look least at because they trust that the title insurer and the policy will take care of the situation if something like an unrecorded lien is found.
"I'm not disparaging title companies, I think they do a really important job," said Suzy Lindblom, managing director, national operations and credit at Acra Lending, who is also a member of the Default Analytics advisory council. But I do think it's a lender's responsibility to look at that title, and I honestly think that is the least that people look at."
What it costs servicers and lenders
The ultimate ding for the servicer is having to write the entire loan off because of this fraud.
For seller/servicers, Levonick pointed out that "an innocuous change" in who is on the title can trigger an investor repurchase demand under standard contractual terms.
A concern for servicers is these non-monetary ownership changes are also inflating the property's valuation, Lindblom said.
Many of these transfers are using a limited liability company to also obfuscate the ownership.
"It's transferred from one LLC to another, and these LLCs typically have the same partners," Lindblom said.
"Most lenders, when they lend to an LLC, anybody that has 25% or more ownership in that LLC has [provided a] personal guarantee," Lindblom said. "So you see these percentages change by LLC, but they could all be owned by the same people."
Having LLC investors makes it easier for the fraudsters to hide, because those looking for it are not seeing common names, but rather anonymous entities, she said.
"You kind of start into the swamp, thinking it's not going to be nearly as wide or as deep as it is," Boyd said.
The wider title-fraud picture
Shadow loan fraud is among a number of scams involving the status of a property's title.
Seller impersonation
A survey of 245 title insurance professionals found 59%
This compares with 28% in a similar 2024 survey.
The number of respondents who were targeted in at least one attempt in the month prior to the survey grew to 45% from 10%. Just under one-quarter, 23%, received three or more attempts, versus 4% in the prior survey.
Reverse mortgages
Properties with reverse mortgages also have a knowledge gap. Benutech performed a study on nearly 35,000 active reverse mortgage loans, comparing the file against county deed records, tax rolls and death filings.
The good news was 66.7% had a confirmed title match with this data. But 11.6% had a severe title mismatch. Another 11.6% were on properties with absentee ownership, while 4% had recorded death filings. Home Equity Conversion Mortgages, the Federal Housing Administration-insured product which makes up the bulk of outstanding reverse mortgages, has
In Florida and California,
These situations, usually innocently when borrowers execute quitclaim deeds to family members, trusts, or heirs without notifying their loan servicer. This shows the need for realtime public title monitoring, the Benutech report said.
"In reverse mortgage servicing, time is the single biggest factor in preserving equity," Brian Fox, Benutech's chief revenue officer said.."When a title transfer goes unnoticed, the lag between when a borrower leaves and when the servicer finds out creates significant operational risk. Continuous title cross-matching bridges that gap, giving servicers actionable visibility so they can manage risk proactively rather than reacting after collateral value has already eroded."
Benutech added that forward mortgage servicers have their own version of this data gap.
Who is offering a fix
Technology is part of the answer. What is helping, Levonick said, is emerging technology which allows for checks, something which used to be a painstakingly manual process.
Default Analytics also offers monitoring for government agencies, servicers, lenders and securitization investors which looks at undisclosed transfers and activities which take place after closing.
The Default Analytics product "was interesting to me because this is not an area that states can regulate necessarily," Levonick said. "This is not something that can be solved with an anti-predatory lending obligation to protect consumers."
First American Title Insurance said the independent agents who source business to the company are able to offer a property title and fraud alert service when their owner's policy is underwritten by the company.
Policies directly written by First American had this service since earlier this year.
"Fraud isn't new," said Sarah Frano, vice president and real estate fraud risk expert at First American Title. "
These alleged criminals are looking to take advantage of a visibility gap. Even if the lender does everything right at the time or origination as well as diligently service the mortgage, unless they have ongoing visibility into the title, changes in the public record can put their interest at risk, she said.
"What matters is title visibility over the life of the loan," Frano continued. "A change in the public record doesn't automatically mean fraud."
A service such as the title monitoring First American is offering can alert a lender when something meaningful changes and give them the opportunity to take a closer look.
This same principle applies for homeowners as well, because they also need greater visibility into potentially suspicious changes.
"That's where title expertise matters," Frano said. "The value isn't simply seeing that something has changed. It's knowing which signals matter and when to ask the next question."
CertifID
"Title companies are being asked to protect more, move faster and deliver a better experience at a time when the risks have never been greater," said Tyler Adams, CEO of CertifID, in the Closinglock deal press release.
The call for GSE leadership
To help lenders and servicers combat this form of fraud, the government-sponsored enterprises need to take the lead role, Corbet said. They did this when it came to the need for hazard insurance coverage.
During natural disasters, properties were damaged beyond repair and the GSEs and the servicers were fighting over who bore responsibility for the loss.
The agencies ultimately said to the servicers if the coverage was not on the property, it would need to be force-placed.
"It's in both of our interests to have a control in place to not have those ugly conversations when that rare event of a house burning to the ground occurred," Corbet said. "I look at this in the same way; why are folks not figuring out how to acknowledge they have to monitor this so you're not having the conversations over who is responsible when it occurs?"
