According to the FBI, mortgage fraud is a “crime characterized by some type of material inaccuracy, misrepresentation, or omission in connection with a mortgage that a lender then relies on. A lie that influences the decision of a bank – whether, for example, approving a loan, agreeing to a reduced repayment amount, or agreeing to certain repayment terms – is mortgage fraud.”
Mortgage fraud occurs when a person intentionally lies or omits information on a mortgage application to qualify for a loan they would not otherwise be eligible for or to make a profit. Mortgage fraud falls into two broad categories:
- Fraud for profit: This is when people commit mortgage fraud to make money. They tend to be industry insiders such as bank officers, mortgage brokers, appraisers, lawyers, loan originators, and other industry professionals. They usually have specialized knowledge that helps them commit the fraud. The goal is not to get housing, but to abuse the mortgage process to steal money. The FBI prioritizes fraud for profit cases.
- Housing Fraud: This is when people commit mortgage fraud to get a home they wouldn’t otherwise be entitled to. They misrepresent income and asset information in mortgage applications or trick appraisers into manipulating a property’s appraised value.
Types of Mortgage Fraud
There are several types of mortgage fraud. Some are more common than others, such as the risk of income fraud, when perpetrators inflate their income or work history to qualify for loans. Real estate fraud is another common type where property value is intentionally misrepresented. Here are some other types of mortgage fraud:
Perpetrators will misrepresent the transaction, such as undisclosed agreements between parties and falsification of documents. There are several types of transactional fraud:
- silent buyer — The abuser will trick the lender into borrowing his down payment. The lender believes the buyer has invested their own money. The additional loan is hidden from the lender.
- straw buyer — The genuine buyer may have bad credit, so he will use a straw buyer to act on his behalf. Once the Straw Buyer receives ownership, they will transfer it to the actual buyer.
- At arm’s length — When two parties to the transaction are related, both parties may be susceptible to manipulation by the other.
Foreclosure rescue/loan modification programs
Criminals will identify homeowners who are in foreclosure or at risk of defaulting on their mortgages. They will mislead them into thinking they can save their home by putting the property in an investor’s name or offering to renegotiate the terms of the loan. The perpetrators profit by demanding large fees up front or selling the property to an investor or straw buyer. They will then create equity using a fraudulent appraisal and then steal the proceeds paid for by the owners.
Illegal property reversal
The abuser will buy a property, falsely appraise it at a higher value, then quickly resell it. They will manipulate the loan information to buy the property below market and immediately resell it at an artificially inflated price.
Builder bailout/conversion to condo
The authors are generally builders who find buyers to obtain loans for their properties. The buyer then allows the property to go into foreclosure. In a condo conversion program, developers recruit straw buyers with cash back incentives and inflate the value of condos. In addition to not disclosing cash back incentives to the lender, information about income and assets of straw buyers is often inflated.
Home Equity Conversion Mortgage (HECM):
A HECM is a reverse mortgage product insured by the Federal Housing Administration. Borrowers must be over the age of 62, own their own property, occupy the property as their primary residence and participate in the HECM council. The authors will take advantage of the elderly and then obtain a HECM in the name of the recruited owner. They will convert home equity into cash. Scammers keep the money and pay a fee to the senior or take the full amount without the senior’s knowledge.
The perpetrators will use a straw buyer with fake income documents and fake credit reports to get a mortgage. The straw buyer transfers ownership to the investor. The investor makes no mortgage payments and rents the property until foreclosure.
The abuser will use a non-existent property to obtain a loan. Air loans involve brokers who invent borrowers and properties. They then establish accounts for payments and maintain deposit accounts for escrows. They can set up a fake office to trick creditors trying to verify information on loan applications.
Commercial real estate loans
These types of loans make up a large portion of fraudulent mortgages. Distressed commercial real estate owners obtain financing by manipulating the appraised value of the property. They can create false leases to exaggerate the profitability of the building. Fraudulent appraisals induce lenders to provide loans to the homeowner.
How to Prevent Mortgage Fraud
Financial institutions have compliance teams to help identify fraudulent activity. There are many laws and regulations that financial institutions must follow. Financial institutions must adopt written policies and procedures that detect fraud. Government agencies monitor professionals involved in mortgage lending to ensure they follow regulations. Third parties who represent a bank are subject to the same regulatory requirements.
Many professionals involved in mortgages must undergo training to help prevent fraud. Here are some steps you can take to protect yourself against mortgage fraud.
- Be careful. Don’t be afraid to ask questions throughout the process. Don’t rush into making a bad decision. Remember, if something seems too good to be true, it probably is. Scammers and criminals will try to speed up the process hoping that you don’t take the time to check all the documents. If you think something is wrong, you can go to different government agencies, FBI, US Attorney’s Office, Federal Housing Finance Agency (FHFA), etc.
- Do your due diligence. Check the references and recommendations of the professionals who help you. This includes the loan officer, real estate agent and other people who assist you. You can check their license with the state agency and see if any disciplinary action has been taken against them. Work with reputable people who have a solid track record.
- Research the property. You can do a title search to see if there are any other debts, unpaid property taxes, or unpaid dues. Double check to make sure the tax assessment and appraisal value are accurate. You can use websites to see if a property is significantly overvalued or undervalued.
- Have a lawyer review your documents. Have a lawyer review all documents and keep track of the money so no one can steal the money. Be clear on the numbers so you know if money is missing or the math doesn’t add up. Your lawyer can help you make sure the final loan documents are correct.
Buying a home is one of the most expensive decisions you can make. Mortgage fraud has increased dramatically as the housing market has warmed. The cost of mortgage fraud is high, with every dollar of fraud costing mortgage companies $5.34. More than half of fraudulent transactions now take place through online and mobile channels. Mortgages are an easy opportunity for perpetrators to cut corners, mislead and defraud for profit or to buy a home they would not otherwise be entitled to. Knowing the different types of mortgage fraud can help you monitor them.