Types of Mortgage Fraud

Mortgage fraud is a significant and growing concern in the United States. It was one of the reasons for the Great Recession in 2008 and since the COVID-19 pandemic, it has grown by almost 40%. In this article, we explain what mortgage fraud is, the most common types of mortgage fraud, and what you can do to protect yourself from it.

What is mortgage fraud?

Mortgage fraud is when someone intentionally lies or omits information on a mortgage application to either qualify for a loan they wouldn't otherwise qualify for or to make a profit.

Mortgage fraud is a serious offense in which individuals may work alone or with others to deceive lenders and borrowers. These schemes involve lying, misrepresenting information, making a misstatement, or withholding important details that lenders rely on when approving loans.

Because mortgages play a large role in our economy, law enforcement and the FBI recognizes mortgage fraud and scams as a major criminal problem. Mortgage fraud falls under two main 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, attorneys, loan originators, and other professionals in the industry. They typically have specialized knowledge that helps them commit the fraud. The goal isn't to obtain housing, but to misuse the mortgage lending process to steal money. The FBI prioritizes fraud for profit cases.
Fraud for housing: This is when people commit mortgage fraud to secure a house that they wouldn't otherwise qualify for. They misrepresent income and asset information on mortgage applications or entice appraisers to manipulate a property's value.

There are multiple types of mortgage fraud. Below are common types of mortgage fraud:

Income fraud

Income fraud occurs when a borrower provides false information about their income to obtain a loan. There are two main types of income fraud:

False stated income: This happens when the income details provided on the loan application are not properly verified.
Misrepresentation of employment: In this case, the borrower presents fake proof of employment, such as phony pay stubs or employer documents.

Property fraud

This type of fraud occurs when the value of a property is intentionally misrepresented. This can happen in a number of ways, such as forging documents or falsifying information about the property, including its condition and worth.

Transaction fraud

Perpetrators misrepresent the transaction using different methods, such as creating undisclosed agreements between parties and falsifying records. There are several types of transaction fraud:

Silent buyer: The perpetrator will deceive the lender by borrowing their down payment. The lender believes the buyer invested their own money. The additional loan is hidden from the lender.
Straw buyer: The real buyer may have bad credit, so they'll use a straw buyer to act on their behalf. After the straw buyer receives the property, they will transfer it to the real buyer.
Non-arm's length: When two parties in the transaction are related, both parties may be susceptible to manipulation by the other.

Foreclosure rescue/loan modification schemes

The perpetrators will identify homeowners who are in foreclosure or at risk of defaulting on their mortgage loans. They will mislead them into believing they can save their homes by putting the property in the name of an investor or offering to renegotiate the terms of the loan.

The perpetrators profit by demanding large fees upfront 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 by the homeowners.

Illegal property flipping

The perpetrator will purchase a property, falsely appraise it at a higher value, and then quickly resell it. They will manipulate the loan information to purchase the property below market and immediately resell it at an artificially inflated price.

Builder bailout/condo conversion

The perpetrators are typically builders who find buyers to obtain loans for their properties. The buyer then allows the property to go into foreclosure. In a condo conversion scheme, developers recruit straw buyers with cash back incentives and inflate the value of the condos.

In addition to failing to disclose the cash back incentives to the lender, the straw buyers' income and asset information are often inflated.

Home equity conversion mortgage (HECM)

A HECM is a reverse mortgage loan product insured by the Federal Housing Administration. Borrowers must be over age 62, own their own property, occupy the property as their primary residence, and participate in HECM counseling.

Perpetrators will take advantage of seniors and then obtain a HECM in the name of the recruited homeowner. They will convert equity in the homes into cash. The scammers keep the cash and pay a fee to the senior citizen or take the full amount unbeknownst to the senior citizen.

Equity skimming

The perpetrators will use a straw buyer with false income documents and false credit reports to obtain a mortgage loan. The straw buyer signs the property over to the investor. The investor does not make any mortgage payments and rents the property until foreclosure.

Air loans

The perpetrator will use a nonexistent property to obtain a loan. Air loans involve brokers who invent borrowers and properties. They then establish accounts for payments and maintain custodial accounts for escrow.

They may establish a fake office to deceive creditors who attempt to verify information on loan applications.

Commercial real estate loans

These types of loans are a large portion of fraudulent mortgages. Owners of distressed commercial real estate obtain financing by manipulating the property's appraised value. They may create bogus leases to exaggerate the building's profitability. Fraudulent appraisals trick lenders into extending loans to the owner.

How to prevent mortgage fraud

Financial institutions have compliance teams to help identify fraudulent activities. There are numerous laws and regulations that financial institutions must follow. Financial institutions must adopt written policies and procedures that detect fraud.

Government agencies monitor professionals involved with mortgages to ensure they follow regulations. Third parties that represent a bank are subject to the same regulatory requirements.

Many of the professionals involved with mortgages have to undergo education to help prevent fraud. Here are some steps you can take to protect yourself from mortgage fraud:

Be vigilant. Don't be afraid to ask questions throughout the process. Don't be rushed into making a bad decision. Remember, if something sounds too good to be true, it most likely is. Scammers and perpetrators will try to rush the process, hoping you don't take time to check all of the paperwork. If you feel something isn't right, you can talk to different government agencies, the FBI, the U.S. Attorney's office, Federal Housing Finance Agency (FHFA), etc.
Do your due diligence. Check the references and referrals of the professionals you're working with. This includes the loan officer, real estate agent, and others assisting you. You can check their licensing with your state's real estate licensing agency and see if there are any disciplinary actions taken against them. Work with reputable people who have a strong track record.
Research the property. You can conduct a title search to find out if there is any other debt, unpaid property taxes, or unpaid dues on the home. Double check to ensure the tax assessment and appraisal value is accurate. It's also a good idea to check if a property is significantly overvalued or undervalued.
Have an attorney review your paperwork. Have an attorney review all the paperwork and keep track of the money you're putting into a home purchase, so no one can steal it. Be clear on the numbers so you know if money is missing or the math doesn't add up. Your attorney can help ensure the final loan documents are correct.

Purchasing a home is one of the most expensive decisions you'll ever make. Mortgage fraud has increased significantly as the housing market has heated up. The cost of mortgage fraud is high, with every $1 of fraud costing mortgage lending companies $4.23.

More than half of fraudulent transactions are now through online and mobile channels. Mortgages are an easy opportunity for perpetrators to cut corners, mislead, and defraud for profit or buy a home they would not otherwise qualify for. By being aware of the different types of mortgage fraud, it can help you be on the lookout for them.

FAQs

There are numerous types of mortgage fraud. The most common ones are transaction fraud, income fraud, and property fraud. Scammers have become more sophisticated in their fraud as more mortgages are sought online or through a mobile app.
Mortgage fraud is characterized by a material misstatement, misrepresentation, or omission in relation to a mortgage loan to deceive a lender. Mortgage fraud falls into two main categories, fraud for profit and fraud for housing.
Mortgage fraud is a criminal offense investigated and prosecuted by law enforcement. Depending on the amount and type of fraud, mortgage fraud can be a misdemeanor, but it is typically a felony. Civil and criminal penalties for mortgage fraud at the state and federal level can be severe. They may include convictions and prison time, restitution payments, state fines, and/or probation.
It is important to be vigilant and aware of signs of fraudulent transactions. Education is key to identifying mortgage fraud. Understanding the different types will help consumers detect mortgage fraud. Many compliance processes at financial institutions are fundamental to preventing mortgage fraud. You can also work with different agencies that are familiar with mortgage fraud.