1. What is Mortgage Fraud?

Mortgage fraud has become more prevalent over time and is a particular concern during an economic recession. Upheaval in housing markets, homeowners facing foreclosure and unscrupulous persons looking for easy money all contribute to a climate in which mortgage fraud may occur.

The FBI defines mortgage fraud as "any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan." By that definition, such fraud can clearly be committed by both lenders and applicants, even though the latter may not think their misrepresentations or omissions are significant enough to be a concern.

Mortgage fraud is a broad term that can refer to many activities:

• Inflating an appraisal in order to obtain a mortgage for more than a property is worth
• Claiming income or assets the borrower does not have.
• Posing as a borrower on behalf of another who's actually making the purchase.
• Pretending to provide financial help to an economically stressed homeowner in order to skim off equity from the home.

Mortgage loan frauds can be initiated by consumers themselves or unscrupulous lenders, brokers, real estate agents or someone seeking a favor. Persons looking to purchase a home or homeowners seeking to refinance can be inadvertently caught up in mortgage fraud by acting on bad advice from an unscrupulous mortgage lender or real estate professional they trust.

There are really two different types of mortgage fraud. Traditional mortgage frauds involve activities undertaken in an effort to defraud the lender, such as trying to obtain a loan one cannot legitimately qualify for. Other mortgage frauds target consumers, such as foreclosure prevention or loan modification scams in which unscrupulous individuals try to defraud homeowners who are in financial trouble.

Mortgage fraud is harmful to lenders, who face higher risks of default when borrowers misrepresent their financial information. Even worse, criminals may use mortgage loan frauds to steal from lenders by manipulating the mortgage and real estate transaction process. It can also be harmful to neighborhoods and communities by producing more foreclosed and empty properties, instead of homes occupied by responsible owners.

Mortgage fraud can also be harmful to borrowers, particularly the foreclosure rescue scams that prey upon vulnerable homeowners. Such scams can end up with the homeowner in even worse financial shape than before and possibly even cost them the home itself. Other scams seek to take advantage of gullible investors or skim money out of a seemingly normal real estate transaction without the borrower's knowledge.

While mortgage fraud is more prevalent than in previous years, it is also prosecuted on a more regular basis by the FBI and other national, state and local law enforcement agencies. Six-figure fines and lengthy jail times are not uncommon and federal laws enacted with the collapse of the real estate market in 2007-09 have made such penalties even harsher.

Just because a lender indicates they have significant experience in the mortgage business doesn't mean that they are trustworthy. There have been numerous stories over the years of mortgage lenders conducting Ponzi schemes or other fraudulent activities.

In addition, the regulation of mortgage lenders is traditionally more lax than that of other financial service providers, such as wealth and portfolio managers and Certified Financial Planners. The bottom line is that it is important for mortgage seekers to complete their homework in researching lenders because some "mortgage brokers" may not have a borrower's best intentions in mind.

Remember, mortgage fraud is a prosecutable crime and a felony under various federal and state laws. If a borrower feels that they are being asked to break the law, they should, at the very least, talk to a reputable real estate lawyer or the licensing authority in that home state before making a decision.