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.
Understanding Mortgage Fraud & list of common frauds
Magicians earn applause by performing card tricks or pulling rabbits out of their hats. Anyone who tries to pull a fast one with a mortgage, however, earns prison time. Here are some examples of mortgage fraud that occur every day.
Mortgages are the largest investment most people will ever make. With all those dollar signs comes plenty of temptation for the criminal element. There are countless mortgage frauds on the market. Here are some common types perpetrated both on and by homeowners:
- Not-so-accurate income. Because of the way self-employed people file taxes, many individuals fail to report their full income on their taxes. A "stated income" loan allows a potential borrower to claim a certain amount, and an underwriter bases a lending decision on that stated income. If a borrower inflates that figure, it constitutes mortgage fraud.
- Under-the-table exchange. Banks are reluctant to lend money to people who can't prove that they have the financial means to make regular loan payments. A hefty down payment, however, can sway many a lender's opinion. If a seller really needs to dump a property, he can give the borrower enough money for a down payment under the table. With the money in hand, the buyer can illegally "qualify" for the loan.
- Owner-occupant refusing to occupy. Because lenders tend to charge higher interest rates to non-owner occupants, a common mortgage fraud tactic is to claim occupancy even if you don't live on the premises. If you plan to buy property and claim occupancy, pack your bags and move in. Otherwise, you'll be committing mortgage fraud.
- Gifting a down payment, and then repaying it. You're allowed to gift part of a down payment for a home on the condition that the gift is not repaid. It's much like the under-the-table exchange between a seller and a potential buyer, but in reverse. This "gift" is given officially, but then repaid under-the-table.
Scams from the pros
On occasion, you may fall victim to a scam perpetrated by a mortgage professional. These tend to be more complicated and are difficult to detect. It's much easier for an individual to select a trustworthy broker up front than to catch a mortgage con artist in the act.
When choosing a mortgage broker or loan officer, make sure that they're backed by a long-standing lending institution and can provide you with solid referrals. Keep your eyes open for deals that sound too good to be true, because they usually are.
You may also decide to pay for the services of an attorney to review all your loan documents prior to closing. A lawyer can provide definitive answers, and will always work on your behalf.
Mortgage fraud is a tricky topic, especially because mortgage loans tend to be confusing. As the housing market gets tighter, and buyers and sellers become more desperate, you can expect mortgage fraud to rise. Armed with the right information, you'll have the knowledge to keep them at bay.