Mortgage Fraud: What It Is And How To Avoid It
As much as the Federal Bureau of Investigation (FBI) works to combat it, mortgage fraud is still one way that unscrupulous individuals can make a fast – and illegal – buck. It can put you at risk of losing thousands of dollars if you don’t know what to watch out for. Though it may be impossible to know exactly how rampant this problem is, statistics show it’s growing.
CoreLogic is a property analysis company that releases a quarterly mortgage fraud report. According to their annual 2021 Mortgage Fraud Report, 0.83% of all mortgage applications were found to have the characteristics of potential fraud. While that doesn’t sound like a lot, when looked at in the context of all mortgage applications in the quarter, it represents 1 in 120 applications.
There are several third parties involved in getting a mortgage, which means there’s a propensity for individuals involved in the transaction to commit conspiracy.
What Is Mortgage Fraud?
As the government agency primarily in charge of investigating this type of crime, the FBI defines mortgage fraud – sometimes colloquially referred to as mortgage scams – as any scheme containing “a material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.”
In other words, it is the act of lying or omitting details on a mortgage application in order to get loan approval or obtain a mortgage with more favorable terms. However, such a definition gives the impression that only borrowers can commit mortgage fraud; in reality, fraudulent loans can also be committed just as easily by professionals in the mortgage industry who prey on homeowners in distress to make more money. Let’s take a look at why individuals commit fraud and the two primary categories of mortgage fraud.
Why Commit Mortgage Fraud?
Both borrowers and lenders can be motivated to commit mortgage fraud for various reasons. Most of the reasons can be defined by falling into one of two categories: fraud for property and fraud for profit. Let’s briefly go over both.
Fraud For Property
The FBI defines fraud for property – also known as fraud for housing – as instances in which borrowers misrepresent or omit information about their financial circumstances to ensure they qualify for loans. Perpetrators of this type of fraud may exaggerate incomes, borrow assets from others or manipulate appraisers into inflating property values in order to obtain or maintain ownership of homes.
Fraud For Profit
The FBI defines fraud for profit as situations in which professionals within the industry, such as mortgage brokers, lenders, appraisers, attorneys, etc., use their positions to commit fraud for their own financial gain. Perpetrators of this type of fraud may work independently but can also collude with others working on a transaction to increase commissions and embezzle from lenders and/or borrowers.
Types Of Mortgage Fraud
The FBI has a list of the most common types of mortgage fraud committed in the United States. Some of the major fraud schemes and scams include inflated appraisals, foreclosure scams, using a false identity or income fraud, asset rental, equity skimming, property flipping and occupancy fraud.
Lenders rely on appraisals to determine loan limits because they want to ensure that they don’t lend more money than homes are actually worth. In certain cases of mortgage fraud, the appraisal can be artificially inflated to make the home seem like it’s worth more than it actually is. Appraisers can become complicit in this type of fraud when borrowers twist their arms to ensure that their loans are high enough to purchase properties in overinflated markets.
Homeowners who are at risk of defaulting on their loans or whose homes are in foreclosure are sometimes led to believe that someone can save their home in exchange for a deed transfer and upfront fees. The perpetrator will re-mortgage the property without actually saving the property from foreclosure.
Using A False Identity
A common loan fraud method is through identity theft. This happens when another person’s identity, including the victim's personal and financial information such as Social Security number, birth date or credit history is falsely used to apply for a loan application.
This type of fraud occurs when people borrow the assets of others in order to make themselves appear more qualified for financing. In these cases, the money is paid back to whomever it came from after the mortgage closes.
In situations of equity skimming, an investor uses a straw buyer along with a false credit history and false income information to apply for a loan. After the loan closes, the straw buyer signs the property over to the investor, who then rents out the property (without making mortgage payments) until the property is foreclosed.
The act of buying a property, appraised at a higher value, fixing it up and quickly selling it at a profit is classified as property flipping. However, it’s not an illegal act unless the acquisition of the property involves falsifying loan documents, such as income information, appraisals, etc.
When obtaining a mortgage, the borrower must explain the intent of the property as either their primary residence, second home, or as an investment property. Occupancy fraud occurs when the borrower misleads the lender about the intended use of the property. For example, if the borrower tells their mortgage lender the property is going to be their primary residence, when in reality, it will be rented out to tenants, that is occupancy fraud.
Mortgage Fraud Risk Factors
The risk for mortgage fraud increases when consumers have more difficulty obtaining loans. Therefore, high property values and interest rates, competition within the market and low loan volumes are all factors that tend to escalate mortgage fraud risk.
For these reasons, home buyers are more at risk than refinancers. In addition, the FBI’s classification of mortgage fraud as a white collar crime, as well as the crime rates and socioeconomic statuses of specific regions, can increase the likelihood that a consumer will be made a victim of mortgage fraud.
Mortgage Fraud Penalty: What Happens To Those Who Commit The Crime?
Mortgage fraud is a serious federal crime, and penalties can be pursued as misdemeanors or felonies at the state or federal level depending on who has committed the fraud in a given real estate transaction and the severity of their actions.
Penalties At The State Level
At the state level, fraudulent loan applicants could face heavy fines, restitution charges and incarceration. In addition to these punishments, fraudulent mortgage lenders, mortgage brokers and other real estate agents or professionals could also face suspension or total revocation of their licenses and lose their ability to practice their profession.
Penalties At The Federal Level
At the federal level, the fines and prison sentences could increase substantially. Just as at the state level, the repercussions for committing mortgage fraud are significant.
How To Prevent Mortgage Fraud
If you’re getting a mortgage, the best thing to do is just be honest on your application. Every mortgage lender wants to be able to put people into a house they can afford.
On the other hand, a mortgage is a big financial transaction involving several people. There are bad actors out there who might wish to take advantage of you. That said, there are several things you can do to protect yourself from becoming a victim of mortgage fraud:
- Make sure you get referrals for real estate and mortgage professionals from trusted friends and family.
- Find out what other homes in the area have sold for in comparison to the property you are looking at and review tax assessments to verify the property’s actual value.
- Make sure you understand everything you’re signing. Don’t sign anything you aren’t comfortable with. If there’s something you don’t understand, be sure to consult an attorney. And be wary of any documents that contain blanks, as this can leave you vulnerable to fraud.
- Review all the loan documents to ensure all the information – including your name – is accurate and true.
- Check the title history to find out how often the property has been sold and resold. It could be an indication the property’s value has been falsely inflated and the property illegally flipped.
- Don’t be pressured into borrowing more than you can afford to repay.
Mortgage Fraud Prevention Tools
For mortgage lenders, efforts to prevent mortgage fraud are often supplemented by software geared toward fraud detection and risk mitigation. Avoiding the acceptance of applications from fraudulent borrowers requires constant monitoring and assessment, and automating parts of that process can be of great benefit to many lenders.
For individual consumers who are afraid of being taken advantage of by predatory or fraudulent lenders, knowledge is the best tool you can equip yourself with. If the terms of a loan seem a little too good to be true, don’t be afraid to ask questions, and if there are details you want a second opinion on, don’t hesitate to seek out informed opinions from professionals outside of the transaction.
Reporting Mortgage Fraud
If you suspect that you’ve become a victim of mortgage fraud, you have a few options for reporting the crime. Contacting the FBI field office closest to you is the best place to start, but you can also contact a consumer hotline at your state attorney general’s office to file a report and get assistance.
It’s also possible to reach out to the Federal Trade Commission (FTC) to report your case – while they don’t investigate individual instances of mortgage fraud, sharing your story with them can sometimes help in the identification of systemic patterns and the pursuit of justice on a larger scale. To find out more about how to avoid mortgage fraud and report fraud, visit ReportFraud.ftc.gov.
The Bottom Line
Buying a home is a large investment – for most of us, it’s our biggest. So, it’s important to look out for signs of fraud to avoid becoming a victim. And always make sure to choose a real estate agent and mortgage banker you can trust.
Have other questions about your mortgage loan? Reach out to one of our trusted experts at Rocket Mortgage® today!
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