Mortgage fraud involves falsifying information in any way to receive a mortgage on a property. The FBI defines mortgage fraud in the following way – “Any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.” Mortgage fraud is taken very seriously by the US government, and the punishment for anyone who commits this crime is really severe. In times of recession, mortgage fraud becomes more common since people’s incomes go down, and buying property becomes even harder.
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Mortgage fraud generally happens when interest rates and house prices rise at the same time. In this scenario, getting a mortgage can be really expensive, and so people resort to mortgage fraud. This implies that lenders will have to find better ways to give out loans. Statistics show that the fraud rate rose from 2017 to 2018. In 2017, 0.82% of mortgage applications (or 1 in 122 applications) were fraudulent. In 2018, this number rose to 0.92% (or 1 in 109 applications). This increase may seem small, but it is significant indeed and highlights the need for house lenders to be extra vigilant.
When making new underwriting standards, they need to be extremely careful and should also come up with additional measures to help them detect when someone is falsifying any information in order to get a mortgage.
Written below are a few activities that fall under mortgage fraud:
- Showing the value of an appraisal to be much more than what it is actually to get a mortgage above what the property is actually worth
- Claiming assets that the person does not really own
- Acting as the borrower when the actual borrower is someone else
- Pretending to give someone financial help with the hope of skimming off equity
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Categories of Mortgage Fraud
Broadly speaking, there are three major categories of mortgage fraud that are discussed in detail below. These are fraud for profit, fraud for property, and fraud for criminal activities.
Fraud for Profit
This category has an elaborate process that involves a group of people who are quite knowledgeable about the industry trying to commit fraud with lenders in order to gain financial benefit out of it. The consumers are targeted in this type of fraud. Fraud for profit can be initiated by mortgage lenders, bank officers, appraisers, real estate agents, attorneys, and mortgage brokers in order to gain profit.
These people can work on their own or can also create partnerships amongst themselves to commit these fraudulent acts. People who commit this type of fraud are not doing this to get housing of any sort, but only to get the maximum amount of money from it. They misuse the entire process to get money from lenders or homeowners. The FBI takes fraud for profit cases very seriously, and the consequences of this type of mortgage fraud (and mortgage fraud in general), is prison time.
Fraud for Property
This majorly involves those people who want to get a loan to buy any sort of property. These people do not have the kind of money that they need in order to secure a mortgage, so when they find out that they do not qualify for a loan, they inflate their income by making use of false information like a false bank statement.
They don’t disclose most of their debt to increase their chances of securing a mortgage. By misrepresenting information, they are able to entice the appraiser to manipulate the value of the property.
Fraud for Criminal Enterprise
This type of mortgage fraud involves illegal endeavors that are even more severe and deal with things like money laundering. Money laundering is the process of hiding illegally obtained wealth through the use of a property or a legitimate business. Property flipping is a common way that people usually deal in mortgage fraud for this purpose.
Other Types of Mortgage Fraud
In addition to the three main types of mortgage fraud mentioned above, here are a few other types of mortgage fraud that one should be wary of.
Identity Theft
When a person tries to steal someone else’s identity in any way, it is known as identity theft. This involves taking someone else’s personal information like their name, social security number, address, date of birth, and so on. This other person’s identity is then used to apply for credit or any sort of a loan.
Income Fraud
Income fraud involves a person overstating their income in order to qualify for a mortgage.
Straw Borrowers
This is a major crime that involves a person who allows his name and other information like social security number, credit standing and date of birth to be used by someone else in order to qualify for a mortgage. Real people and real information are involved in this kind of crime, but the person is not the real borrower. Here are a few red flags that can help identify straw borrowers.
- The mortgage payment is made by an entity and not a borrower
- A first-time buyer who has recently seen a significant increase in the expense of his house
- There is no real estate agent involved in the buying process
- No changes have been made before the contract is signed
- The power of attorney is being used
- The income and savings of the applicant do not match with the overall profile of the applicant
- The signatures in the file don’t match and are inconsistent
- The title of the property is transferred once the sale is closed
- The buyer does not have any intentions of actually living in the property due to any reasons that he might give. These can be the size or condition of the property. This can also be called occupancy fraud
Air Loans
This is very similar to straw borrowers. These loans are made to buyers that don’t exist for fake, non-existing properties. A lot of damage is done to the lender when this loan defaults. There is no way that the lender can recover from this loss since there is no actual existing property to bank on. It was all made up. The red flags that can be used to identify straw borrowers can also be used to identify air loans.
Illegal Property Flipping
This happens when a property is purchased and then sold again at a much higher price after making a few slight improvements. Often times, inflated appraisals are used to fraudulently show the price to be much higher. In transactions like these, straw borrowers are often used. A few red flags to identify illegal property flipping are as follows:
- The property title was acquired by the seller very recently
- There is no involvement of a real estate agent
- The property was originally bought at a much lower price
- The value of the property is hugely inflated after being appraised
- The appraiser is a known property flipper
Foreclosure Rescue
Foreclosure rescue scams are those that target people who are already facing foreclosures. What a scammer usually does in this case is that they offer to pay off the foreclosure by charging a minimal fee. The person’s mortgage is not paid this way, and he loses his property, too. Some ways to identify foreclosure rescue fraud include:
- The scammer offers the owner of the house a deal where the owner signs over the house to the scammer but can live in the house as a renter until they are able to buy the property back
- Scammers tell their victims not to have any contact with their attorneys, lenders, or credit counselors. If your “foreclosure rescue specialist” tells you this, it’s a scam
- If a borrower says that he is sending the mortgage payments to another party, then it’s a sure sign of foreclosure rescue fraud
- The borrower says that he/she was promised debt elimination
Buy-and-Bail
This happens when a home’s value falls below the amount that the owner owes, and they apply to buy another house. When they get a new mortgage, they allow their first property to go into foreclosure. The following signs can help in the identification of buy-and-bail schemes:
- Once the borrower buys another property, he defaults on the original mortgage
- The borrower has insignificant equity or no equity in the original property
- The borrower is a first-time landlord
Avoiding Mortgage Frauds
The best way to avoid common types of mortgage fraud is to educate yourself about all the types of mortgage fraud that can happen. Once a person is fully aware of how he can be cheated, he will be more careful and will also look for red flags before actually entering into any sort of agreement.
A person who is well aware of the different types of mortgage scams out there will know exactly what they have to look out for.
It is also highly advisable to get help from qualified real estate professionals who can help in his regard. Those who have been in this field for a while know exactly how to stay safe from such fraudulent acts and what to be aware of. Law enforcement agencies and other financial institutions exist too, that can help reduce the risks associated with this type of fraud. Mentioned below are a few tips that will help you avoid becoming a victim of mortgage fraud.
Don’t Pay Advanced Fees
When it comes to applying for a mortgage, homebuyers should never pay an advance fee to anyone. US law generally prohibits paying any kind of advance fee, since that can lead to further complications and legal issues down the line.
Also, negotiating with your current lender is much better than negotiating with any third party. There’s always a chance that the third party can be a scammer who is looking to capitalize on your need for a loan.
Don’t Transfer the Title of Property
A title is used as evidence to show ownership. It is of high importance, and it is highly recommended that you don’t transfer the title of your property at any cost. A lot of scams target this. Scammers tend to make homeowners believe that transferring the title is necessary in order to negotiate with the bank. People who don’t really have any idea of how things work in this field tend to actually follow the scammer’s orders, which proves to be very detrimental for them.
Once the title of the property is transferred, the scammer will have total control of the property. It is highly essential that a person’s property is under their own name.
Work With Caution
Always work with certified and licensed counselors and lenders. The documents involved should always be reviewed by a counselor so that he can address any doubts that are present. If one works with caution, the chances of them falling prey to mortgage scams are low. Reverse mortgage scams are also very common. They involve tricking low-income seniors into getting free houses through falsified down payment.
Don’t Sign Blank Documents
Your signature is personal and official. As such, any document that you sign becomes official and means that you understand the terms of the document and you’ve given your consent for whatever is written in the document. That is why you must never sign a blank document, especially when it comes to mortgage applications.
Missing content is a big red flag that can warn a person about mortgage fraud. Fraudsters can make you sign a document and then fill in any information that they want after the fact. This can get a person into a lot of trouble. Before you put your signature on anything, first read the documents very carefully, analyze what they say and then show your consent by signing.
If you aren’t able to understand what the documents actually say, then it is best to seek help from someone who is more knowledgeable about the field, or an attorney.
Background Checks
You should conduct a thorough background check before actually working with any mortgage rescue company. Their names and certifications should be checked thoroughly to ensure that they are a trusted company and are good at what they do. It is best if a person also gets referrals and asks around in their social circle to be very sure that the company is a trusted one.
Don’t Sign Deeds Temporarily
One should always be careful when it comes to signing any deed temporarily on behalf of someone else. Knowingly or unknowingly, this can get a person into a lot of trouble. They might lose all of the upfront fees. The scammer might even sell the house of the owner without him having the slightest hint.
Don’t Have False Hopes
A lot of mortgage lenders give false hopes to people, telling them more than what they can afford with the amount of wealth that they have. People who are looking to buy a home should be very well aware of their own budgets and what they can afford and should ensure that they keep such potential fraudsters away at all times.
On an ending note, there are majorly three broad categories of mortgage fraud. Other types of mortgage fraud also exist, and they have been discussed above too. There are a few things that one needs to be wary of to minimize the chances of being a victim of mortgage fraud. In the end, it’s best to remember the old saying, “If something seems too good to be true, it probably is.”