Mortgage fraud involves a loan approval based on false statements or omissions. It can also involve getting some other kind of improper advantage from a lender through false statements — such as being allowed to make a reduced loan payoff, or make easier payments.
Mortgage applicants can commit fraud. So can home sellers. So can banks, appraisers, or insurers. Indications of fraud are present in about one of every 120 mortgages.
Loss of reputation, fines, prosecution and prison sentences are the potential consequences of mortgage fraud.
Here, we take a look at how it’s happening today.
Occupancy Fraud: Fraud for Housing
Occupancy fraud is a term that describes mortgage applications containing false information by a borrower. This type of fraud is becoming more common because:
- Homes keep getting steadily harder to afford;
- The cost of renting is even higher than the cost of a mortgage;
- Fraud has found fertile ground since the Covid pandemic began (rising nearly 40%);
- Mortgage companies’ shift to mobile and online processes can create new fraud vectors; and
- Loan applicants are desperate to succeed.
Some applicants inflate their income or assets by submitting fake financial account webpages. Some write down job titles that appear to support a higher income than the applicants actually draw. Some try to conjure up employers.
This is why loan officers refuse to accept copied webpages without additional proof. They don’t want to wind up being fooled by fake documentation. A bank officer or underwriter can usually spot a misrepresentation before making any decision on a loan approval. Professionals are good at picking out bank account statements or financial profiles that don’t jibe with stated figures for an applicant’s wages.
Some mortgage applicants misstate their intentions. A common example is the applicant who says an investment property will be a primary residence when they don’t actually plan to live there. Why do people do this? They’re hoping to snag loans with lower down payments, easier interest rates, and tax benefits. In a time when rates are rising, the government is on the lookout for spikes in this type of activity.
Then there is straw buyer mortgage fraud. Straw buyers are applicants trying to get loan approvals for someone else who wouldn’t qualify. The idea is to transfer the title over to the other person later. Some straw buyers aren’t aware that their identities are being exploited.
Sometimes, seemingly innocent funding sources become an issue. Loan applicants must be very careful never to agree to borrow funds from friends or relatives to unsustainably puff up their assets and lower their debts. Covering a down payment with borrowed money is a no-no in the world of mortgage borrowing. An outright gift is acceptable, but the borrower must disclose it. The mortgage consultant will need a gift letter, along with bank statements or other documentation connected with the funds. A lender needs to know the gift came from an above-board source.
Appraisal Fraud: Wrongdoing by Industry Insiders
From time to time, professionals who deal with purchases, titles, and loans fall afoul of mortgage fraud laws. Brokers, appraisers, and title insurers have been caught (often in FBI investigations) taking bribes or kickbacks.
Mortgage fraud opportunities can tempt investors, including big companies, who see high home prices and hope to take advantage of the huge renter pool and potential profits in real estate. Fraudulent appraisals show up at very high rates (about one in 23) in investment property deals.
Inflated appraisals also turn up at a high rate in purchases of houses to be flipped. If selling the property can be done based on an inflated valuation, the owner can make more money out of the property. If an appraiser can be convinced to inflate a property’s value, the buyer is getting ripped off. Appraisal fraud is far from a victimless crime.
Of course, there is nothing wrong with house-flipping itself — plenty of buyers pick up distressed properties at bargain prices, fix them up, and resell them for profit. Yet this area of the market tends to attract people with underhanded practices as well as the many who are doing everything on the level.
The manipulation of appraisals also comes up in the world of predatory lending. Predatory lenders who urge people to get high-interest loans are rarer today than they were before the Congressional crackdown of 2009-2010. Still, it’s possible to find mortgage insiders who encourage false statements from applicants, or who cook up appraisals that enable homes to be sold for inflated prices.
How is a home appraisal inflated? Sometimes, information that would lower the home’s value is not counted into the calculation. Sometimes, nonexistent upgrades or additions are added in.
Dialing for Dollars: Mortgage Foreclosure Relief Scams
Some people prey on homeowners struggling to keep up with their mortgage payments. Pre-foreclosure public record databases are playgrounds for these people.
The debtor gets a phone call from someone who promises a way to get out of the problem with lower payments or zero payments if the debtor will “temporarily” part with the house title, rent from them, and so forth.
☛ Find out more about the most common types of mortgage and deed fraud schemes happening in today’s real estate world.
Companies might promise to get the debtor a load modification to save the house — for a large, upfront charge. Then these companies leave the debtor hanging.
Avoiding Mortgage Fraud Schemes
Any fraudulent mortgage schemes hurt people, and identity theft can hit them especially hard. Once someone takes someone’s social security number and runs with it, the tangle of loss and confusion can take years to unravel. This is why your mortgage consultant won’t take certain information by email — and why applicants should be sure to use secure portals (or, better still, personal visits) instead.
Work with people you (or people you trust) have worked with. Be careful with messages and websites; call and confirm that you’re in the right place, doing the right thing. Legit mortgage loan documents shouldn’t have blank lines or strange information. If it looks off, don’t sign. If you are following instructions to wire money, call and confirm with the bank officer before and after you send the funds. Work out mortgage modifications with your mortgage company — other companies cannot help you overcome the debt or come to a compromise.
If your mortgage loan account might have been hacked, contact your mortgage servicer to report the issue. You might need to contact the federal government, too, if you’ve been a target in a white-collar crime. Review your fraud alert options with one of the major credit score firms, such as Experian.
Most of all, stay alert. Pause and ask questions every time you’re unsure of something. Scammers love to move quickly. Refuse to be rushed, and you might save yourself from costly mistakes — or worse.
Supporting References
Brian O’Connell for Experian.com: Here’s Everything You Need to Know About the Risks of Mortgage Fraud (Apr. 18, 2018; citing the FBI on mortgage fraud for housing and for profit).
David Chang for The Ascent: Mortgage Fraud (updated Jun. 13, 2022).
And as linked.
Photo credits: RODNAE Productions and Mikhail Nilov, via Pexels.