- Mortgage fraud occurs when information is falsified or withheld during the application process to manipulate the terms of the loan or a bank’s decision to approve it.
- Borrowers and homeowners can commit or be victims of mortgage fraud.
- Scams targeting homeowners facing foreclosure are among the most common types of mortgage fraud.
Mortgage fraud is a serious crime, and it is one that borrowers and homeowners can both commit and be victimized.
When frauds are committed by mortgage borrowers, it’s often because they wanted to buy a home, but thought their finances would prevent them from getting approved. Things like lying on your mortgage application or misrepresenting your income are considered mortgage fraud and have serious legal repercussions.
But borrowers and homeowners can also fall victim to fraudsters looking to take advantage of people going through a confusing or stressful process. Homeowners who are behind on their mortgage payments or facing foreclosure are particularly vulnerable, as some of the most common mortgage fraud schemes target struggling homeowners.
What is Mortgage Fraud?
Mortgage fraud involves providing false or misleading information to a lender in order to obtain approval for a mortgage loan. The FBI Defines Mortgage Fraud as “a lie that influences a bank’s decision”. Scams that target homeowners facing foreclosure also fit the FBI’s definition of mortgage fraud.
How is mortgage fraud detected?
With rising mortgage rates and high house prices, buying a home has become less affordable. “Historically, fraud has become a bigger issue for the mortgage industry during times of strong or weak mortgage demand,” said Nick Larson, senior director of strategy and business development at LexisNexis Risk Solutions. “It may entice consumers to falsify income, liabilities, and occupancy to improve the odds of getting a higher mortgage.”
Financial institutions watch for signs of fraudulent activity by carefully checking all information they receive from applicants.
Stricter underwriting processes and advances in technology have made it harder for loan seekers to get away with submitting false information. For instance,
Generally verify the income information you provide by requesting your transcript directly from the IRS. Some lenders also have the ability to obtain information about your assets directly from your bank with your permission.
Lenders will also look for any suspicious activity related to the specific transaction. For example, if you’re buying a house to use as your primary residence several hours away from your workplace and you’re not a remote worker, this may be a red flag. Or if a home is appraising for a significantly higher amount than what other similar homes in the area are appraised at, it would require further investigation.
But fraud can still be difficult for lenders and law enforcement to detect. That’s partly because it’s relatively rare — in the second quarter of 2020, just 0.61% of mortgage applications contained fraud, according to CoreLogic.
Most of these cases involved borrowers misrepresenting their finances in their application so they could buy a home. Large plans are rarer, but they can cost financial institutions more.
Types of Mortgage Fraud
Mortgage fraud falls into two categories: profit fraud and housing fraud.
Fraud for profit
This type of mortgage fraud is often committed by people who work in the mortgage industry, such as loan officers, appraisers or real estate lawyers. The purpose of scams that fall under this umbrella is to make money.
The FBI prioritizes the investigation of cases of fraud for profit.
This type of mortgage fraud is usually committed by borrowers. Housing fraud, as the name suggests, involves providing false information to mortgage lenders in order to purchase a home. An example of housing fraud is inflating your income on your mortgage application in order to be able to buy a house for more than you would generally be entitled to.
Examples of Mortgage Fraud
Mortgage fraud generally falls into one of the two categories of fraud listed above, but there are countless different ways fraud can be committed. Here are some of the most common diets consumers should watch out for.
The seizure process can be stressful, confusing, and scary, making those who go through it a prime target for bad actors. Fraudsters may offer to help the homeowner through the process, charging a hefty fee to negotiate loan modifications with the homeowner’s lender or servicing agent. Or, they could offer a way out of foreclosure by asking the landlord to “temporarily” transfer the deed to them. Then they can sell the property or ask the landlord to pay them rent while letting the property go into foreclosure.
In this scheme, an investor has a “straw buyer”, who is a loan seeker working on behalf of someone else, to obtain a mortgage loan in order to purchase a property. Once the property is purchased, the straw buyer uses a quitclaim deed to give the property to the investor. The investor then rents the property for profit while failing to make the payments on the mortgage. Eventually, the property is seized.
Flipping property, as most people understand it, is not illegal. But illegal property reversal occurs when an individual buys a house, an appraiser artificially inflates the value of that house, and then it is immediately resold for a profit.
Borrowers generally get lower interest rates and can make lower down payments on properties they intend to live in as their primary residence. If a person intends to use a home as a second home or investment property but tells their lender that they will use it as their first home, they have committed occupancy fraud.
Fraud occurs when an appraiser fails to appraise a property based on its actual market value. Since lenders won’t lend more than an appraisal says a home is worth, appraisals can be artificially inflated so that the market value matches the list price. Unscrupulous appraisers can also artificially reduce the market value of a home so that the buyer can buy the home for less, then turn around and sell it for a profit.
How to report mortgage fraud
According to the Department of Justice, there are a few different entities you can report suspected mortgage fraud to.
The Department of Housing and Urban Development accepts tips through its direct line. Dial 1-800-347-3735.
If you think you may be the target of a foreclosure scam, you can contact the Homeownership Preservation Foundation’s HOPE Helpline at 1-888-995-HOPE (4673).
The Federal Trade Commission also has a website where you can report fraud.
How to protect yourself from mortgage fraud
Homeowners who are in arrears and at risk of foreclosure should be especially vigilant, as they are more likely to be the target of mortgage fraud.
“Don’t hire unsolicited companies, meaning anyone you haven’t contacted first,” Angel Hernandez, vice president of industry and regulatory affairs at Stavysaid.
If a company advertises help with loan modifications or loss mitigation, check with your lender or servicer first to see if that company is reputable.
You can make sure you’re working with reputable companies by hiring a HUD-certified housing counselor. These advisers offer free or low-cost advice. If you’re approached by a company that charges a hefty fee to help you, they’re probably not reputable.
To find a HUD-certified housing counselor, you can search online or call 1-800-569-4287.
You can also avoid scams by working proactively with your mortgage lender or repairer. Homeowners can often be afraid to speak to their lender when they’re late with a payment, but the lender is often in the best position to help you avoid a loss.
Hernandez also says that while borrowers are often hesitant to contact them, lenders and managers want to help their borrowers resolve delinquencies. “The success of a repairer is directly tied to the success of the owners they serve,” says Hernandez.