There are many different types of scams that perpetrators use to steal money. Mortgage fraud is one of them, and since the pandemic, it has grown by almost 40%. Mortgage fraud contributed to the Great Recession in 2008. In this article, we explain what mortgage fraud is, the common types of fraud, and what you can do to protect yourself from it.
What is mortgage fraud?
Mortgage fraud is when someone intentionally lies or omits information on a mortgage application. According to the FBI, mortgage fraud is a "crime characterized by some type of material misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by a lender. A lie that influences a bank's decision -- about whether, for example, to approve a loan, accept a reduced payoff amount, or agree to certain repayment terms -- is mortgage fraud."
Mortgage fraud falls under two main categories:
- Fraud for profit: This is when people commit mortgage fraud to make money. They tend to be industry insiders such as bank officers, mortgage brokers, appraisers, attorneys, loan originators, and other professionals in the industry. These people typically have specialized knowledge or authority that helps them commit the fraud. The goal isn't to obtain housing, but to misuse the mortgage lending process to steal money from homeowners and lenders. The FBI prioritizes fraud for profit cases.
- Fraud for housing: This is when people commit mortgage fraud to secure a house. They misrepresent income and asset information on mortgage applications. They also may entice appraisers to manipulate a property's appraised value.
Statistics on mortgage fraud
According to CoreLogic's 2021 Mortgage Fraud Report, Nevada is the top state for mortgage application fraud. New York, Hawaii, Florida, and California round out the top five. The report found that 1 in 120 mortgage applications have indications of fraud, which is up 37.2% from the previous year.
Purchase applications have higher indications of fraud (1 out of 90) than refinance applications (1 out of 169). The risk for purchase applications increased by 40% and refinance applications by about 20% compared to the previous year. The highest-risk applications are for investment properties where 1 in 23 applications are fraudulent. The lowest-risk applications are for loans backed by the VA.
Mortgage fraud has increased significantly as the housing market has heated up. The cost of mortgage fraud is high, with every $1 of fraud costing mortgage lending companies $5.34. More than half of fraudulent transactions are now through online and mobile channels.
How is mortgage fraud detected?
There are numerous laws and regulations that financial institutions must follow. Financial institutions have compliance departments that investigate suspicious activity. They must adopt written policies and procedures. Professionals involved with mortgages have to take regular continuing education. Government agencies monitor them to ensure they follow regulations. Third parties that represent a bank are subject to the same regulatory requirements. They must conduct their due diligence, know their customer, and follow compliance to prevent mortgage fraud from occurring.
Professional organizations such as the Mortgage Bankers Associations (MBA) and National Association of Mortgage Brokers (NAMB) have a code of conduct and best practices that members must follow. The FBI's Economic Crimes Unit also monitors complaints and suspicious activity in the mortgage industry.
Who investigates mortgage fraud?
The Federal Bureau of Investigation (FBI) is the primary agency that investigates mortgage fraud investigations. Other federal agencies may also investigate mortgage fraud depending on the type of loan. The different agencies are:
- The FBI -- will handle most cases
- The U.S. Attorney's Office in your state -- may handle a fraudulent case if you are a victim in an ongoing case or a case that has already been subject to indictment
- Department of Housing and Urban Development (HUD) -- If the case involves a mortgage that is insured by HUD
- Fannie Mae/Freddie Mac -- If the case involves a mortgage owned by either organization
How to report mortgage fraud, including anonymously
There are a number of agencies and organizations to report mortgage fraud. They are:
- The FBI -- You can call 202-324-3000 or by using its website at https://tips.fbi.gov.
- Federal Housing Finance Agency's (FHFA) Office of Inspector General -- You can call 800-793-7724 or visit their website
- The U.S. Attorney's Office in your state -- You can find a link to the U.S. Attorney in your state here: https://www.justice.gov/usao/find-your-united-states-attorney
- HUD -- You can call (800) 347-3735 or email [email protected]
- Fannie Mae/Freddie Mac -- You can call (800) 4FRAUD8 or email [email protected]
You can also contact the financial institution to report mortgage fraud such as a bank or credit union. They have reporting steps and hotlines you can use. If the case involves certain professionals, you can contact the respective agency that regulates them.
Types of mortgage fraud
There are multiple types of mortgage fraud. Some are more common than others such as inflating income or assets in order to qualify for a loan. Each has its own red flags. Here are the most common types of mortgage fraud.
Foreclosure rescue schemes
In a foreclosure rescue scheme, the perpetrators will identify homeowners who are in foreclosure or at risk of defaulting on their mortgage loans. They will mislead them into believing they can save their homes by transferring the deed or putting the property in the name of an investor. The perpetrators profit by selling the property to an investor or straw buyer. They will then create equity using a fraudulent appraisal and then steal the proceeds paid by the homeowners.
Loan modification schemes
Like a foreclosure rescue scam, perpetrators of load modification schemes will look for homeowners who are at risk of defaulting on their mortgages. They will offer to renegotiate the terms of the homeowners' loan with the lender but demand large fees upfront. They will either not negotiate at all or negotiate unfavorable terms for the homeowner.
Illegal property flipping
The perpetrator will purchase a property, falsely appraise it at a higher value, and then quickly resell it. This is illegal due to the fraudulent appraisal information or false information provided during the transactions. The schemes typically involve: fraudulent appraisals; falsified loan documentation; inflated buyer income; or kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees.
Builder bailout/condo conversion
The perpetrators are typically real estate developers or builders facing rising inventory and declining demand. They will find buyers to obtain loans for the properties who then allow the property to go into foreclosure. In a condo conversion scheme, developers recruit straw buyers with cash back incentives and inflate the value of the condos. In addition to failing to disclose the cash back incentives to the lender, the straw buyers' income and asset information are often inflated.
Equity skimming
The perpetrators of equity skimming will use a straw buyer with false income documents and false credit reports to obtain a mortgage loan. The straw buyer signs the property over to the investor. The investor does not make any mortgage payments and rents the property until foreclosure.
Commercial real estate loans
Owners of distressed commercial real estate obtain financing by manipulating the property's appraised value. Bogus leases may be created to exaggerate the building's profitability. Fraudulent appraisals trick lenders into extending loans to the owner.
Air loans
The perpetrator will use a nonexistent property to obtain a loan. Air loans involve brokers who invent borrowers and properties. They then establish accounts for payments and maintain custodial accounts for escrows. They may establish a fake office to deceive creditors who attempt to verify information on loan applications.
How to protect oneself from mortgage fraud
Financial institutions have teams to help identify fraudulent activities. Many of the professionals involved with mortgages have to undergo education to help prevent fraud. Here are some steps you can take to protect yourself from mortgage fraud.
- Check the references and referrals of the professionals helping you. This includes the loan officer, real estate agent, etc. Work with reputable people who have a strong track record. You can check their licensing with the state agency and see if there are any disciplinary actions taken against them.
- Have an attorney review your paperwork. There is never a free lunch. If people are trying to help you, they are usually looking to profit in other ways. Have an attorney review all of the paperwork and keep track of the money so no one can steal the money. Your attorney can help ensure the final loan documents are correct.
- Research the property. You can conduct a title search to find out if there is any other debt, unpaid property taxes, dues, etc., that you were not aware of. Make sure the tax assessment and appraisal value is accurate.
- Be vigilant. Don't be afraid to ask questions and don't be rushed into making a bad decision. Scammers and perpetrators will try to rush the process so they can quickly profit and move on to the next victim.
Buying a home is one of the largest purchases you will make in a lifetime. Mortgages are an easy opportunity for perpetrators to cut corners, mislead, and defraud for profit or buy a home they would not otherwise qualify for.