There are many types of scams that perpetrators use to steal money. Mortgage fraud is one of them, and since the pandemic it has increased by almost 40%. Mortgage fraud contributed to the Great Recession of 2008. In this article, we explain what mortgage fraud is, common types of fraud, and what you can do to protect yourself from it.
What is Mortgage Fraud?
Mortgage fraud occurs 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 inaccuracy, misrepresentation, or omission in connection with a mortgage that a lender then relies on. A lie that influences the decision of a bank – whether, for example, approving a loan, agreeing to a reduced repayment amount, or agreeing to certain repayment terms – is mortgage fraud.”
Mortgage fraud falls into two broad 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, lawyers, loan originators, and other industry professionals. These people usually have specialized knowledge or authority that helps them commit the fraud. The goal is not to get a home, but to misuse the mortgage process to steal money from landlords and lenders. The FBI prioritizes fraud for profit cases.
- Housing Fraud: This is when people commit mortgage fraud to get a house. They misrepresent income and asset information in mortgage applications. They can also encourage appraisers to manipulate a property’s appraised value.
Mortgage Fraud Statistics
According to CoreLogic’s 2021 Mortgage Fraud Report, Nevada is the No. 1 state in mortgage application fraud. New York, Hawaii, Florida and California round out the top five. The report found that 1 in 120 mortgage applications show indications of fraud, which is a 37.2% increase from the previous year.
Purchase requests have higher fraud indices (1 in 90) than refinance requests (1 in 169). The risk for purchase requests increased by 40% and refinancing requests by approximately 20% compared to the previous year. The most risky requests relate to investment properties where 1 in 23 requests is fraudulent. The least risky applications are for VA-backed loans.
Mortgage fraud has increased dramatically as the housing market has warmed. The cost of mortgage fraud is high, with every dollar of fraud costing mortgage companies $5.34. More than half of fraudulent transactions now take place through online and mobile channels.
How is mortgage fraud detected?
There are many 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 in mortgage loans must undergo regular continuing education. Government agencies monitor them to make sure they follow regulations. Third parties who represent a bank are subject to the same regulatory requirements. They need to do their due diligence, know their customer, and track compliance to prevent mortgage fraud.
Professional organizations such as the Mortgage Bankers Associations (MBA) and the National Association of Mortgage Brokers (NAMB) have a code of conduct and best practices for members to 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
- Your state’s U.S. Attorney’s Office — can process a fraudulent file if you are the victim of an ongoing case or a case that has already been the subject of an indictment
- Department of Housing and Urban Development (HUD) — If the case involves a HUD-insured mortgage
- Fannie Mae/Freddie Mac — If the case involves a mortgage held 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 (FHFA) Office of the Inspector General — You can call 800-793-7724 or visit their website
- Your state’s U.S. Attorney’s Office — You can find a link to your state’s United States Attorney here: https://www.justice.gov/usao/find-your-united-states-attorney
- HUD — You can call (800) 347-3735 or email email@example.com
- Fannie Mae/Freddie Mac — You can call (800) 4FRAUD8 or email firstname.lastname@example.org
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 several types of mortgage fraud. Some are more common than others, such as inflating income or assets in order to qualify for a loan. Everyone has their own red flags. Here are the most common types of mortgage fraud.
Foreclosure Rescue Programs
In a foreclosure rescue program, the authors will identify homeowners who are in foreclosure or at risk of defaulting on their mortgages. They will mislead them into thinking they can save their home 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 for by the owners.
Loan modification programs
Like a foreclosure rescue scam, perpetrators will seek out 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 will demand a significant fee up front. They will not negotiate at all or negotiate unfavorable terms for the owner.
Illegal property reversal
The abuser will buy a property, falsely appraise it at a higher value, then quickly resell it. This is illegal due to fraudulent rating information or false information provided during transactions. The schemes typically involve: fraudulent appraisals; falsified loan documents; buyer’s inflated income; or bribes to buyers, investors, real estate/loan brokers, appraisers and employees of the title company.
Builder bailout/conversion to condo
The perpetrators are usually property developers or builders facing rising inventory and falling demand. They will find buyers to obtain loans for the properties which will then allow the property to be foreclosed. In a condo conversion program, developers recruit straw buyers with cash back incentives and inflate the value of condos. In addition to not disclosing cash back incentives to the lender, information about income and assets of straw buyers is often inflated.
The perpetrators will use a straw buyer with fake income documents and fake credit reports to get a mortgage. The straw buyer transfers ownership to the investor. The investor makes no mortgage payments and rents the property until foreclosure.
Commercial real estate loans
Distressed commercial real estate owners obtain financing by manipulating the appraised value of the property. False leases can be created to exaggerate the profitability of the building. Fraudulent appraisals induce lenders to provide loans to the homeowner.
The abuser will use a non-existent property to obtain a loan. Air loans involve brokers who invent borrowers and properties. They then establish accounts for payments and maintain deposit accounts for escrows. They can set up a fake office to trick creditors trying to verify information on loan applications.
How to protect yourself from mortgage fraud
Financial institutions have teams to help identify fraudulent activity. Many professionals involved in mortgages must undergo training to help prevent fraud. Here are some steps you can take to protect yourself against mortgage fraud.
- Check the references and recommendations of the professionals who help you. This includes loan officer, real estate agent, etc. Work with reputable people who have a solid track record. You can check their license with the state agency and see if any disciplinary action has been taken against them.
- Have a lawyer review your documents. There is never a free lunch. If people are trying to help you, they’re usually looking to profit from it in other ways. Have a lawyer review all documents and keep track of the money so no one can steal the money. Your lawyer can help you make sure the final loan documents are correct.
- Research the property. You can do a title search to see if there are any other debts, unpaid property taxes, dues, etc. that you weren’t aware of. Make sure the tax assessment and appraisal value are accurate.
- Be careful. Don’t be afraid to ask questions and don’t rush into making the wrong decision. Scammers and perpetrators will try to rush the process so they can quickly take advantage and move on to the next victim.
Buying a home is one of the most important purchases you will make in your life. Mortgages are an easy opportunity for perpetrators to cut corners, mislead and defraud for profit or to buy a home they would not otherwise be entitled to.