- Mortgage fraud occurs when information is falsified or withheld during the application process in order to manipulate the terms of the loan or a bank’s decision to approve it.
- Both borrowers and homeowners can commit mortgage fraud — or they can become victims.
- Scams targeting homeowners facing foreclosure are among the most common types of mortgage fraud.
Mortgage fraud is a serious offense that both borrowers and homeowners can commit and become victims of.
When mortgagors commit fraud, it is often because they want to buy a home but believe their finances will prevent them from getting a permit. Things like lying on your mortgage application or misrepresenting your income are considered mortgage fraud and have serious legal ramifications.
But borrowers and homeowners can also fall victim to scammers who want to profit by helping individuals go through a confusing or stressful process. Homeowners who are in arrears on their mortgage payments or facing foreclosure are particularly at risk, as some of the most common mortgage fraud schemes target distressed homeowners.
What is mortgage fraud?
Mortgage fraud involves providing false or misleading information to a lender in order to obtain a mortgage approval. The FBI defines mortgage fraud as “a lie that influences a bank’s decision.” Scams targeting homeowners facing foreclosure also fit the FBI’s definition of mortgage fraud.
How is mortgage fraud detected?
With rising mortgage rates and high real estate prices, buying a home has become less affordable. “Historically, fraud has become a bigger problem for the mortgage industry during periods of strong or weak mortgage applications,” said Nick Larson, senior director of strategy and business development at LexisNexis Risk Solutions. “This can tempt consumers to falsify income, liabilities and occupancy to improve the chances of a higher quality mortgage.”
Financial institutions monitor for signs of fraudulent activity by carefully reviewing all information they receive from applicants.
Stricter underwriting processes and advances in technology have made it harder for loan applicants to get away with submitting false information. For example,
As a rule, verify the information you provide about your income by requesting your tax certificate directly from the IRS. Some lenders also have the option, with your permission, to obtain information about your assets directly from your bank.
The lenders will also look for any suspicious activity related to the particular transaction. For example, if you’re buying a house that will be your primary residence and is several hours away from your place of work, and you’re not a telecommuter, this can be a red flag. Or if a home is valued at a significantly higher amount than the value of other similar homes in the area, that would require further investigation.
But fraud can still be difficult for lenders and law enforcement to detect. Part of the reason for this is that it’s relatively rare — just 0.61% of mortgage applications contained fraud in Q2 2020, according to CoreLogic.
Most of these cases involved borrowers who misrepresented their finances in their application so they could buy a home. Larger systems are rarer but can cost financial institutions more money.
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 perpetrated by people involved in the mortgage industry, such as: B. Loan officers, appraisers or real estate attorneys. The goal of scams that fall under this umbrella is to make money.
The FBI prioritizes investigations into for-profit fraud cases.
Fraud for housing
This type of mortgage fraud is typically perpetrated by borrowers. As the name suggests, housing fraud involves giving false information to mortgage lenders in order to buy a home. An example of home-buying fraud is inflating your income on your mortgage application in order to buy a home for more than you would normally borrow.
Examples of mortgage fraud
Mortgage fraud typically falls into one of the two fraud categories listed above, but there are countless different ways that fraud can be committed. Here are some of the most common systems consumers should look out for.
The foreclosure process can be stressful, confusing, and scary, making those who go through it a prime target for bad actors. Scammers may offer to help the homeowner through the process and charge high fees to negotiate loan modifications with the homeowner’s lender or service provider. Or they could offer a way out of foreclosure by having the homeowner “temporarily” transfer the deed to the property to them. They can then sell the property or have the homeowner pay them rent while the property goes into foreclosure.
In this system, an investor has a “straw buyer,” who is a loan applicant working on behalf of another person to obtain a mortgage to purchase a property. Once the property is purchased, the straw buyer uses a title deed to transfer ownership to the investor. The investor then rents out the property profitably without making the mortgage payments. Eventually the property will be foreclosed on.
Flipping property, as most people understand it, is not illegal. But illegal property flipping happens when a person buys a house, an appraiser artificially inflates the value of that house, and then it’s immediately resold for a profit.
Borrowers typically receive lower interest rates and are able to 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 a valuer fails to appraise a property at its true market value. Because lenders don’t lend more than a property appraisal is worth, appraisals can be artificially inflated so that market value equals list price. Unscrupulous appraisers can also artificially lower a home’s market value so that the buyer can purchase the home at a lower price and then turn it around and sell it for a profit.
How to report mortgage fraud
According to the Department of Justice, there are a few different places you can report suspected mortgage fraud.
To file a report with the FBI, contact the nearest field office or call 1-800-225-5324. You can also create a report online.
The Department for Housing and Urban Development accepts information via its hotline. Call 1-800-347-3735.
If you believe you are the target of foreclosure fraud, you may contact the Homeownership Preservation Foundation HOPE Hotline 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 behind on their payments and at risk of foreclosures need to be extra vigilant as they are more likely to be victims of mortgage fraud.
“Don’t hire unsolicited companies, that is, someone you haven’t contacted first,” says Angel Hernandez, Stavvy’s vice president of industry and regulatory affairs.
If a company offers loan modification or loss mitigation assistance, first check with your lender or service provider to make sure the company is reputable.
You can ensure you are working with reputable companies by hiring a HUD Approved Housing Consultant. These consultants offer free or low-cost advice. If you’re approached by a company that charges high fees to help you, chances are they aren’t serious.
To find a HUD-approved housing consultant, you can search online or call 1-800-569-4287.
You can also avoid fraud by proactively working with your mortgage lender or servicer. Homeowners can often be afraid to speak to their lender when they are behind on payments, but the lender is often best placed to help you avoid a loss.
Hernandez also says that although borrowers are often reluctant to reach out to them, lenders and service providers want to help their borrowers resolve their defaults. “Success for the service provider is directly linked to the success of the homeowners it serves,” says Hernandez.