What is Mortgage Fraud?
Mortgage fraud is when a prospective homebuyer, seller, or lender lies or omits critical facts, resulting in a mortgage loan approval or terms that the applicant would not ordinarily qualify for.
Mortgage fraud is defined formally by the FBI as any “statement, deception, or omission in regard to a mortgage loan that is then relied on by a lender.”
Mortgage fraud is a serious violation that can result in prosecution and jail time for those who are convicted. Mortgage fraud is punishable by up to 30 years in federal prison and a $1 million fine under federal and state laws in the United States.
Mortgage Fraud is on the Rise
Mortgage fraud is becoming more prevalent. Mortgage fraud jumped 16.9 percent in the second quarter of 2017 compared to the previous year, according to CoreLogic. Occupancy fraud is the fastest-growing subgroup of mortgage fraud, and it occurs when mortgage applicants supply false mortgage application information in order to purchase a house.
Mortgage fraud is on the rise for a variety of reasons, including:
Rising Demand for Homeownership: According to U.S. Census data issued in January 2018, homeownership rates in the United States reached 64.2 percent. Since 2016, when it reached a 50-year low of 62.9 percent, home ownership has been on the upswing. Demand for homes is increasing as home inventories decrease. As purchasers try to get an advantage in a competitive housing market, more fraudulent mortgage applications may be filed.
Interest rates are on the rise: Time is a factor in the increasing demand for new dwellings. With loan rates on the rise once more, homebuyers want to act quickly and purchase a property before rates rise even further. Home sellers, on the other hand, want to make a deal before rising mortgage rates reduce the pool of qualified purchasers.
Higher Home Values: Mortgage fraud is also encouraged by higher home values in the United States, which attracts more purchasers into the market to capitalize on them. In some situations, those buyers will resort to mortgage fraud to get an advantage in purchasing a potentially profitable home.
Old-Fashioned Greed: In the case of seller-oriented mortgage fraud, such as home appraisal fraud, dishonest house sellers will try to artificially boost the price of their home in order to make a larger profit when the property is sold.
2 Ways Consumers get De-frauded
Profiteering from Fraud
The FBI prioritizes this sort of mortgage fraud, which is typically conducted by industry insiders who utilize their specialized expertise or power to commit or support the fraud. Bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals are frequently involved in mortgage fraud for profit. Profitable mortgage fraud involves exploiting the mortgage loan process to obtain cash and equity from lenders or homeowners.
This sort of fraud occurs when a borrower or potential homebuyer is motivated to obtain or keep possession of a home. For example, the borrower may misrepresent income and asset information on a loan application, or encourage an appraiser to manipulate the appraised value of a property.
These mortgage fraud offenses are further subdivided into the following types:
Applicants intentionally misrepresent their intended use of the property in occupancy fraud, the fastest growing type of mortgage fraud. For example, a consumer may falsely state to a lender that they intend to live in the house while in fact they aim to rent it out. This is done because candidates who live in their own home typically qualify for lower interest rates and down payments than those who buy investment homes.
Fraudulent “Fake Buyer”
This type of mortgage fraud happens when a phony buyer (also known as a “straw buyer”) permits a would-be homeowner to assume another person’s identity in order to obtain mortgage loan approval. The straw buyer usually has better credit than the homebuyer, has a higher income and lesser debt, and has a much better chance of securing a home loan than the intended homeowner.
After the house is sold, the deed to the property may be transferred to the new owner. The imposter buyer may have had his or her identity stolen and is unaware that his or her name, credit, and financial information are being exploited to conduct mortgage fraud.
Fraudulent Home Appraisal
Home appraisal fraud happens when the value of a home is artificially raised over its true value. A higher property appraisal usually results in a higher home price and more money for the seller. A fake higher appraisal report is terrible news for buyers since it might add to the debt load of purchasing a home.
In general, house appraisal fraud is characterized by some red flags, such as essential data missing from the appraisal or fabricated modifications stated on the report. If you feel your house assessment contains red flags, you may always seek a second appraisal—this may cost up to $500 depending on the size of the home, but it may be worth it if it prevents a larger problem.
Financial Income Theft
Another prevalent type of mortgage fraud is providing false income information in order to obtain a better deal or a larger loan. Essentially, someone who lies about their income is attempting to qualify for a mortgage loan that they would not otherwise be able to obtain.
Income fraud, like house appraisal fraud, has several warning indications, such as generic job titles rather than specific job titles and the inability of the mortgage lender to identify an applicant’s employer of record. Another red flag: a mortgage applicant’s reported employment income does not match the household assets or bank records.
Scams Regarding Mortgage Foreclosure Relief and Debt Management
In this sort of mortgage fraud, scammers call homeowners and offer assistance if they are unable to make payments or are about to fall behind on their mortgage (the primary contact is by phone with these). Some thieves may look through publicly available foreclosure announcements to discover possible victims.
In exchange for rent payments to their company, they frequently offer lower payments or make payments for a homeowner. However, they do not make the mortgage payments, and you may wind up in foreclosure nonetheless. This type of fraud, often known as foreclosure scams or foreclosure rescue schemes, is regrettably very widespread and can cost victims a lot of money.
A mortgage provider encourages a homebuyer or application to mislead about information such as income, down payment, or costs via predatory loans or predatory lending. They’ll also frequently include a phony appraisal in order to sell the house for more than it’s worth. Predatory lenders may also lend a borrower more than they can afford while charging exorbitant interest rates.
These are the most common types of mortgage fraud, but they are far from the only ones.
A homebuyer, for example, may obtain a loan from a family member or friend, giving the impression that the buyer has greater income and fewer debt. The monetary present typically assists the buyer in making a down payment, sometimes masking some real financial concerns.
How Mortgage Fraud Affects Consumers
Identity theft is a particularly dangerous type of mortgage fraud because it immediately results in financial loss for the homeowner. For example, if an identity thief obtains a homeowner’s Social Security number or intercepts the mortgage account number, he or she can use that information to obtain a tens of thousands of dollars home equity line of credit (also known as a HELOC) in the homeowner’s name.
The cash is transferred to a bogus account set up by the burglar, leaving the homeowner with the bill. Alternatively, the fraudster could take out a second mortgage using the homeowner’s stolen data details and flee with the money, leaving the burden to the homeowner once more.
While any type of mortgage fraud is a severe act, losing one’s data to identity thieves can result in a significant financial loss that might take years to recover from. Other consequences include losing money, time, or missing out on the acquisition of a dream home because you must spend extra time dealing with recovering your identity if you are a victim of mortgage fraud.
How to Guard Against Mortgage Fraud
The key to avoiding mortgage fraud for homebuyers is education, and never sign a mortgage application form or house assessment form until you’re convinced all of the information—especially personal financial data—is correct.
Protecting yourself from mortgage fraud also includes safeguarding against identity theft, which can result in considerable financial loss.
Unfortunately, both homebuyers and sellers may encounter aggressive bankers, brokers, and real estate agents who are eager to close a deal at any cost. If you have concerns about a potential lending partner, consult with a trustworthy financial counselor or a real estate contract lawyer, and take immediate preventive action if fraud is discovered.
Mortgage loan officers are trained to check for inconsistencies and abnormalities in loan applications. If you have any doubts about the credibility of a mortgage broker or real estate agent, contact your local Better Business Bureau to ensure there have been no complaints filed against your loan partner.