Scammers find new ways all the time of cheating people and companies out of money, information, or other valuables. One popular scam making the rounds is mortgage fraud.
What is Mortgage Fraud?
Mortgage fraud is a serious crime perpetrated by organized crime syndicates, hacker groups, and even individuals. It’s when a homebuyer, lender, or seller falsifies information so that the person is approved for a mortgage even if they don’t qualify.
The FBI defines mortgage fraud as;
“Mortgage fraud is a sub-category of FIF. It 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.”
They classify mortgage fraud as a type of financial institution fraud (FIF) which is crimes targeting banks, financial institutions, credit unions, and other lenders.
The FBI also details the two goals of mortgage fraud:
- “Fraud for profit: Those who commit this type of mortgage fraud are often industry insiders using their specialized knowledge or authority to commit or facilitate the Fraud. Current investigations and widespread reporting indicate a high percentage of mortgage fraud involves collusion by industry insiders, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the industry. Fraud for profit aims not to secure housing but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners. The FBI prioritizes fraud for profit cases.
- Fraud for housing: This type of fraud is typically represented by illegal actions taken by a borrower motivated to acquire or maintain ownership of a house. The borrower may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property’s appraised value.”
Common Mortgage Fraud Schemes
Under the definition of mortgage fraud, there are some typical mortgage fraud schemes that the FBI warns about. They include:
Illegal Property Flipping
This is when a fraudster purchases a property, has it appraised higher than the actual value, and then sells it for a profit. These scams usually involve a fraudulent appraiser, title company employee, or mortgage broker.
Mortgage Loan Frauds
Scammers contact people who are behind on mortgage payments and offer to help bail them out. They claim to be able to help negotiate the loan modification, but in reality, they charge high fees, and usually, the homeowner ends up worse than before and loses some cash.
Foreclosure Rescue Scams
Equity skimming is when an investor falsifies loan documents for a fake buyer. After closing, the bogus buyer signs everything over to the investor. They take ownership and rent out of the property but never make any mortgage payments until the bank forecloses.
Home Equity Conversion Mortgage (HECM)
A HECM is basically a reverse mortgage for older adults who own their own home and have a lot of equity in it. Scammers may offer to help these victims turn the equity in their homes into cash with a HECM, but before the homeowner sees a dime, the scammer takes off with the money.
Builder Bailout/Condo Conversion
Builders may use fake buyers to purchase properties promising cash-back incentives. They may also assist these buyers with fake income and asset documentation, so they qualify.
A silent second is when the buyer of a piece of real estate borrows the money to purchase from the seller but does not disclose it to the bank. So, the bank assumes the buyer has the funds to pay.
Commercial Real Estate Fraud
Owners of a commercial property may deceive lenders by inflating property values with fake appraisals and fake leases to show that the property is profitable. After they obtain the financing, they will allow the mortgage to lapse and take off with the cash.
Air loans are very common where scammers create fake borrowers and fake properties; nothing is actually bought or sold. They may set up phone banks and mailboxes to verify employment and phone numbers. The goal here is to obtain credit or cash before anyone finds out it is all fake.
Laws Related to Mortgage Fraud
In 2009 the U.S. government enacted The Fraud Enforcement and Recovery Act (FERA) to help federal law enforcement crack down on mortgage fraud and related activities. Under this law, punishments can include fines of up to $1 million and 30 years in prison.
Roughly one-third of U.S. states also have mortgage fraud laws. Some examples would be California, Florida, and New York. New York’s residential mortgage fraud laws enable law enforcement to charge individuals with either a Class A misdemeanor or a Class C felony.
Federal charges are always more severe than state offenses.
How to Protect Yourself from Mortgage Fraud
Although financial fraud affects lenders, banks, and other financial partners, it also affects individuals. Some ways that you can protect yourself from mortgage fraud are:
- Never sign any financial documents that you have not read and do not understand.
- Educate yourself on the types of fraud that exist.
- Protect your personally identifiable information (PII) and sign up for identity theft monitoring.
- If you feel pressured during a real estate or refinancing deal, speak to a trusted friend, family member, or financial advisor.
- Check the Better Business Bureau before doing business with any bank, credit union, or lender to ensure its legitimacy.
- Watch out for appealing offers with low-interest rates or “quick cash.”
- Review your credit reports and look for anything suspicious.
- Use common sense and don’t rush into anything when it comes to your finances. Always do plenty of research and take your time. If something sounds too good to be true, it probably is. Walk away.