Mortgage Fraud Exposed: Types, Schemes and Legal Protections

Different Types of Consumer Mortgage Fraud

For many, buying a home can be a life-changing experience. For some, it can mean reaching a higher social and financial status. Unfortunately, it can also lead to temptations such as overreaching or overstating one’s financial condition.

This article will cover the major types of mortgage fraud and law enforcement’s efforts to combat these crimes.

The FBI And the Department of Justice

According to the FBI, mortgage fraud is [any] misrepresentation or omission of a material fact about a specific property or mortgage to fund, purchase, possess or obtain a mortgage loan

Those parties to property transactions that engage in mortgage fraud fall under two general categories. According to the FBI, these are categorized as “Fraud For Housing” and “Fraud For Profit.”

 Fraud For Housing

Fraud for housing is a term used by law enforcement to describe borrowers, loan officers, appraisers, and others who engage in fraud by misrepresenting a buyer’s assets and liabilities, income, employment, and credit profile.

Sometimes these misrepresentations are coupled with misstatements about the property’s actual condition.

The courts have long since determined these types of practices amount to criminal acts of fraud, given that in most situations, the borrower would not have been qualified for the loan had the real income been disclosed.

Fraud for housing can also happen when there is a sharp downturn in the markets caused by inflationary conditions, rising interest rates, and international instability, such as the current conflict between Russia and Ukraine.

When people experience a sudden financial decline, they become vulnerable and can be easily exploited by those who promise easy money through the mortgage loan process. Economic desperation, especially in the housing market, can lead people to make bad decisions, leading to criminal and civil consequences.

Fraud For Profit

Fraud for profit is similar to fraud for housing in that buyers and borrowers engage in the same kinds of tactics but for a different purpose. These are the people that exploit the system through fraud for the sole purpose of increasing profit.

Fraud for profit is an intentional and fraudulent scheme focused on profit rather than the possession of property.

Fraudulently inflating profit is usually accomplished by falsifying employment records and income statements or by manipulating the property’s value and condition to extract illegal gains from the loan transaction.

Fighting Misleading And Deceptive Mortgage Practices

The consequences of fraud in the issuance of home mortgages can involve financial corruption at the highest levels of institutional banking and lending systems.

Mortgage fraud encompasses many financial and lending activities, including fraudulent appraisals, fraudulent loan documents, and intentional avoidance of consumer and homeowner disclosure requirements.

Different Mortgage Fraud Methods

Sometimes the fraud induces the lender to believe the buyer is seeking the mortgage as an owner-occupied transaction.

On the loan application, the borrower will represent that they will take possession of the property as their primary residence. As a result, the borrower will be eligible to receive a lower interest rate.

The reason for the lender’s lower rate for owner-occupied transactions is that “non-owner-occupied” transactions statistically have a much higher delinquency and default rate.

Overstated Income Fraud ( AKA Liar Loans)

This occurs when borrowers overstate their gross income to qualify for a mortgage or a much more considerable loan amount.

This type of fraud is where the borrower or lender acting for a borrower (with or without the borrower’s knowledge) does not verify the income needed to qualify for the loan.

Lessons Learned From The Subprime Crisis of 2008

The subprime “mortgage disaster” of 2008 was caused, in part, when large numbers of borrowers lied about their income and acquired homes they could not afford and then defaulted. All of this occurred in an artificially inflated housing market resulting in a catastrophic financial meltdown.

Since the meltdown, lenders have tightened their underwriting standards, and “stated income” loans have become less available.

Fast forward to 2022, with the help of sophisticated digital technology, the re-emergence of inflating income and reducing without detection has brought a new wave of mortgage corruption to the forefront.

Even in traditional full-documentation loans, dishonest borrowers have figured out clever ways of forging or altering employer-issued tax returns or bank statements resulting in artificially inflated higher income levels and lower debt.

Failure To Disclose Liabilities

Some Borrowers conceal the nature and extent of their current financial obligations, such as other loan obligations on other properties or newly acquired credit card debt. The purpose is to remove the appearance of debt to qualify for a reduced interest rate or otherwise would not be able to qualify for the mortgage.

This intentional omission of liabilities artificially lowers the key underwriting criterion to determine eligibility for most mortgage loans.

It is still considered fraud because it allows the borrower to qualify for a loan that otherwise would not have been granted had the borrower’s actual debt and liabilities been disclosed.

Multiple Parties Engaged in Fraud

Sometimes the scheme will involve numerous parties acting under different capacities, such as lenders, appraisers, and bank officers, all of whom share one common goal: To defraud the lender out of large sums of money.

The Straw Man

Fraud for-profit schemes frequently include the use of a straw man, usually a dishonest appraiser, who intentionally overstates the value of a property, resulting in the lender granting an inappropriately large loan.

Fraudulent Investors

In other cases, “investors” are lured into the scheme by promising that the home will undergo substantial renovations once the tenants take occupancy, resulting in rents and profit.

Each of the parties involved shares in the illegal gains. And the mortgage? It eventually goes into default.

Once the loan is closed, the organizer of the scheme magically disappears. The renovations had never taken place, and there were never rent-paying tenants that occupied the property.

If schemes like these go undetected, a bank can lend hundreds of thousands of dollars on a property worth far less than what was represented to the bank.

Banks may be totally deceived in the case of more sophisticated schemes involving different players and transactions, resulting in the additional lending of millions more than the properties are worth.

Fraudulent Appraisers

A dishonest appraiser often organizes the fraudulent appraisal by either overstating or understating the property’s appraised value.

When the value is overstated, the borrower can sometimes raise more money in the form of another seller engaging in another home purchase transaction.

Appraisal fraud includes cases where a home’s equity is intentionally understated to obtain a lower price on a foreclosed property.

Using the valuation as a pretense, the fraudster attempts to induce the lender to lower the amount still owned on the mortgage through a loan modification.

Cash-Back Schemes

Cash-back schemes begin with inflating the property’s value to induce a cash-back transaction then get distributed to the borrowers, who receive a “rebate.” This scenario remains undisclosed to the mortgage company.

The net result is that the mortgage lenders lend too much. The buyer receives the overage and divides it among the scheme participants, which usually include the seller and real estate agent.

This scheme requires appraisal fraud to deceive the lender. “Get Rich Quick” real-estate gurus (think the art of the deal) have taught these types of methods to increase profitability.

Law Enforcement Successes

With elevated levels of mortgage fraud, the FBI has continued to dedicate significant resources to the threat.

As interest rates increase to fight off the risk of a deepening recession, the housing market is creating the conditions for mortgage fraud perpetrators to apply their methods to circumvent loopholes and gaps in the mortgage lending systems.

Kickback Are Here To Stay

Some say there will always be kickbacks to investors, loan brokers, appraisers, and title agents; therefore, mortgage fraud will be with us for the foreseeable future.

Getting Help – Consumer Rights Lawyers

Consumer rights attorneys and their law offices has become the resource of choice to combat morgage fraud and assist victims where possible in recovering a financial settlement on behalf of the victims.

Should you want additional information seek the advice of an online Consumer Rights Lawyer