Mortgage fraud is a complex form of fraud. It involves a material omission, misrepresentation or misstatement on a loan application. This false information is used by the lender to make decisions. In very simple terms, if there is a lie on your mortgage application, you are committing fraud. A number of specific types of mortgage fraud exist. However, two are the most common, namely, fraud for housing and fraud for profit.
Fraud for Housing
Fraud for housing happens when borrowers commit fraud on purpose. Their motivation will be to get and keep ownership of a property through false representation. For instance, they may misrepresent their income or provide false information on other assets.
Fraud for Profit
Fraud for profit happens when mortgage industry insiders use their authority or knowledge to facilitate or commit fraud. It is believed that the majority of mortgage fraud is a type of fraud for profit, whereby industry insiders collude to facilitate them. These insiders include appraisers, bank officers, attorneys, mortgage brokers, loan originators and more.
Common Mortgage Fraud Schemes
- Foreclosure rescue schemes – Here, scammers will find homeowners who are currently at risk of defaulting on their loan, or who are actually facing foreclosure. They will then provide them with misleading information to suggest the property can be transferred to an investor, thereby saving their home. In reality, the scammers release any equity that exists in the property or even create false equity and have the property foreclosed on after all.
- Loan modification schemes – These are not unlike the foreclosure rescue scams. Basically, a con artist will pretend to help homeowners who are behind on their mortgage payments and will soon lose their property. They will make them believe that they can change the terms of the loan by negotiating with the lender. To do so, however, they will require very high fees, which is how the scammers make their money. It is very rare for the scammers to actually be able to renegotiate terms and many won’t even try.
- Illegal property flipping – In this scam, someone purchases property and then has it falsely appraised to inflate the value, at which point it is quickly sold. The reason why this is illegal is because the appraisal information is fraudulent and false. In most cases, a number of illegal acts are involved in doing this: falsified loan documentation, fraudulent appraisals, kickbacks (to buyers, property brokers, investors, loan brokers, title company employees and appraisers) and inflated buyer income.
- Builder bailout or condo conversion – This happens in the builder industry, who are facing declining demand for new properties with rising inventories as well. In order to offset losses, they use bailout schemes in fraudulent manners. For instance, they will find a buyer who is able to get a loan on a certain property, but will then still allow this property to go into foreclosure. This can also happen with entire apartment complexes, where straw buyers are recruited to take advantage of the various cash back incentives that exist. In many cases, income and assets are inflated in order to convince lenders that a buyer qualifies for a loan.
- Equity skimming – In this case, a straw buyer is constructed using false credit reports and income information in order to have a mortgage loan accepted. When the loan closes, the straw buyers immediately sign over the property to an investor using a quit claim deed, meaning that they no longer have any claim on a property. The investor then simply rents the property out rather than pay the mortgage, until the property is foreclosed on.
- Silent second – Here, a property buyer borrows the money for the down payment from a lender by using a second mortgage, which they then do not disclose. For the primary lender, it will look as if the borrower actually used his own money as an investment, when it is actually borrowed. The second mortgage is kept hidden from the lender.
- Home equity conversion mortgage (HECM) – Not all HECM options are scams. They have been created to allow elderly people to release the equity in their home in order to supplement their income during old age. Unfortunately, some of these are scams and designed to swindle elderly and vulnerable people out of their hard earned money. One of the most worrying things about this type of fraud is that it is often advertised in places of trust, such as churches and community centers, but also on billboards and regular mailers. Scammers will obtain an HECM using the homeowners’ names and then keep most of the money released to themselves, hoping that the homeowners will never realize that their property was actually worth a lot more. In many cases, nobody knows that this type of fraud has been committed until the homeowner dies and the value of the property becomes clear.
- Commercial real estate loans – Here, people who own distressed commercial properties create bogus leases in order to obtain financing. They do this by exaggerating its profitability to lenders, thereby heightening the appraisal value of their property, which takes income into consideration. By providing false leases and appraisals, lenders are tricked into providing property owners with loans. Cash flow tends to be limited, which means that the property is neglected. Once the borrower defaults on the loan, the lender may start to foreclose on the property, only to find that it is pretty much worthless anyway because it is completely run down and does not actually have any leases on it.
- Air loans – Air loans are a type of loan whereby there is actually no collateral at all. Basically, brokers invent properties and borrowers, set up payment accounts and even have custodial accounts into which escrows can be deposited. They may even have a huge office with many telephones, whereby each telephone represents a fake employer, a credit agency, an appraiser and so on. This is then used to deceive any potential credit who is trying to verify information provided to them.
Local Responses to Mortgage Fraud
For some time now, the Financial Crimes Task Forces have been operated by the FBI. These allow for local collaboration, essentially acting as a force multiplier in financial fraud schemes that are often very large. This includes mortgage fraud. The task forces are made up of local, state and federal law enforcement and regulatory agencies. Together, they work together very effectively to pool resources and get results. Resources are shared between the different agencies, who understand that doing so and that sharing intelligence is the best way to resolve large fraud schemes across the country.
Furthermore, the FBI has created a number of working groups that look more specifically at financial institution fraud and mortgage fraud matters. These groups, which also include local, state and federal law enforcement and regulatory agencies from across the country, also join forces with the private industry. These include bank security investigators. They work together to review current and new cases, share intelligence and start joint investigations where necessary.
All over the country are local FBI offices. These often hold presentations and outreach events to people in order to educate them about their rights and responsibilities. Partnerships with various businesses are also formed, and intelligence is collected in terms of mortgage fraud. The information is then disseminated to other national agencies so that it can be properly analyzed. This is done in such a way that ongoing investigations are not jeopardized and the information is also shared with the private industry.
National Responses to Mortgage Fraud
There are also various national responses. The FBI has started the Federal Financial Enforcement Fraud Task Force and the Mortgage Fraud Working Group, both of which are multi-agency groups. Here, agencies come together to share and use training, coordinated enforcement strategies and outside collaboration in order to better understand the threat of mortgage fraud and to address it properly as well. By working together with other regulatory and law enforcement agencies, the FBI started a yearly study that looks specifically at mortgage fraud across different states. By reviewing this data year upon year, a very clear picture about mortgage fraud now exists. This data has also made it possible for a number of ‘hot spots’ on regional and local levels to be identified.
The data is also used by the FBI to identify where the threat of mortgage fraud must be addressed first. This information is shared with other agencies through the various working groups and via regular liaison. Additionally, it is used by agencies such as the U.S. Department of Housing and Urban Development and by the Federal Housing Finance Agency to address threats of mortgage fraud.
Additionally, the FBI has a presence at various conferences and seminars relevant to the mortgage industry. They have frequent meetings with people within the banking and mortgage industry to discuss prevention as well. Together, they are creating educational programs to help others be able to spot mortgage fraud schemes. Additionally, these events are an opportunity for excellent information sharing across a very wide audience, ranging from federal government to local individuals.
Because the FBI shares information and works together with other agencies across the government and with businesses in the private sector, they have a much clearer picture of the threat of mortgage fraud now. From this, it was made possible for experts to identify emerging mortgage fraud threats and latest trends. By working together and sharing knowledge, skills and resources with other federal, national, local and private agencies, they have been able to identify many trends in the mortgage fraud field and they have been able to stop man in their tracks as well.
Tips to Help You Avoid Mortgage Fraud
It is very important that you learn how to protect yourself from mortgage fraud. The following tips can assist you with that:
- Make sure that mortgage and real estate professionals are properly referred to you. You must check the license of any professional that you work with. Their licenses can be checked within your own local, county or state agencies.
- Always be suspicious of any offer that states you can make a huge profit in a very short length of time, and with little to no risk.
- Don’t trust unsolicited contacts or strangers, particularly if they make your pressured to make a purchase.
- Never make any decision without receiving written information. Look through this properly and make sure it includes comparable sales in your geographical area. Tax assessments are a really good source for this and will allow you to check whether the value of the property is correct.
- Make sure that you understand anything that you sign. If you have any questions, make sure they are answered by a third party, such as an attorney. The third party must be someone who represents your interests.
- Before you decide to buy a house, make sure to read its title history. If it has been ‘flipped’ (bought and sold quickly) several times, it could mean the value has actually been inflated as part of a fraud scheme.
- Properly understand your mortgage terms. Make sure your personal information is correct as well.
- Do not sign any documents with blank spaces.
You also need to protect yourself from any kind of debt elimination schemes. This can be done by:
- Being suspicious of online advertisements, including emails that say your debts can be eliminated if you pay some sort of fee. Red flags to look out for include Promotion Redemption Certificates, Due Bills, Bills of Exchange, Bonds for Discharge of Debt and Declarations of Voidance.
- Know that you cannot be relieved of debt quickly and easily.
- Know that you could lose thousands of dollars by falling for one of these schemes.
To protect yourself from foreclosure fraud schemes, you must:
- Be careful with any offer that promises to ‘save’ you from your current difficulties.
- Work with qualified attorneys or credit counselors.
- Never pay an advance fee.
- Emerging Fraud Trends, according to Freddie Mac
- FBI Resource on How Scams On Foreclosure Rescue Schemes Work
- Resource on How Scams on Loan Modification Schemes Work
- FBI Resource on Illegal Property Flipping
- FreddieMac Resource on Scams On Builder Bailout or Condo Conversion
- Resource on Equity Skimming
- Resource on the Silent Second Mortgage Scam
- FHA Resource on the Home Equity Conversion Mortgage Scam
- Resource on Commercial Real Estate Loan Scams
- Resource on Air Loan Scams
- FBI Financial Crimes Task Force