Mortgage Fraud What it Means How it Works
Mortgage Fraud: What it Means, How it Works
Definition of Mortgage Fraud
The intention of mortgage fraud is to receive a larger loan amount than permitted by falsifying information on a mortgage application. Fraud schemes include straw buying, air loans, and double-sales.
Large scale mortgage fraud schemes are not uncommon. In 2008, the U.S. Department of Justice and FBI initiated "Operation Malicious Mortgage" to investigate and prosecute 144 cases. Penalties for mortgage fraud include fines, restitution, and prison time with sentences of 28 months on average.
There are two areas of mortgage fraud.
Fraud for profit
Perpetrators of this fraud are industry insiders such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals. Fraud for profit aims 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 fraud is represented by illegal actions taken by borrowers to acquire or maintain ownership of a house. For example, misrepresenting income and asset information on a loan application or manipulating a property’s appraised value.
Breaking Down Mortgage Fraud
Mortgage fraud is the falsifying of loan documents, or otherwise illegally profiting from the mortgage loan process. The FBI considers fraud to be a material misstatement, misrepresentation, or omission in relation to a mortgage loan that is relied upon by a lender. Fraud influences a bank’s decision about whether to approve a loan, accept a reduced payoff amount, or agree to certain repayment terms. The definition has been broadened to include fraud targeting distressed homeowners.
Aside from lying on a loan application, other types of mortgage fraud include:
– Straw buyers are used to disguise the true buyer or nature of the transaction.
– An air loan is a loan to a non-existent buyer on a non-existent property.
– A double sale is the sale of one mortgage note to more than one investor.
– Illegal property flipping occurs when property is purchased and resold quickly at an artificially inflated price, using a fraudulently inflated appraisal.
– Ponzi, investment club, or chunking schemes involve selling properties at artificially inflated prices, pitching them as investment opportunities to naive real estate investors.
– A builder bailout is when a seller pays large financial incentives to the buyer and facilitates an inflated loan amount by increasing the sales price, concealing the incentive, and using a fraudulently inflated appraisal.
– A buy-and-bail is when the homeowner is current on the mortgage but applies for a purchase-money mortgage on another home, allowing the first home to go into foreclosure.
– A foreclosure rescue scheme involves foreclosure "specialists" who promise to help borrowers avoid foreclosure but often take payment without providing services.
– In short sale fraud, the perpetrator conceals transactions or falsifies information, including the true value of the property, to prevent an informed short sale decision.
– A non-arm’s length short sale scheme involves a fictitious purchase offer made by the homeowner’s accomplice to reduce the indebtedness on the property and allow the borrower to remain in their home.
– In a short sale flip scheme, the perpetrator manipulates the short sale lender into approving a short payoff and conceals an immediate contingent sale to a pre-arranged end buyer at a higher sales price.
– In reverse mortgage fraud, the perpetrator manipulates a senior citizen into obtaining a reverse mortgage and then keeps the victim’s proceeds.
– In affinity fraud, perpetrators exploit trust and friendship in groups held together by a common bond.
– In reverse occupancy fraud, a borrower buys a home as an investment property, lists rent proceeds as income to qualify for the mortgage, and then occupies the premises as a primary residence.
