Dishonest appraisers can engage in appraisal fraud. Government policy and spending responses. Dan Rafter 10 September The file should include: Mortgage fraud is a broad term that can refer to many activities:. You may also decide to pay for the services of an attorney to review all your loan documents prior to closing. These schemes leave lenders exposed to large losses because the subsequent mortgages are junior to the first mortgage to be recorded and the property value is insufficient for the subsequent lenders to collect against the property in foreclosure.
Scams from the pros
The last sections provide a state-by-state breakdown of resources where consumers can turn for help in dealing with mortgage fraud, including law enforcement agencies and regulatory bodies. Chapter 1: What is Mortgage Fraud? An overview and definition of mortgage fraud, along with some illustrative. Mortgage loan fraud can be divided into two broad categories: fraud for property and fraud for profit. Fraud for property generally involves material misrepresentation or omission of information with the intent to deceive or mislead a lender into extending credit that would likely not . Mortgage fraud is a crime in which the intent is to materially misrepresent or omit information on a mortgage loan application in order to obtain a loan or to obtain a larger loan than could have been obtained had the lender or borrower known the truth.
Why Commit Mortgage Fraud?
However, predatory lending practices often co-exist with mortgage fraud. This occurs where the borrower wishes to obtain a mortgage to acquire an investment property , but states on the loan application that the borrower will occupy the property as the primary residence or as a second home.
If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinquency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction.
In addition, lenders allow larger loans on owner-occupied homes compared to loans for investment properties. When occupancy fraud occurs, it is likely that taxes on gains are not paid, resulting in additional fraud. It is considered fraud because the borrower has materially misrepresented the risk to the lender to obtain more favorable loan terms.
This was most often seen with so-called " stated income " mortgage loans popularly referred to as " liar loans " , where the borrower, or a loan officer acting for a borrower with or without the borrower's knowledge, stated without verification the income needed to qualify for the loan. All lenders obtain an official IRS transcript that must match the borrower provided tax returns. It is considered fraud because in most cases the borrower would not have qualified for the loan had the true income been disclosed.
The "mortgage meltdown" was caused, in part, when large numbers of borrowers in areas of rapidly increasing home prices lied about their income, acquired homes they could not afford, and then defaulted. Many of the past problems no longer exist. This occurs when a borrower claims self-employment in a non-existent company or claims a higher position e. Failure to disclose liabilities: Borrowers may conceal obligations, such as mortgage loans on other properties or newly acquired credit card debt, to reduce the amount of monthly debt declared on the loan application.
This omission of liabilities artificially lowers the debt-to-income ratio , which is a key underwriting criterion used to determine eligibility for most mortgage loans. It is considered fraud because it allows the borrower to qualify for a loan which otherwise would not have been granted, or to qualify for a bigger loan than what would have been granted had the borrower's true debt been disclosed.
A complex scheme involving multiple parties, including mortgage lending professionals, in a financially motivated attempt to defraud the lender of large sums of money. Fraud for profit schemes frequently include a straw borrower whose credit report is used, a dishonest appraiser who intentionally and significantly overstates the value of the subject property, a dishonest settlement agent who might prepare two sets of HUD settlement statements or makes disbursements from loan proceeds which are not disclosed on the settlement statement, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan.
The parties involved share the ill-gotten gains and the mortgage eventually goes into default. Once the loan is closed, the organizer disappears, no repairs are made nor renters found, and the "investor" is liable for paying the mortgage on a property that is not worth what is owed, leaving the "investor" financially ruined.
If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth far less and in large schemes with multiple transactions, banks may lend millions more than the properties are worth.
The Robert Douglas Hartmann case is a notable example of this type of scheme. A detailed case study of the complex United States v. Occurs when a home's appraised value is deliberately overstated or understated. When overstated, more money can be obtained by the borrower in the form of a cash-out refinance , by the seller in a purchase transaction, or by the organizers of a for-profit mortgage fraud scheme.
Appraisal fraud also includes cases where the home's value is deliberately understated to get a lower price on a foreclosed home, or in a fraudulent attempt to induce a lender to decrease the amount owed on the mortgage in a loan modification. A dishonest appraiser may be involved in the preparation of the fraudulent appraisal, or an existing and accurate appraisal may be altered by someone with knowledge of graphic editing tools such as Adobe Photoshop.
Appraisal Independence is current law. Occur where the true price of a property is illegally inflated to provide cash-back to transaction participants, most often the borrowers, who receive a "rebate" which is not disclosed to the lender. As a result, the lender lends too much, and the buyer pockets the overage or splits it with other participants, including the seller or the real estate agent. This scheme requires appraisal fraud to deceive the lender.
Occurs when multiple loans for the same home are obtained simultaneously for a total amount greatly in excess of the actual value of the property. These schemes leave lenders exposed to large losses because the subsequent mortgages are junior to the first mortgage to be recorded and the property value is insufficient for the subsequent lenders to collect against the property in foreclosure.
The Matthew Cox and Robert Douglas Hartmann cases are the most notable example of this type of scheme. The result of this fraud is that lenders often litigate which has first priority to the property.
A technique which entails the excessive lien stacking knowingly executed on a specific property within an inordinately narrow timeframe, via the serial recording of multiple Deeds of Trust or Assignments of Note. This " gaming " or exploitation of a structural weakness in the US legal system is a critical precursor to "shotgunning" and considered white-collar crime when implemented in a systemic fashion.
Occurs when a person assumes the identity of another and uses that identity to obtain a mortgage without the knowledge or consent of the victim. In these schemes, the thieves disappear without making payments on the mortgage. Falsification of loan applications without the knowledge of the borrower: The loan applications are falsified without the knowledge of the borrower when the borrower actually will not qualify for a loan for various reasons.
The business happens only if the loan application is falsified. But the borrower struggles to repay the loan and defaults the loan eventually. Mortgage fraud may be perpetrated by one or more participants in a loan transaction, including the borrower; a loan officer who originates the mortgage; a real estate agent, appraiser, a title or escrow representative or attorney; or by multiple parties as in the example of the fraud ring described above.
Remember, mortgage fraud is a prosecutable crime and a felony under various federal and state laws. If a borrower feels that they are being asked to break the law, they should, at the very least, talk to a reputable real estate lawyer or the licensing authority in that home state before making a decision. Magicians earn applause by performing card tricks or pulling rabbits out of their hats. Anyone who tries to pull a fast one with a mortgage, however, earns prison time.
Here are some examples of mortgage fraud that occur every day. Mortgages are the largest investment most people will ever make. With all those dollar signs comes plenty of temptation for the criminal element. There are countless mortgage frauds on the market. Here are some common types perpetrated both on and by homeowners:. On occasion, you may fall victim to a scam perpetrated by a mortgage professional.
These tend to be more complicated and are difficult to detect. It's much easier for an individual to select a trustworthy broker up front than to catch a mortgage con artist in the act.
When choosing a mortgage broker or loan officer, make sure that they're backed by a long-standing lending institution and can provide you with solid referrals. Keep your eyes open for deals that sound too good to be true, because they usually are. You may also decide to pay for the services of an attorney to review all your loan documents prior to closing. A lawyer can provide definitive answers, and will always work on your behalf. Mortgage fraud is a tricky topic, especially because mortgage loans tend to be confusing.
As the housing market gets tighter, and buyers and sellers become more desperate, you can expect mortgage fraud to rise. Armed with the right information, you'll have the knowledge to keep them at bay. SecureRights collects and transfers your information to complete your request.
Posing as a borrower on behalf of another who's actually making the purchase. Pretending to provide financial help to an economically stressed homeowner in order to skim off equity from the home. Here are some common types perpetrated both on and by homeowners: Because of the way self-employed people file taxes, many individuals fail to report their full income on their taxes.
A "stated income" loan allows a potential borrower to claim a certain amount, and an underwriter bases a lending decision on that stated income. If a borrower inflates that figure, it constitutes mortgage fraud. Banks are reluctant to lend money to people who can't prove that they have the financial means to make regular loan payments.
A hefty down payment, however, can sway many a lender's opinion. If a seller really needs to dump a property, he can give the borrower enough money for a down payment under the table.
With the money in hand, the buyer can illegally "qualify" for the loan. Owner-occupant refusing to occupy.