Mortgage fraud is one of the most prominent crimes in the U.S. and its scams continue to morph with the market. From leaving homeowners with ¨underwater”mortgages that are greater than the valued price of their home, lenders dealing with foreclosed homes, and brokers/real estate professionals having to accurately screen clients finances. These schemes are not uncommon. This form of fraud is a serious concern and is always adapting to the latest trends. Also, the FBI (identifies mortgage fraud as “tricky”) and the United States Department Of Justice are involved with creating a unique way to investigate and prosecute such cases (mortgage-fraud.asp). Mortgage fraud typically can be committed by both individual borrowers and industry/insiders professionals. This financial crime is involved with misrepresenting information and falsifying loan documents; as well as, trying to make an illegal profit from the mortgage loan process. There are two distinct areas of mortgage fraud, which are fraud for housing and fraud for profit.
Housing Fraud
Those that commit housing fraud, “fraud for property” or fraud-for-housing crimes are fulfilling these actions by being a borrower, who would like to acquire or maintain ownership of a house in a dishonest manner; in which they would either provide falsified income, asset information on a loan application, or persuade an appraiser to manipulate a property's appraised value. This form of fraud typically happens when homeowners attempt to lie about their financial backgrounds. Those buyers could also be taking part in identity theft, which is a particular mortgage fraud. For example, a thief can steal a homeowner’s or someone’s personal information (for example, Social Security number) to take out a home equity line of credit, take the cash and leave the homeowner or victim in debt. The Motivation behind the borrower’s desire to get housing this way, is to be able to get the dream home or property, they wouldn’t have been able to qualify for. This is considered the the “least expensive kind of fraud”, since the objective is receive and keep the home, so the borrower is usually motivated to pay it back. https://www.experian.com/blogs/ask-experian/heres-everything-you-need-to-know-about-the-risks-of-mortgage-fraud/
Fraud for Profit
Those that commit fraud for profit are often industry insiders using their specialized knowledge or authority to commit or facilitate the fraud (https://www.investopedia.com/terms/m/mortgage-fraud.asp). These professionals can be a bank officer, mortgage broker, attorney, loan originators, appraisers and any other professional engaged in the industry. This form of fraud is not focused on securing a home, but to misuse the mortgage lending process to steal cash and equity from lenders or distressed homeowners. The penalties are harsher and can also involve prosecution.
Common Scheme
The most common investor mortgage scheme and scam are property flipping, straw buyers/fake buyer and appraisal fraud. Borrowers and professional are either motivated by the desire to gain extra cash, increase sale or investment position or to obtain a home that the wouldn't have been able to afford. Property flipping (also known as wholesale real estate investing), which is a real estate investment strategy in which an investor purchases property not for their own use, but with intentions of selling it to make a great profit. The profit is derived from profit appreciation in result of capital improvements of the property. In this case, the investor would purchase a home in a great neighborhood, renovate it and then offer a higher price. Generating a steady flow of income by engaging in this in illegal scheme by simply buying low and selling high and quickly.
The next common component of mortgage fraud is a straw buyer, which is an individual (fake buyer) who would consent to the use of their personal information and name by the would-be or intended homeowner. The straw buyer typically has better credit, higher income and has a better chance to get approved for the mortgage loan than the intended homeowner. When the home is sold, a deed transfer would occur to shift the deed to the intended owner. Straw buyers could end up serving jail time.
Finally, the most common industry mortgage fraud scams are the home appraisal fraud, which can be described as a home that is fraudulently inflated beyond its actual value. It often involves a builder, a real estate agent, appraiser and loan officer; working together to help maximize to increase their commissions and purchase price. The higher/greater the home appraisal, the higher/greater the home price and the more cash for the seller. However, any appraisal that is too high or low (to undervalue the property to make it more, can be bad for the buyer and can add a major debt burden when the home is purchased.
The Fix
These cases can be handled by loan officers, in order to detect and reduce mortgage fraud. Thorough analysis of statements and reviewing of loan files, loan officers are able to see the red flags quicker. Additionally, the government agencies are monitoring activities, transaction and compliances; of insurance agencies, real estate agents, title and lending companies. “The FBI's Economic Crimes Unit II also monitors complaints and suspicious activity in the mortgage industry” (https://www.investopedia.com/articles/mortgages-real-estate/10/how-mortgage-fraud-affects-markets.asp#ixzz5TGVhje00). Currently, the Consumer Financial Protection Bureau has enforced newer mortgage regulation that emphasizes on loan, borrower and professional qualities. Which will prevent certain loan features. There is a new rule called the “Ability-to-Pay”, in which borrowers must clear standards and information must be verified by lender’s, with documentation that it could also be repaid. https://www.cnbc.com/2013/10/03/what-you-need-to-know-about-mortgage-fraud.html.
In the case of being a homebuyer under unfortunate and personal circumstances, being practical is the best thing to avoid committing fraud. The desire to have a dream home can be strong, especially when it does not reflect the current situation. There are options available, such as forbearance, loan modification, refinancing their mortgage and repayment plans. These are preventative measure to prevent providing falsified documents and the pressures a home buyer would go through.
Also, dealing with aggressive brokers, lenders and real estate agents can be a major red flag. It would also be a great idea to check with the BBB – Better Business Bureau for any reports on lenders and to take additional preventative measures. Unfortunately, the behaviors or reason for the aggression can be happening within the real estate professionals circle. There are great pressures brokers and lenders must go through to close their mortgages. Appraisers have been blaming brokers and lenders for the appraisal fraud epidemic. If these professionals are going through these pressures, with their livelihoods being threatened they are most likely will do anything to stay in business. The only way to avoid these issues ss a homebuyer, it will be best to pay for your own appraiser that is state certified and works for banks (whom are likely to be ethical and competent).
Conclusion
Mortgage fraud is on the rise and has increased 16.9% in the second uarter of 2017 vs the prior year (https://www.experian.com/blogs/ask-experian/heres-everything-you-need-to-know-about-the-risks-of-mortgage-fraud/). Currently, Ohio has been added and ranked number one in Mortgage Fraud Top 10 states. Although, financial institutions file fraud reports, it can take years after the fraud occurs before it is discovered. The FBI reported that in 2010 the most common mortgage crime, “housing fraud”, was reported to have a total of $10 billion in fraudulent loans and data. The key to avoid mortgage fraud is to educate yourself and to protect your information. The great news is that combating and reducing mortgage fraud have been in the works and that governments have been active with monitoring suspicious activity in the mortgage industry.