Mortgage Fraud

Sentences under FERA can include $1 million fines and 30-year prison sentences. Some states also have laws that address fraud-related crimes in the mortgage industry.

What we refer to as mortgage fraud includes various illegal schemes. These schemes involve misrepresentation or misstatement on mortgage documents. Mortgage fraud may involve fake W-2 forms or inflated property appraisals submitted by:

  • A homebuyer
  • A mortgage broker
  • Other real estate professional

In general, fraud involves two parties:

  • The party providing false information
  • The party that relies on that information to complete a transaction

Such crimes are commonly prosecuted as wire fraud, bank fraud, and conspiracy. Federal statutes do not directly reference "mortgage fraud."

Mortgage fraud cases often carry severe consequences for the defendants. The criminal charges that such cases bring can affect a criminal record irreparably. Mortgage fraud charges are serious. Continue reading to learn more.

FERA and the Prosecution of Mortgage Crimes

The Fraud Enforcement and Recovery Act (FERA) expanded the reach of federal law enforcement officials. It did so in enforcing mortgage fraud laws. FERA took effect in 2009. 

An investigation may also lead to bankruptcy fraud or tax fraud charges. Authorities tend to target unscrupulous mortgage brokers in investigations. They also target appraisers, real estate attorneys, and other real estate professionals. But sometimes, homebuyers are arrested for providing inaccurate information.

Law enforcement officials recognize two main categories of fraud related to mortgages:

  • Fraud for Housing: A borrower submits false, incomplete, or inaccurate information. They do so to qualify for a loan or to get more favorable terms when buying a home. This type of fraud affects homeowners.
  • Fraud for Profit: A real estate professional commits fraud to extract money from a property or transaction. Examples of real estate professionals include appraisers and mortgage brokers.

Cases involving FERA violations are heard in federal court. The law pertains to federal mortgage fraud. Violations of FERA are a federal crime. Federal charges like these can carry heavy penalties. The Federal Bureau of Investigations (FBI) handles investigations. Prison sentences are served in federal prisons.

Common Types of Mortgage Fraud

Mortgage transactions provide ample opportunities for fraud. They do so because they involve multiple parties and large sums of money. These transactions are part of the lending process for buying a home. Some such schemes are sophisticated and unique, but the following types are the most common:

  • Fraudulent Supporting Loan Documentation: A loan applicant submits forged or altered paycheck stubs. They might submit other fraudulent documentation.
  • Property Flipping: A piece of real estate is purchased, appraised at a falsely inflated value, and then quickly resold. The fraudulent appraisal makes this practice illegal, as "flipping" during a housing boom is not necessarily illegal.
  • Straw Buyers: The borrower's identity is hidden through the use of a nominee, in whose name and credit history the loan application is made.
  • Silent Second: The buyer takes out a second mortgage to cover the down payment on the initial loan. It is illegal because the second, smaller loan is taken out without the initial lender's knowledge.
  • Stolen Identity: A mortgage loan applicant uses a fictitious or stolen identity. If stolen, the true person's name, personal information, and credit history are used without their knowledge. This variety of mortgage fraud involves identity theft.
  • Equity Skimming: An investor uses a straw buyer, false credit reports, and false income documents to get a mortgage in the straw buyer's name. The straw buyer signs the property over to the investor after closing, relinquishing all property rights. The investor makes no payments but rents the property until it is foreclosed.
  • Inflated Appraisal: The appraiser, colluding with the mortgage broker and/or loan officer, provides unrealistically high appraisal value to match the buyer's offer and complete the deal.

Whatever the variety of fraud, they all tend to involve false statements.

State Mortgage Fraud Laws

More than one-third of U.S. states, including California, Florida, and New York, have laws prohibiting at least one form of mortgage fraud. The New York law (New York Penal Code, Article 187), for example, defines "residential mortgage fraud" as an intentional act involving statements containing false information or that conceal information to mislead another party. The crime is prosecuted as a class A misdemeanor to a class B felony offense, depending on the severity of the offense.

Federal sentences are more severe than state sentences for mortgage fraud convictions. Talk to a local attorney to learn more about the laws in your state, including ways to avoid being a victim of this crime.

Civil Liability for Mortgage Fraud

Those accused of committing mortgage fraud may also be held liable for monetary damages incurred by the lender. Civil claims may be based on contractual theories, misrepresentation and/or deceit, conspiracy to defraud the lender, or breach of trust.

Third parties involved in the fraudulent transaction, such as mortgage brokers or appraisers, may also be liable for damages. If the fraud involves a financial institution, they may be held liable, too. The same applies to mortgage lenders, real estate agents, and underwriters.

Charged with Mortgage Fraud? Get in Touch with an Attorney

Inflating a property's value, overstating your income on a loan application, or conspiring with another investor to buy property are all vigorously investigated and punished. If you're being investigated for mortgage fraud or any other crime, it's a good idea to contact a local criminal defense attorney to discuss the facts of your case.

If you're facing charges related to mortgage fraud, it's a good idea to contact a criminal defense lawyer. This area of white-collar crime can be complicated. Contact an attorney today. Don't try to resolve your criminal case on your own. A lawyer specializing in this area of criminal law can help. Their legal advice will be invaluable.

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