What Is Mortgage Fraud?
Mortgage fraud includes various illegal schemes involving material misrepresentation, misstatements, or omissions that relate to property or a potential mortgage.
In general, mortgage fraud involves two parties: the party providing false information and the party that relies on that information to complete a transaction.
It can be committed by both individual borrowers (fraud for housing) and industry professionals (fraud for profit).
Let's look at five common mortgage fraud schemes:
- Fraudulent Supporting Loan Documentation. A loan applicant submits forged or altered paycheck stubs, or otherwise fraudulent documentation.
- Foreclosure rescue schemes. A fraudster approaches a legitimate owner with a debt-consolidation scheme that typically involves the owner paying up-front fees and transferring the property title (sometimes unwittingly) to the fraudster. Though such scams come in many forms, there are ways for homeowners to identify foreclosure rescue scam red flags.
- Property flipping. A piece of property is repeatedly and fraudulently sold between colluding individuals. The price is artificially driven up through false appraisals or successive sales between the colluding individuals. The fraudulent appraisal is what makes this practice illegal, as "flipping" during a housing boom is not necessarily illegal.
- Equity skimming: An investor uses a straw buyer, false credit reports, and false income documents to obtain 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 often rents the property until it is foreclosed.
- Silent second: A 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.
Need More Help?
This introduction just scratches at the surface of the myriad types of "traditional" mortgage fraud and how to avoid them.
But the face of mortgage fraud is constantly evolving. Just this week, Bank of America was hit with an $864 million mortgage fraud fine for selling subprime mortgages, the defective securities largely responsible for triggering the Great Recession in 2008, to government-owned enterprises.
For additional guidance on anything from foreclosure frauds to subprime shenanigans, you may want to consult an experienced real estate attorney.