Mortgage Loan Scams

Mortgage loan scams or fraud are among a growing number of crimes involving real estate financing. Mortgage loan scams can take many forms and can involve multiple parties, including:

• Buyers
• Sellers
• Investors
• Creditors
• Real Estate Agents

Signs of potential mortgage fraud may include property flipping, equity skimming, and credit or income misrepresentation. Not only do mortgage scams threaten a homeowner or business individually, they can also wreak havoc on the national economy. This section includes information and resources to:

• Help you recognize mortgage scams and their various forms
• Figure out what to do if you suspect mortgage fraud

What Is a Mortgage Scam?

Homebuyers and borrowers need to be aware of the various illegal schemes. These are collectively referred to as mortgage fraud or mortgage scams. Even if a lender offers to help you get a loan by falsifying income data, you could end up in foreclosure if you cannot afford the loan. You shouldn't be overly paranoid when meeting with lenders, but the ability to recognize signs of fraud will help you avoid most problems.

There are two main categories of mortgage fraud:

• Fraud for Housing: A borrower submits incomplete or false information to appear more creditworthy when applying for a loan.
• Fraud for Profit: A real estate professional, such as an appraiser, commits fraud with the goal of extracting money from a transaction (often by wire transfer).

Fraud can occur when buying or selling a home, refinancing, applying for a home equity loan, re-modifying a loan, or virtually any kind of mortgage loan process.

Common Types of Mortgage Loan Scams

Some types of mortgage fraud are more common than others, while some are extraordinarily sophisticated and unique. Here are some common scams:

Common Mortgage Scams by Borrowers

• Fraudulent Documentation: This often occurs when a borrower submits false or altered paycheck stubs to inflate their reported income.
• Silent Second: Taking out a second, smaller loan (without the initial lender's knowledge) to pay for the down payment on the first loan.

Types of Scams by Third Parties

• Loan Flipping: While quickly selling a home after buying it generally is not illegal, quickly reselling a property after obtaining a fraudulent appraisal is.
• Straw Buyer: Using the name and credit history of a proxy (another individual) to hide the actual borrower's identity. Sometimes the scammer's proxy is a victim of identity theft.
• Equity Skimming: An investor uses a straw buyer and false documentation to obtain a mortgage. Next, the straw buyer signs the property over to the investor after closing, who rents the property out until it is foreclosed (without making any payments).
• Relief Scams: A lender may misrepresent facts to a borrower to advertise mortgage relief. For example, they may promise terms that are too good to be true, such as low interest rates or mortgage payments.

Reverse Mortgage Scams

Reverse mortgages may be a legitimate way for people to prioritize their retirement. They allow homeowners to use their primary residence to access equity in their home. Many senior citizens might use reverse mortgages to boost their monthly incomes or to obtain a large payment from a mortgage lender.

But some illicit mortgage lending institutions target the elderly to rob them of their homes. Since a reverse mortgage is secured by a borrower's home, a lender may use abusive terms to wrongfully take title.

Mortgage Modification Scams

There are a number of housing and credit counselors who claim the ability to help you save your home through a mortgage modification. Many of them are legitimate and can be helpful, but there also are plenty of fraudulent players in this space. While there is often some variance in how the legitimate ones operate, some warning signs indicate possible fraud. These include:

• Any explicit "guarantee" that they will save your home
• Charging $1,000 or more up front (there may be small fees, though)
• Asking you to "sign over" your home (you may end up losing your home but still liable for the balance on your mortgage loan)
• Advice to ignore your lender or to stop making payments
• Being asked to sign a blank or incomplete document

Home Equity Loan Scams

Taking out a home equity loan on your house may be a great way to access cash. But if the lender doesn't consider whether you can reasonably repay, you risk foreclosure.

There are many different types of home equity loan scams, but the most common include:

• Equity Stripping: The lender provides a loan based on the equity in your home, not your ability to repay (often leads to foreclosure).
• Bait and Switch: The lender offers one set of loan terms but then pressures you into another type of loan when you sign.
• Deceptive Loan Servicing: The lender intentionally fails to provide accurate account information, hoping that you may overpay what you actually owe.

To avoid scams, you may consider obtaining referrals from legitimate sources. It's harder for fraudsters to influence your situation if you work with an attorney or housing counselor.

How Mortgage Scams Are Caught and Reported

If you're a victim, it's important to look for red flags that could give way to a scam. For example, if the interest rate on a home loan sounds too good to be true, it might be. Or a lender may be offering to provide a refinance or loan modification without closing costs.

A mortgage lender might not require a traditional loan application. They might refuse to provide you with loan documents for review. If your mortgage broker exhibits suspicious behavior, you may consider involving law enforcement.

Predatory lenders target first-time homebuyers, people facing tough times, and trusting seniors. They might offer foreclosure rescue by posing as a counseling agency. But in reality, they could be after your bank account or other private contact information.

They might try to charge ridiculous upfront fees that are uncharacteristic of legitimate financial institutions, loan originators, or credit unions. If these fact patterns sound familiar, you may have recourse under federal law. Aside from consulting with a HUD housing counselor or attorney for advice, you can report violations to:

• The Consumer Financial Protection Bureau (CFPB)
• The Federal Bureau of Investigation (FBI)
• The Federal Trade Commission (FTC)

There is a lot of money on the table, and often multiple parties involved, when it comes to mortgage loans. This creates the incentive for some to engage in fraud. Click on a link below to learn how to protect yourself.