Mortgage fraud

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Mortgage fraud is a term used to describe a broad variety of actions where the intent is to materially misrepresent information on a mortgage loan application, in order to obtain the loan.

Mortgage fraud is not to be confused with predatory mortgage lending. Mortgage fraud is when one or more individuals defraud a financial institution; predatory lending is when a dishonest financial institution willfully misleads or deceives the consumer.

[edit] Examples of mortgage fraud

Occupancy fraud: Frequently this is seen where the borrower wishes to obtain a mortgage to acquire an investment property, but instead the borrower claims on the loan application that they will occupy the property as their primary residence or 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 delinqency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction.

Employment/income fraud: Borrowers may overstate income in order to qualify for a larger loan amount. This is most often seen with so-called "stated income" (popularly referred to as "liar loans") mortgage loans, where the borrower declares their income without verification. It is sometimes seen in traditional full-documentation loans where the borrower alters an employer-issued Form W-2 to overstate income. Another example is to claim income from self-employment without documentation to prove that the borrower's business even exists.

Failure to disclose liabilities: Borrowers may conceal obligations, such as mortgage loans on other properties or newly acquired credit card debt, in order to reduce the amount of monthly debt declared on the loan application. This is pertinent because the debt-to-income ratio is a key underwriting criterion to determine eligibility for most mortgage loans, and the omission of liabilities artificially lowers the debt ratio, allowing the borrower to qualify for a bigger loan.

Mortgage fraud ring: A more complex scheme involving multiple parties in a financially motivated attempt to defraud the lender of large sums of money. One possible scheme includes a straw borrower whose credit report is used, a dishonest appraiser who intentionally and significantly overstates the value of the subject property, a dishonest attorney who prepares two sets of HUD closing documents, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan. If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth far less. The parties involved share the ill-gotten gains and disappear without making payments on the mortgage.

Appraisal fraud: If a home's appraised value is deliberately overstated, more money can be obtained by the borrower in the form of a cash-out refinance or obtained by the seller in a purchase transaction. A dishonest appraiser may inflate the value, or someone with knowledge of graphic editing tools such as Adobe Photoshop can alter an appraisal. In many cases of mortgage fraud, the appraisal is involved..

Cash-Back Schemes: The buyer and seller collude to deceive the lender as to the true sale price of a property. The seller gives the buyer a cash rebate which is not disclosed to the lender. As a result the lender lends too much, and the buyer and seller pocket the overage. This scheme usually requires appraisal fraud to deceive the lender. "Get Rich Quick" real-estate gurus' courses frequently rely heavily on this mechanism for profitability.

Shotgunning: When a person takes out multiple loans for the same home simultaneously the term is shotgunning. Typically after committing the mortgage fraud, the person or persons leave the country.

Identity Theft: When a person assumes the identity of a home owner and takes out a mortgage on their property. Sometimes this is part of a mortgage fraud ring where a seller assumes the identity of the home owner, and a buyer who seeks the mortgage to buy the house; both of whom are using false identities, share the ill-gotten gains and disappear without making payments on the mortgage.

[edit] Other background

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. Dishonest and unreputable stakeholders may encourage and assist borrowers in committing fraud because most participants are typically compensated only when a transaction closes.

According to a December 2005 press release from the FBI, "mortgage fraud is one of the fastest growing white collar crimes in the United States". [1]