Mortgage Fraud

January 1, 1 7 min read Mortgage Fraud Real Estate Fraud Loan Fraud Financial Crime Housing Fraud Property Fraud Real Estate
Mortgage fraud occurs when a potential borrower or a financial institution makes false representations that distort true financial outcomes, often leading to fraudulent gains or losses.
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Definition

Mortgage Fraud

Mortgage fraud refers to any misrepresentation, misstatement, or omission of crucial information that could potentially affect a mortgage lending decision. The FBI identifies two primary types of mortgage fraud in the United States:

  1. Fraud for Property/Housing: This type of fraud involves the borrower making false statements about income, personal debt, property value, or down payment. The borrower’s intent is to obtain a property and repay the loan. Often, industry professionals might assist by coaching the borrower to qualify for the loan.

  2. Fraud for Profit: This more severe fraud involves professional criminals who conduct multiple fraudulent loan transactions, often across several financial institutions. It includes falsifying information about income, assets, employment, or credit history. In many cases, this involves identity theft (“Straw Man”) or making the property appear owner-occupied through false claims.

Examples

  1. Income Overstatement: A borrower provides fraudulent income documents to show a higher income than they actually earn to qualify for a more substantial loan.

  2. Fake Employment: A borrower lists a fake employer or fabricates employment history and wages to meet income requirements for a loan.

  3. Property Value Inflation: Through fraudulent appraisals, a property’s value is falsely inflated to secure larger loans and potentially higher profits upon resale.

  4. Occupancy Fraud: The borrower falsely states that the property will be their primary residence when they actually intend to rent it or sell it for profit.

  5. Straw Buyer Schemes: Using someone else’s identity and credit history (often with or without their knowledge) to secure loans or buy property.

Frequently Asked Questions

What is mortgage fraud?

Mortgage fraud entails deceiving a financial institution or client by providing false statements, documents, or information relevant to buying, selling, or filing for a mortgage.

Who commits mortgage fraud?

Anyone involved in the transaction, including buyers, sellers, real estate agents, loan officers, appraisers, or even insiders at lending institutions.

What is the punishment for mortgage fraud?

Penalties vary by jurisdiction but can include hefty fines and prison sentences. Federal convictions can result in, among others, decades-long prison terms and millions in restitution payments.

How can one identify potential mortgage fraud?

Red flags include discrepancies in income statements, suspicious appraisals, unverifiable employment history, unusual down payment structures, and multiple loans on the same property.

What constitutes “Fraud for Profit” mortgage fraud?

Fraud for Profit involves professionals who intentionally misstate or omit information to gain financially from multiple transactions. It often involves inflated property values, false documentation, and sometimes identity theft.

  • Appraisal: A professional assessment determining the value of a property, often manipulated in fraud cases.

  • Straw Buyer: A person used to buy a property and secure a mortgage loan under false pretenses, often for the benefit of another individual.

  • Identity Theft: Illegally obtaining someone’s personal information to assume their identity often used in mortgage fraud to secure loans.

  • Occupancy Fraud: Falsely claiming property as a primary residence to benefit from favorable mortgage terms.

Online Resources

  1. FBI Mortgage Fraud Overview
  2. Consumer Financial Protection Bureau (CFPB)
  3. Federal Trade Commission (FTC) - Mortgage and Real Estate: Guide and Resources
  4. National Mortgage Servicing Fraud Index

References

  1. Federal Bureau of Investigation (FBI). “Mortgage Fraud.” FBI.gov.
  2. Consumer Financial Protection Bureau. “Complaints to the CFPB.” ConsumerFinance.gov.
  3. U.S. Department of Justice. “Mortgage Fraud and Real Estate Fraud.”

Suggested Books for Further Study

  1. “Mortgage Fraud and Katie-Malarkey: Fighting Financial Crime” by Riley and Sons
  2. “The Monitor’s Guide to Real Estate and Mortgage Fraud” by Kevin Perkis
  3. “Real Estate Law: Practice and Technique” by Gordon Masters
  4. “Financial and Fringe Real Estate Crimes” by Maria Wilson

Real Estate Basics: Mortgage Fraud Fundamentals Quiz

### What are the main types of mortgage fraud identified by the FBI? - [x] Fraud for Property and Fraud for Profit - [ ] Fraud for Identity and Fraud for Credit - [ ] Valuation Fraud and Employment Fraud - [ ] Income Fraud and Buyer's Fraud > **Explanation:** The FBI identifies Fraud for Property and Fraud for Profit as the two main types of mortgage fraud activities in the United States, highlighting borrower misrepresentations and professional criminal involvement respectively. ### What typically characterizes "Fraud for Housing"? - [x] Borrowers making a few misrepresentations regarding their income and intent to repay - [ ] Organized criminal rings generating multiple fraudulent loans - [ ] Illegal flipping schemes - [ ] Full cash transactions to avoid loan documentation > **Explanation:** Fraud for Housing, also known as Fraud for Property, involves borrowers making a few misrepresentations, typically about income or property value, intending to live in the property and eventually repay the loan. ### What type of mortgage fraud involves professionals and multiple transactions? - [ ] Straw Man Fraud - [x] Fraud for Profit - [ ] Appraisal Manipulation - [ ] Solo Fraud Activities > **Explanation:** Fraud for Profit involves professional criminals committing multiple fraudulent transactions, often involving altered credit histories, false employment records, and inflated property values. ### Who typically gets involved in coaching in "Fraud for Housing"? - [ ] Law enforcement officials - [ ] Financial advisors - [x] Industry professionals, like loan officers or real estate agents - [ ] Mortgage reviewers > **Explanation:** Industry professionals, such as loan officers or real estate agents, might coach borrowers on how to meet the loan qualifications by misrepresenting some aspects of their financial situation. ### How does occupancy fraud affect a mortgage loan? - [x] By claiming the borrower will live in the property to receive better mortgage terms - [ ] By reducing the total loan term - [ ] By increasing the borrower's credit score mistakenly - [ ] By automating the repayment process > **Explanation:** Occupancy fraud happens when a borrower states that the property will be their primary residence to get better loan terms, while the actual intent may be to rent or sell the property. ### What is a common feature of "Fraud for Profit"? - [ ] Single loan transactions by honest borrowers - [x] Gross misrepresentations and involvement of co-conspirators - [ ] Direct cash paybacks to lenders - [ ] Verifiable asset listings > **Explanation:** Fraud for Profit is often characterized by multiple loan transactions that involve gross misrepresentations related to income, employment, and property value, frequently backed by co-conspirators. ### Which fraud type is often facilitated through an inflated property appraisal? - [x] Fraud for Profit - [ ] Fraud for Housing - [ ] Simple Mortgage Fraud - [ ] Automatic Loan Validations > **Explanation:** Fraud for Profit often involves inflated property appraisals to generate a higher sales price and justify larger loan amounts, which can also facilitate illegal gain extraction by fraudsters. ### What does fraudulent gift letter mean in a mortgage fraud context? - [x] Disguising borrowed money as a down payment gift from a relative - [ ] False means to claim foreclosure mornatorium - [ ] Fake letter of employment verification - [ ] Wrong refund claims on mortgage insurance > **Explanation:** In the context of mortgage fraud, a fraudulent gift letter is used to disguise borrowed funds as a gift, often submitted falsely to meet down payment requirements. ### Which type of mortgage fraud usually results in the borrower not disclosing their full debt load? - [ ] Fraud for Housing - [ ] Fraud for Rehabilitation - [x] Fraud for Profit - [ ] Low-Income Loan Fraud > **Explanation:** Fraud for Profit entails not fully disclosing all debts of the borrower as one of the means to falsely assure their creditworthiness and ability to repay the loan. ### Who might unwittingly pose as a borrower in strawman fraud? - [ ] Lenders - [ ] Home inspectors - [ ] Mere Surveyors - [x] Another person whose identity is assumed > **Explanation:** In strawman fraud, the real borrower assumes the identity of another person (the "straw man"), using their credit and financial records without their knowledge.
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