Protecting Yourself Against Mortgage Fraud

What exactly is mortgage fraud and how does it impact all of us? Mortgage fraud affects everyone, not just the victims.  It affects our economy as a whole.  When scammers defraud lenders, the legitimate consumer pays the price through increasing the cost of borrowing.  It harms our communities by increasing the number of foreclosures and vacant properties.  This, in turn, creates other criminal activities in our communities.  For the illegal loan applicants and fraudsters, committing mortgage fraud can earn them prison time, and this is costly to the legal and judicial system as well as the law abiding taxpayers.

After the housing meltdown and subprime mortgage crisis that took place in the United States between 2007 to 2010, the economic impact was devastating. Many people lost their jobs and homes, and financial institutions suffered tremendous losses.  New laws and regulations were implemented to tighten the industry to deter mortgage fraud.  Despite many efforts and tight lending practices after 2008, mortgage fraud has not declined.  Fraudsters continue to find alternative ways to make quick money.  According to the CoreLogic 2018 Annual Mortgage Fraud Report, mortgage fraud is on the rise.  It is estimated that one in every 109 mortgage applications appeared to have indications of fraud.  The data indicated that the rise in fraudulent applications may be due to rising home prices and the demand for a house in some states. Mortgage program data provided by Fannie Mae Trends reveal that the top ten states with the highest mortgage fraud incidents include California, Florida, New York, Texas, Illinois, New Jersey, Pennsylvania, Georgia, Maryland, and Washington.  Approximately 40 percent of mortgage fraud originated with the misrepresentation on the loan applications. Mortgage fraud refers to a wide range of fraudulent activities, including but not limited to inflation of income, transaction fraud, property fraud, occupancy fraud, undisclosed real estate debts, identity theft fraud, false information, straw buyers, loan modification, equity skimming, silent second mortgages, air loans, and so forth.

The Internal Revenue Service Criminal Investigation (IRS CI), U.S. Department of Urban and Housing (HUD), Office of Inspector General (OIG), and the Federal Bureau of Investigation (FBI) have committed a lot of investigative resources to combat mortgage fraud and other related fraud over the years.  The IRS CID, HUD OIG, and the FBI have aggressively pursued unscrupulous individuals and entities who are endangering the stability of the financial system and holding them accountable for their actions. With technology, many unscrupulous individuals and criminal enterprises are able to actively pursue and find different methods to defraud financial institutions and victims globally.  The proliferation of mortgage fraud and the availability of technology globally have made it challenging for law enforcement communities to combat the rise in mortgage fraud and other financial related fraud. As the U.S. Government invests its resources to contend with this issue, it also needs the cooperation of the financial industry, real estate industry, consumers, and other industries that partake in the business of borrowing and lending money.

What is Mortgage Fraud?

Mortgage fraud is defined as a misrepresentation, misstatement, or omission of information on a mortgage or loan application to secure a loan.  The information is critical for underwriters or lenders to make an informed decision to fund or insure a loan.  Mortgage fraud is a broad term and there are a wide variety of criminal activities such as fraudulent loan applications, inflated income, appraisal fraud, identity theft, occupancy fraud, transaction fraud, straw buyers, loan modifications, silent second mortgages, and so forth.  These fraudulent activities can be initiated by either consumers, unscrupulous lenders or brokers, real estate agents, attorneys, and/or appraisers.

Types of Mortgage Fraud

The complexity of mortgage fraud is multifaceted, and the schemes range from simple to complex depending on the magnitude of the scheme and the people involved.  According to Freddie Mac, mortgage fraud continues to be the fastest growing crime in the United States.  Unscrupulous individuals and/or entities come from all walks of life and around the globe. With the availability of internet and accessibility to information, it has made it easier for fraudsters to devise much more sophisticated ways to make easy money.

According to the FBI and Freddie Mac, mortgage fraud is classified into three categories, i.e., fraud for profit, fraud for criminal enterprise, and fraud for housing or property.  Fraud for profit is referred to as the industry insider fraud, whereby fraudulent schemes are perpetrated by multiple industry professionals and insiders.  The borrowers may or may not be aware of or participate in this scheme.  This fraud scheme is undoubtedly the most costly type of mortgage fraud and most difficult to initially detect.  Fraud for criminal enterprise is the rising trend in the mortgage fraud arena.  In comparison to violent crimes, for some organized criminal enterprises, mortgage fraud is attractive due to the fraud generally being less violent and safer for the perpetrators resulting in less prison time, and greater opportunities for easy money.  Fraud for housing is also known as fraud for property, and the fraud is generally motivated and committed by the borrowers.  With this type of fraud, the borrowers may be motivated to either maintain or acquire ownership of real property.  In order to accomplish their objectives, the fraudsters fabricate or misrepresent their income and asset information on a loan application and/or other related loan documents.  Sometimes they conspire with other real estate professionals to carry out this scheme.

As previously mentioned, mortgage fraud is on the rise despite the tightening of new government regulations and laws.  The law enforcement communities continue to seek collaboration from the private and public sectors to combat mortgage and financial fraud.  Keep in mind that mortgage fraud does not just affect financial institutions, rather it creates a domino effect that affects our economic structure as a whole.

Minimize the Risk of Mortgage Fraud for Borrowers

As mentioned earlier, the internet made it easier for fraudsters to have access to resources and information, which were not readily available many decades ago.  Fraudsters have become more sophisticated.  Although it is not expected that the average borrower knows everything about the loan process, having knowledge of the people whom you do business with is significant in order to minimize risk and victimization.  Below are some suggestions that borrowers can do to help reduce their risk of mortgage fraud:

  • Research the people you do business with such as mortgage brokers. Monitor your mortgage brokers in the Nationwide Mortgage Licensing System (NMLS).  NMLS is a system of licensure for mortgage companies for state agencies and licensure for Mortgage Loan Originators (MLOs) for state and territorial agencies.
  • Check out tips published by HUD’s website.
  • Thoroughly read and understand all related documents prior to signing them. Do not sign documents that are unfamiliar to you.
  • When borrowers feel that they are being solicited to break the law, seek the advice of a reputable real estate lawyer or licensing authority in your state. Do not fall victim to fraudsters who are just trying to make easy money off you.
  • Beware of aggressive marketing with unrealistic promises. When something is too good to be true, it generally is not true.  Proceed with caution.
  • Safeguard your personal information and do not just it out freely.

Mortgage fraud is a challenging topic and to totally prevent it would be an impossible task as long as fraudsters are always looking for ways to make easy money.  However, there are steps that borrowers can take to minimize and make it difficult for fraudsters to profit from mortgage fraud.  Borrowers should be cautious in selecting a mortgage broker or loan officer to avoid falling victim to a scheme perpetrated by fraudsters.  When choosing a mortgage broker or loan officer, try to select only reputable individuals and companies that are backed by a long-standing lending institution.