What is Mortgage Fraud?

​Mortgage fraud covers a wide variety of fraudulent, deceptive, and illegal practices through which individuals obtain housing or make money off the mortgage loan process. Although the concept is more often associated with borrowers or consumers who attempt to obtain mortgage loans fraudulently, lenders and other professionals in the mortgage process also often play significant roles in perpetrating this fraud. The Federal Bureau of Investigations (hereinafter referred to as the FBI) defines mortgage fraud as "a sub-category of Financial Institution Fraud. It is a crime characterized by some type of material misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by a lender. A lie that influences a bank's decision—about whether, for example, to approve a loan, accept a reduced payoff amount, or agree to certain repayment terms—is mortgage fraud."[1] 

Mortgage fraud is considered a serious problem in the US, partly due to the devastating effects it can have on not just the innocent homeowners and lenders involved but also on the economy. For instance, the global financial crisis of 2008 was fueled in part by the unscrupulous activities of borrowers who obtained loans on massively inflated real estate and lenders who intentionally or recklessly gave loans to people who were unable to repay.

As a result, government agencies at both the federal and state level take a serious stance towards mortgage fraud. Individuals who are apprehended may be subject to misdemeanor or felony prosecution. Also, mortgage fraud can result in civil and criminal action against professionals and lending entities who initiate or help perpetuate this fraud. In all cases, the services of a mortgage banking expert are often required to help clarify the obligations of lenders and borrowers in specific cases and determine if misconduct has occurred.

Understanding mortgage fraud and how it occurs
The FBI has identified two distinct areas of mortgage fraud. It may either occur in relation to fraud for housing or fraud for profit.

While fraud for housing is more often associated with homeowners, it may be committed by either borrowers, lenders, or other professionals in the mortgage industry. With fraud for housing, the goal is to provide false or inaccurate information or omit relevant details to obtain or maintain real estate ownership. For instance, a borrower may omit important details relating to their income level, on their own or with the assistance of a loan originator, to qualify for a housing loan.

Fraud for profit is more targeted towards illegally "gaming" the mortgage process in order to make illicit and fraudulent financial gains. It is often committed by professionals in the mortgage industry who employ fraud and deception to enjoy illegal profits on a loan transaction. However, just like a fraud for housing, the fraud here can also be committed by borrowers and, sometimes, in conjunction with industry professionals.

Mortgage fraud by borrowers
Fraud by homeowners can be committed in various ways, both aimed at obtaining housing or profit in fraudulent ways. These include the following:

• Income/asset falsification: This often involves the false or inaccurate declaration of income or assets by a borrower. They may falsely claim they own the property they don't or claim income from sources that do not exist.
• Fraudulent loan qualification: Here, the borrower procures fraudulent assistance in order to qualify for a mortgage loan. A common example of this scam is when a property seller provides the borrower with a down payment for the loan in exchange for the borrower obtaining a loan that is higher than the actual value of the property. The excess loan amount is then shared between seller and borrower.
• Fraudulent property flipping: Property flipping is generally legal. However, when a seller buys a property and then colludes with a property appraiser to fraudulently overvalue the property for later sale, it may amount to fraud.
• Straw buyer: This is also referred to as a "silent second" scam where an individual poses as the borrower to qualify for the loan when in actual fact, the loan is going to a third party.
• Occupancy fraud: This type of mortgage fraud is targeted towards obtaining more favorable interest rates over the mortgage. Generally, an owner-occupied property will receive lower rates than one that is not occupied by the owner. As a result, homeowners may falsely claim that they are occupying the property when in fact, they are not.
• Equity skimming: There are many ways that this scam occurs. A popular instance is when a borrower obtains a mortgage, then rents the property to an unsuspecting person. They collect rents without paying anything on the mortgage, and once foreclosure arises, the fraudulent borrower absconds.

Mortgage fraud by lenders
Fraud by lenders is often considered even more serious than fraud by borrowers. As a result, the FBI pays special attention to scams of this nature. Some of the common types of fraud by lenders include:

• Air loan fraud: As the name suggests, this scam involves processing and approving a loan that has no actual borrower. Instead, the mortgage professionals involved collect the loan and split the illicit gains.
• Appraisal fraud: This fraud is often tied up with other types of mortgage fraud. It is especially perpetrated by dishonest property appraisers who either overvalue or undervalue real estate for fraudulent purposes.
• Mortgage rescue scam: Here, homeowners with troubled properties may be targeted with scams disguised as a "mortgage rescue" effort. Shady entities or individuals may promise homeowners that they will help them pay down or eliminate their mortgage. Instead, they charge high upfront fees without actually affecting the mortgage obligation or execute fraudulent transfers of the property without the knowledge of the homeowner.
• Refinance fraud: Similar to mortgage rescue scams, these scams promise troubled homeowners that they can help refinance their mortgages. However, the homeowner often finds that nothing changes, even after paying exorbitant upfront fees.
• Fake government programs: Some scammers pose as representatives from government-backed homeowner programs. They may promise mortgage relief in exchange for high upfront fees and then abscond without providing relief.

Conclusion
The dangers of mortgage fraud and how it occurs signifies the ongoing threat that scams of this nature pose to innocent homeowners and lenders, as well as the economy at large. Combating this fraud will require even closer scrutiny from regulatory and law enforcement agencies and the input of professionals such as mortgage banking experts.
Victims of mortgage fraud may seek redress through the courts.  Mortgage fraud cases often utilize an expert witness.  A mortgage lending expert witness can be retained to conduct an investigation and offer opinions as to whether or not the alleged conduct was improper.


[1] https://www.fbi.gov