What Is Mortgage Fraud?
As fallout settles from the bursting of the real estate bubble, investigators are finding that mortgage fraud played a role in a shocking number of house-related transactions during the last few years. In a 2005 press release, the FBI noted that mortgage fraud was one of the "fastest growing white collar crimes" in the country.
That's scary, considering mortgage fraud is a federal crime that can result in hundreds of thousands of dollars in fines and even jail time. Here's what you need to know to make sure your next real estate transaction isn't fraudulent.
Mortgage Fraud: Definition
The FBI defines mortgage fraud as any purposeful misrepresentation of information on a mortgage loan application included in order to be granted a loan. Unlike predatory lending, mortgage fraud can be committed by a variety of players in the real estate game, including:
- loan officers or originators;
- real estate agents;
- title or escrow representatives; and attorneys.
Sources report that the number of FBI agents working on mortgage-related cases increased 50% between 2007 and 2008, which is perhaps unsurprising, considering the various forms mortgage fraud can take.
Types of Mortgage Fraud
Throughout the process of buying and selling real estate, unscrupulous individuals have committed mortgage fraud. Here are some common forms this crime takes.
- Occupancy Fraud: A borrower claims that he or she will be living in a property actually meant for investment purposes. This is fraudulent because default rates for investment properties are higher than those for residential properties. To protect themselves from potential defaults, lenders offer investment property loans at higher interest rates than residential loans. Lying about residence intentions could mean financial losses for the lender.
- Employment/Income Fraud: A borrower lies on his or her loan application about total income, in order to qualify for a larger loan amount (these are sometimes called "stated income" or "liar" loans). This can take the form of altering W-2 forms, lying about income from self-employment or providing insufficient income verification during the lending process.
- Omitting Debt: A borrower doesn't list some of his or her debt on the loan application, thus altering his or her debt-to-income ratio. This ratio plays a key role in lenders' decisions to grant loans; low amounts of debts qualify people for larger loans. During the application process, borrowers must disclose all debt, including credit card, mortgage, child support, etc.
- Fraud Ring: Groups of people (borrowers, real estate agents, appraisers and more) work together to defraud lenders out of large amounts of money. This is a more complex kind of mortgage fraud, meaning that you aren't likely to commit it by accident.
- Appraisal Fraud: An appraiser values a home at more than it's worth, sometimes by using digitally-altered photos. This may allow the borrower to get a larger loan or the seller to get more money for the house than it's worth.
- Kickback Schemes: Borrowers/buyers and real estate agents or sellers work together to trick the lender into lending more than the value of the home. The agent or seller then gives the borrower cash as a bonus for the "deal." Appraisal fraud is often needed for this to work.
- Identity Theft: A person steals the identity of a house's owner to take out a second mortgage on the house, or both the buyer and seller act under assumed identities. In cases of identity theft, perpetrators usually vanish before they have to make payments on their loans.
- Silent Second Mortgage: A borrower who can't afford the down payment on a house is given a separate loan by a second lender; the primary lender knows nothing of this transaction. Or, using appraisal fraud, a house can be valued higher than its true value. The borrower gets the full loan amount from the main lender (rather than the more common 90%), and a second mortgage from another lender. After finalization, the second mortgage is excused. This increases risk to the lender that the borrower will default, since the borrower has less equity in the house than the lender believes.
- Repayment of Down Payment "Gifts": A borrower is "given" money for a down payment. After papers are finalized, though, the borrower must pay back the "giver," meaning that he or she is responsible for making more payments than the lender believed, and is thus more likely to default on his/her loan.
Get Help from a Local Attorney
Mortgage fraud can be a complex and confusing crime. In some cases, unsuspecting borrowers commit fraud without meaning to, because they're led astray by others in the process. Having a lawyer on your side may help you make sure your mortgage documents are legal and non-fraudulent.
Whether or not bankruptcy may be an option, a bankruptcy attorney may be able to help you assess your finances and determine the best course of action.