Mortgage Fraud: The Insidious Enemy and Its Telltale Signs

When it comes to mortgage fraud, ignorance is not bliss. By being informed and vigilant, prospective borrowers can avoid becoming unwitting accomplices or victims. It is estimated that fraudulent mortgage applications result in annual losses totaling nearly $3 billion and growing. According to law enforcement, industry insiders are implicated in 80% of all losses flowing from mortgage fraud. Federal officials and representatives from the mortgage industry are aggressively combating mortgage fraud, which has been steadily on the rise and is being perpetrated nationwide. Mortgage fraud is becoming increasingly sophisticated, and while no particular group is immune from this scam, the most vulnerable segments of society are first-time home purchasers, seniors, and those eager to sell their homes or struggling to make their mortgage payments.

Mortgage fraud is defined as a scheme whereby a lender or other interested party engages in an intentional misrepresentation, deception, or omission in order to insure, purchase, provide funding for, or receive a mortgage loan. While it refers to a varied ensemble of scams, most cases of mortgage fraud concern the artificial inflation of a home's value for purposes of pecuniary gain. Mortgage fraud leaves behind defrauded and exploited homeowners and a trail of negative consequences, which include the following:

1. Higher incidence of foreclosure, default, and delinquency: statistics show a strong link between mortgage fraud and home loans culminating in default and foreclosure.
2. Increased expenses (i.e. high attorney fees, broker commissions, and foreclosure costs) for lenders
3. Artificially-inflated real estate prices: the sale of properties impacted by mortgage fraud at artificially-high prices causes properties in nearby neighborhoods to follow suit. A hike in property taxes accompanies an increase in property values. Artificially-inflated home prices make it more difficult for property owners to sell their homes.

Mortgage fraud falls into one of two categories:

1. Fraud for housing or fraud for property schemes
These involve misrepresentations or false pretenses on the part of borrowers for the purpose of acquiring ownership to property that would otherwise be unaffordable to them. Typically, the false representations concern employment history, assets, or income, and unscrupulous mortgage industry representatives are usually acting in collusion with and aiding and abetting the borrower in the falsification of information.

2. Fraud for profit schemes
Alternatively dubbed "industry insider fraud", this type of mortgage fraud usually involves multiple loans and a group of individuals who collaborate to defraud a mortgage lender or a prospective homeowner by issuing loans based on fictitious real estate or inflating property prices. The con artist(s) may engage in one of the following common types of scams: (1) gross misrepresentations regarding loan documents and appraisals; (2) identity theft whereby a stolen or fake identity is utilized on a loan application, including credit history, personal data, and the victim's name; and (3) illegal property flipping which involves false appraisals and the subsequent sale of a home at a higher price to a collaborator in the scheme. Generally implicated in this category of mortgage fraud are investors, mortgage brokers, straw buyers, and appraisers. Straw buyers are individuals who lend their good credit and identity to the scheme in exchange for monetary compensation.

Bad credit mortgage lenders, which cater to prospective homeowners with bad credit who are looking to buy a home, are a dime a dozen. While the vast majority of them are ethical and responsible, some of these mortgage companies prey on consumers who are in a precarious financial situation. Some of the predatory lending practices include charging excessive fees, points, and interest rates.

It is important for future borrowers to recognize the signs of mortgage fraud. Some of the commonly-encountered red flags are as follows:

1. Inflated appraisals
2. Insistence by a mortgage broker that an applicant work with a specific lender
3. Generous bonuses or high commissions offered to appraisers and brokers
4. Incitement of individuals to borrow more than they can afford
5. Promises of high profits in a brief period of time
6. Falsification of mortgage information
7. Failure to furnish customers with copies of loan documents they sign
8. Request to sign forms that are missing information or blank

To avoid shady practices and protect themselves against mortgage fraud, prospective borrowers should keep the following tips in mind:

• Avoid purchasing loans that are disguised as refinances;
• Obtain referrals for mortgage professionals;
• Verify industry professionals' licenses with county, city, or state regulatory agencies;
• Check property's history to see if it was sold numerous times in a short period of time;
• Ensure that they understand the terms of their mortgage;
• Refrain from signing loan documents that include blanks;
• Examine comparable sales in the neighborhood and tax assessments to verify the true value of the property in question;
• Steer clear of online mortgage websites promising to raise their credit rating for a fee;
• Seek out their own appraiser and verify an appraisal's accuracy by contacting the Housing and Urban Development Department; and
• Consult a one-stop online information center or website offering mortgage help and providing resources such as online mortgage quotes, current mortgage rates, history of average mortgage rates, history of average mortgage rates, payment/affordability calculators, daily rate averages, rate movements, and a list of reputable mortgage lenders.