Mortgage Fraud: How to Spot it and Avoid It

With average home loan amounts reaching $347,000 in January 2022, there’s a lot of money to be made for all parties involved in a mortgage transaction — and a lot of opportunity for mortgage fraud. From large schemes involving housing industry insiders to the simple act of omitting a debt from a loan application, knowing how to spot and avoid mortgage fraud can keep you from getting an unpleasant visit from the FBI.

What is mortgage fraud?

Mortgage fraud is a crime that involves lying or omitting information related to a mortgage loan, which the lender relies on when deciding whether to approve your application. If a lender makes the loan based on that lie or omission, then it’s mortgage fraud.

Types of mortgage fraud

There are two primary types of mortgage fraud, according to the FBI: fraud for profit and fraud for housing.

Fraud for profit

Mortgage and housing industry insiders use specialized knowledge or authority to misuse the mortgage process and steal money from lenders or homeowners in fraud for profit schemes. The FBI indicates a high percentage of these cases involve bank officers, home appraisers, mortgage brokers, attorneys, loan officers and other housing- and mortgage-related professionals.

Fraud for housing

This type of mortgage fraud involves illegal actions by a borrower to buy or keep their home. In many cases, the borrower lies about the information on their loan application, such as overstating how much income they make or trying to influence an appraiser to “hit a value” that will help them borrow more.

How to spot common mortgage fraud scams

Once you apply for a home loan or become a homeowner, you’re fair game for mortgage fraudsters. You’re likely to get phone calls, emails, snail mail and even a knock at your door from mortgage fraud perpetrators hoping you’ll fall for their schemes.

While the FBI commits most of its resources to fraud for profit, lenders devote significant resources to spot fraud for housing — which is basically lying on a loan application to boost your approval odds. Knowing the signs of mortgage fraud can help you avoid being defrauded, or keep you from getting in trouble for being dishonest on a loan application.

Foreclosure rescue scam.Fraudsters scan public records to look for foreclosure notices and swoop in to save the day. Here’s the way it usually works:

• The perpetrator tells you they can save your home if you transfer ownership to them or an “investor.”
• They charge an upfront nonrefundable fee.
• They lie and say the fee will be used to make negotiated payments to your lender.
• They sell the home to another fraudster and keep the proceeds.
• They hire their own appraiser to provide a bogus value.
• They don’t make payments and the home goes into foreclosure.

Loan modification scam.The sales pitch is similar to the foreclosure rescue scam, and is often made by a company claiming to staff specialized attorneys that negotiate mortgage modifications to provide payment relief to struggling homeowners. A large upfront fee is required but the modification terms aren’t helpful, if they’re negotiated at all.

Property flipping fraud.It’s not illegal to buy a home and sell it quickly for a profit, unless you falsify loan documentation, inflate appraised values all with the help of a ring of mortgage and housing professionals to get kickbacks and commissions.

Air loan schemes.This is a more sophisticated scam that involves creating a property out of thin air, in some cases even establishing an office with phone banks to simulate fake employers, appraisers and credit agencies. The fraudsters literally invent borrowers and properties to trick mortgage companies into lending them money.

Equity skimming fraud.You’ll hear the term “straw” buyer in this scheme, because this person doesn’t exist, or applies using falsified income, asset and credit information to qualify for a mortgage. After closing, the straw buyer transfers ownership to the fraudulent investor who keeps the loan funds and never makes a mortgage payment.

Reverse mortgage fraud.A home equity conversion mortgage (HECM), or reverse mortgage, is designed to give borrowers aged 62 or older an easy qualifying option for tapping their home equity. Scammers take advantage of elderly homeowners, often convincing them they need to manage the funds obtained through the reverse mortgage. Because there is no monthly payment required, lenders often don’t learn about the scheme until the borrowers die.

Builder bailouts or condo conversions.Developers or condominium investors who make bad bets on a building or condo project may try to bail themselves out by recruiting bogus buyers to apply for loans. The straw buyers often receive a fee for lying about their income and assets and never make a payment.

Silent second fraud.In this scheme, a buyer borrows money directly from a home seller, which is used to meet the lender’s down payment requirement, although mortgage guidelines don’t permit this type of arrangement. The second is “silent” because it’s often not recorded on the property, or is recorded after the first mortgage is completed.

Mortgage application fraud

A little white lie on a loan application can lead to big fraud problems for a borrower down the road. Mortgage companies are expected to originate $2.59 trillion worth of home loans in 2022, according to the Mortgage Banker’s Association. Even a small pool of fraudulent loans can cost lenders millions — if not billions — of dollars in foreclosure and resale expenses.

The agencies that back mortgage loans keep track of suspected mortgage fraud to alert lenders and avoid losses. For example, Fannie Mae issues a report every year that tracks the following on each loan application:

• Assets to see if the figures are inflated or counterfeit
• Identity, social security and credit history to see if the person is a victim or perpetrator of identity theft
• Income to verify the employer and earnings are accurate
• Debts to confirm the borrower properly disclosed all borrowed money
• Occupancy to confirm whether property is a primary, vacation or investment home
• Appraised value integrity to verify the chosen sales are valid and the value isn’t inflated
• Title search to verify ownership to the property has been properly transferred and all liens and current owners have been disclosed
• Property check to assess the home’s condition and verify the features are accurate and apply to the home being financed

The bottom line: It’s better to tell the whole truth upfront than risk a loan denial, or worse, a fraud investigation for lying on a mortgage loan application.

Why do people commit mortgage fraud?

When it comes to fraud for profit, the biggest motivation is large sums of money. Whether it’s mortgage brokers and real estate agents looking for a guaranteed flow of commissions, or scammers trying to bilk distressed homeowners out of money in moments of desperation, the goal is to make as much money off of people without getting caught.

Fraud for housing is typically committed by borrowers who don’t really qualify for a mortgage. However, fraud for housing can also be unintentional. Some examples of unintentional mortgage fraud may include:

• Not disclosing a cosigned loan. Borrowers often don’t realize they need to disclose debts such as student loans and car loans even if they are just cosigners and don’t make the payments.
• Not disclosing a free and clear property. If you’re fortunate enough to own real estate with no mortgages, you still need to disclose the property taxes and homeowners insurance costs, since those are monthly expenses that could affect your ability to repay a new mortgage.
• Not disclosing you have a side hustle or self-employed gig. If you have a side business that’s showing losses on your tax returns, lenders will count the losses against you when they pull your IRS transcripts.
• Not disclosing your future occupancy plans. If you refinance a home now as your primary residence but plan to sell it in the next year, you could have problems with a new lender if you try to buy a new home as a primary residence in the near future.
• Not disclosing a private loan from a friend or relative. Even if a private loan on a home isn’t on your credit report, lenders can still get information about it through public records if the lien was recorded on your home. They may also see a pattern of monthly payments on your bank statements they could ask you to address.

How to avoid mortgage fraud: Six mortgage fraud red flags

It’s easy to avoid some types of mortgage fraud. When it comes to fraud for housing, simply tell the truth on your loan application. Be upfront about any unique situations you have with private loans or your plans for living in your home.

When it comes to fraud for profit, Freddie Mac offers tips to help you spot six common mortgage fraud red flags:

1. Upfront fees. Never, ever pay an advance fee to anyone to negotiate a loan modification, refinance or foreclosure on your home. These services are available for free from counselors certified by the U.S. Department of Housing and Urban Development (HUD) and you can find a local counselor by checking the HUD website.
2. Guaranteed results. If you aren’t able to pay your mortgage according to your original loan terms, there’s no guarantee you or anyone else will be able to negotiate new terms.
3. Mortgage payment transfers. Never assign or transfer your mortgage payments to someone else to pay.
4. Deed or ownership transfers. Never transfer ownership of your home to anyone else, especially if you feel pressured. Contact a HUD counselor immediately if you’re not sure where to turn for help.
5. “Government-approved” or “official government” loan programs. These may include headlines like “FHA approved,” “VA approved” or even indicate they’re part of a program offered by the current president of the United States. They all have one thing in common — they’re scams.
6. Over-the-phone financial information requests. These are also called “call-spoofing” scams and involve callers impersonating a bank official, government official or someone in an authority position to obtain your personal information. Best advice: Hang up the phone when the personal questions start.

What are the penalties for mortgage fraud?

Mortgage fraud was rampant in the days leading up to the 2007-2009 financial crisis. The Fraud Enforcement and Recovery Act (FERA) was enacted in 2009 to enable federal law enforcement officials to pursue mortgage fraudsters. Sentences under FERA can include $1 million fines and prison sentences up to 30 years.

Investigations often target scams by mortgage brokers, appraisers and real estate attorneys, but homebuyers can also be arrested for providing inaccurate information.