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Mortgage fraud occurs when a potential homebuyer, seller, or lender lies or omits key information that leads to a mortgage loan approval or terms that the applicant wouldn't normally qualify to receive.
More formally, the FBI defines mortgage fraud as any "misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by a lender."
Mortgage fraud is a serious offense and can lead to prosecution and jail time for convicted offenders. Under U.S. federal and state laws, mortgage fraud can result in up to 30 years in federal prison, and up to $1 million in fines.
The Growth of Mortgage Fraud
Mortgage fraud is a growing problem. According to CoreLogic, mortgage fraud increased 16.9% in the second quarter of 2017 vs. the prior year. The fastest-growing subset of mortgage fraud is occupancy fraud, which happens when mortgage applicants deliberately provide false mortgage application information to purchase a home.
Mortgage fraud is on the rise for multiple reasons:
- Rising Demand for Homeownership: U.S. homeownership rates hit 64.2%, according the the U.S. Census data released in January, 2018. Homeownership has been on the rise since 2016, when it hit a 50-year low of 62.9%. As home inventories shrink, demand for homes is on the rise. That can lead to more fraudulent mortgage applications being filed, as homebuyers try to get an edge in a competitive home-buying field.
- Interest Rates Are Rising: Part of the growing demand for new homes is time-related. With interest rates once again on the rise, homebuyers want to act now, and buy a home before rates rise even further. Conversely, home sellers want to cut a deal before high interest rates thin the pool of qualified buyers.
- Higher Home Values: Mortgage fraud is also fueled by stronger U.S. home values, which draws more buyers into the market to capitalize on them. In some cases, those buyers will turn to mortgage fraud to get the inside track on buying a potentially profitable property.
- Old-Fashioned Greed: In the event of seller-oriented mortgage fraud, like home appraisal fraud, shady home sellers will try to artificially inflate the price of their home, to get a bigger pay day when the property is sold.
How Consumers Can Get Scammed by Mortgage Fraud
The FBI breaks down two distinct areas of mortgage fraud: fraud for profit and fraud for housing.
Fraud for Profit
This type of mortgage fraud, prioritized by the FBI, is usually committed by industry insiders who use their specialized knowledge or authority to commit or facilitate the fraud. Many times mortgage fraud for profit involves collusion by industry insiders, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals. Fraud for profit focuses on misusing the mortgage lending process to get cash and equity from lenders or homeowners.
Fraud for Housing
This type of fraud is typically when a borrower or potential homebuyer is motivated to acquire or maintain ownership of a house. The borrower may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property's appraised value.
These fraud-for-housing crimes are further broken down into different types of mortgage fraud:
Occupancy Fraud
With occupancy fraud, the fastest growing type of mortgage fraud, applicants deliberately misrepresent their intended use of the property. For example, a consumer may fraudulently disclose to a lender that they'll live in the house when they really intend to rent it out. This is done because applicants who occupy a house usually qualify for lower interest rates and down payments than those who are buying investment properties.
"Fake Buyer" Fraud
This form of mortgage fraud occurs when a bogus buyer (real estate professionals call them "straw buyers") allows a would-be homebuyer to assume another person's identity in an effort to get approval on a mortgage loan. The straw buyer typically has better credit than the homebuyer, likely has higher income and lower debt, and stands a much stronger chance of getting approved for a home loan than the intended homeowner.
After the home is sold, the deed to the property may be shifted over to the intended owner. The fake buyer may have had his or her identity stolen and may not know that his or her name, credit, and financial data are being used to perpetuate mortgage fraud.
Home Appraisal Fraud
Home appraisal fraud occurs when a home is fraudulently inflated beyond its actual value. A higher home appraisal usually leads to a higher home price, and more cash to the home seller. A fraudulent higher appraisal report is bad news to buyers, as it can can add a higher debt burden to the purchase of a home.
Generally, home appraisal fraud comes with some red flags, including key data missing from the appraisal or fake renovations cited on the appraisal. If you suspect your home appraisal has red flags, you can always get a second appraisal—this may cost up to $500 depending on the size of the home, but it might be worth it if it keeps you from a bigger issue.
Financial Income Fraud
Reporting inaccurate income information to get a better deal, or a bigger loan, is another common form of mortgage fraud. Basically, someone fudging the facts on income is trying to qualify for a mortgage loan they otherwise may not get.
Like home appraisal fraud, income fraud comes with some warning signs attached, including generic, instead of specific job titles, and the inability of the mortgage lender to confirm an applicant's employer of record. Another warning sign—a mortgage applicant's employment income filed doesn't match the household assets or bank statements.
Mortgage Foreclosure Relief and Debt Management Scams
In this type of mortgage fraud, scammers contact homeowners offering help if they can't make payments or may be falling behind on their mortgage (the primary contact is by phone with these). Some criminals may find potential victims by reviewing publicly available foreclosure notices.
Often they make promises of lower payments or making the payments for a homeowner in exchange for rent payments to their company. However, they don't actually make the mortgage payments and you may end up going into foreclosure anyway. Also known as foreclosure scams or foreclosure rescue schemes, this kind of fraud is unfortunately very common and can cost consumers a lot of money.
Predatory Loans
With predatory loans or predatory lending, a mortgage provider encourages a homebuyer or applicant to lie about information such as income, down payment, or expenses. They'll also often incorporate a doctored appraisal in order to sell the home for more than it's worth. Predatory lenders also may knowingly lend a borrower more than they can afford while charging high interest rates.
These are the most prevalent forms of mortgage fraud, but they're not the only ones.
For example, a homebuyer may take a loan from a family member or friend, thus giving the appearance that the buyer has more income and less debt. The cash gift usually helps the buyer make a down payment, potentially covering up some serious financial issues.
How Consumers Are Affected By Mortgage Fraud
Identity theft is a particularly threatening form of mortgage fraud, as it tends to lead directly toward homeowner financial loss. For example, if an identity thief steals a homeowner's Social Security number, or intercepts the mortgage account number, he or she can use that information to take out a home equity line of credit (also known as a HELOC) worth tens of thousands of dollars, in the homeowner's name.
The cash is sent to a fraudulent account established by the thief, and the homeowner is left holding the bill. Or, the fraudster could take out a second mortgage using the homeowner's stolen data information, and escape with the cash, once again leaving the debt to the homeowner.
While any form of mortgage fraud is a serious offense, losing one's data to identity thieves can trigger a financial loss that's difficult to overcome, and that could take years to clear. Additional impacts include losing money, time, or missing out on the purchase of a dream home because you have to take additional time to deal with restoring your identity if you're the victim of mortgage fraud.
How to Protect Yourself From Mortgage Fraud
For homebuyers, the key to avoiding mortgage fraud is educate yourself, and never sign a mortgage application form or home appraisal form until you're certain all the information—especially personal financial data—is accurate.
Protecting yourself against mortgage fraud also involves protecting yourself from identity theft, which can lead to significant financial loss.
Unfortunately, both homebuyers and home sellers may find themselves working with aggressive lenders, brokers and real estate agents who want to get a deal done, at any cost. If you're suspicious about a potential lending partner, talk to a trusted financial advisor or lawyer focused in real estate contract law, and take a direct course of preventive action if fraud is revealed.
Mortgage lenders are trained to look for inconsistencies and irregularities on mortgage loan applications. If you're unsure about the credibility of a mortgage broker or real estate agent you're using, check with your local Better Business Bureau to make sure there's been no problems reported with your lending partner.
Take these additional measures to ensure you're not entangled in a mortgage fraud situation:
1. Stick to Credible Referrals
When you're buying a home, you need to trust your mortgage partners. Build that trust with referrals from family, neighbors, friends, and especially real estate professionals who'll vouch for a lender, broker, appraiser, or real estate agent. If you have an established relationship with a bank or financial institution, leverage those relationships as well. You'll be more prepared if you get pre-approved for a mortgage by a reputable lender so you make the homebuying process smoother.
2. Avoid Aggressive Mortgage Lenders
Mortgage lenders who push you hard to sign on the dotted line should be avoided. That's especially the case with mortgage lenders who tout no-money down or "low or no document" loans. These loans may or may not fall into the "fraudulent category," depending on state-by-state mortgage loan statutes, but they may get you a loan with high interest rates that could increase over time, and high mortgage fees that only add to your mortgage loan debt burden. If anyone suggests that you lie on a mortgage application, don't. That's an immediate red flag to avoid working with that person or firm.
3. Don't Sign Any Shady Documents
Never sign a mortgage loan document that is either blank, has blank lines, or contains questionable or unfamiliar data. Doing so could lead you down the path to mortgage fraud. Instead, consult with a trusted real estate professional or legal expert to review the mortgage loan document.
4. Check Your Credit
Additionally, you want to regularly review your credit report for any new accounts you don't recognize. Another way to keep an eye out for new accounts is to use an identity protection product like Experian IdentityWorks, which provides alerts when new accounts or inquiries are added to your credit report. You also get access to a dedicated fraud resolution agent if you're a victim of identity theft.
5. Be Practical
Buying a house can be an emotional experience. Don't let your desire to buy your first place or dream home cloud your good judgment. Take your time with assessing all people you work with from your real estate agent to your buyer. If there's something you don't feel good about, seek a trusted advisor. Also, if you're in a situation where you own a home and you're struggling to pay your mortgage payment, contact your lender to see what options they have. There are usually other options if you can't pay your mortgage, such as refinancing your mortgage, forbearance, loan modification, and repayment plans.
How to Report Identity Theft From Mortgage Fraud
If you believe your mortgage loan account has been breached via identity theft, take these three steps:
1. Immediately Contact the Company Involved
Make sure to contact your mortgage lender or financial institution immediately so they flag any potential mortgage fraud or identity theft as soon as possible. Document your conversations and keep paperwork in a secure location so you can access as needed through the identity theft recovery process.
2. Report ID Theft to Uncle Sam
Go to the Federal Trade Commission's ID Theft Reporting website IdentityTheft.gov to file a report. The FTC will walk you through your report, point you to the right recovery resources, and ultimately help you build an individual identity theft response plan to get you on the road to recovery.
3. Obtain a Fraud Alert
If you suspect someone has tampered with your identity, obtain a fraud alert with Experian. Fraud alerts notify potential creditors or lenders to verify your identification before extending credit in your name in case someone is using your information without your consent. A fraud alert stays on your credit report for 90 days, which should give you enough time to close any compromised accounts, open new ones, and go through the proper channels to rectify the damage. You can also get an extended fraud alert for up to seven years if you are confirmed to be the victim of identity theft.
Here are some additional resources to understand, prevent and deal with mortgage fraud:
- U.S. Department of the Treasury Financial Crimes Enforcement Network: Resources on mortgage fraud
- FDIC: Resources on understanding foreclosure scams
- USA.gov: Tips for avoiding housing scams
- The Department of Housing and Urban Development (HUD): Counselors are available throughout the U.S. to help you look out for scams and choose the right loan