Common Mortgage Fraud Schemes

What Constitutes Mortgage Fraud?

Handcuffs sitting on a piece of paper next to a small house figurine and $10 bills
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Borrowers can unknowingly commit mortgage fraud because they're confused by certain information, or by mistakenly making omissions on their applications. But several types of intentional omissions and lies also occur during the mortgage application and approval process.

All states have laws in place that prohibit this type of activity. Some states have specific laws for it, while others are more vague. Mortgage fraud is also a federal offense under the Fraud Enforcement and Recovery Act of 2009.

Fraud for Profit vs. Fraud for Housing

Federal law recognizes two types of mortgage fraud. Fraud for profit is typically perpetrated by professionals involved in a transaction, such as brokers, loan originators, appraisers, and bank officers. The goal is to siphon off cash or equity from homebuyers or lenders for their own gain.

The Federal Bureau of Investigation puts fraud for profit high on its priority list for investigations.

Fraud for housing is typically committed by borrowers and would-be homeowners with the goal of acquiring or keeping property. Some types of fraud for housing are more common than others.

Undisclosed Kickbacks

These are undisclosed deals that are negotiated between a buyer and seller that aren't included in the mortgage documents.

For example, a buyer might strike a deal with a home seller that involves receiving money to pay for a new roof. This is fraud if the lender is unaware of it. It's not detailed in the purchase contract, the addendum, or the estimated closing statement.

A "Silent" Second Mortgage

This is a second mortgage that's placed on an asset for down payment funds but isn't disclosed to the original lender on the first mortgage.

A borrower without a down payment can commit fraud by borrowing the down payment from the seller in exchange for giving the seller a silent second mortgage against the property that the first lender isn't aware of.

Falsifying Income

Mortgage fraud occurs when borrowers overstate their income levels. Borrowers are motivated to commit fraud in order to purchase a house or maintain ownership of one. Income is sometimes misrepresented when the borrower wouldn't qualify for the loan necessary for buying the home.

Non-Owner Occupancy

Lenders typically offer higher interest rates and less favorable terms to non-owner occupants because they're taking more of a risk in the event that tenants don't pay.

Buyers who don't intend to live in a property shouldn't promise that they will. A lender can foreclose when and if the situation is found out. The likely scenario would be that the lender would demand immediate payment in full of the remaining loan balance, and foreclosure would result if the borrower can't afford to pay.

Down Payment "Gifts"

Both the giver and the recipient can commit fraud when a "gift" of money is actually intended to be repaid. This is actually a loan in disguise. It will probably be flagged when the buyer's down payment is sourced to something other than deposits. Maintaining asset documentation can be critical to avoid any perception that the money is a loan.

Inflated Purchase Price

It's mortgage fraud when a seller has two purchase contracts and sends the false contract with the higher sales price to the lender in hopes of obtaining a higher appraisal.

The same is true if a higher purchase price is entered on the purchase agreement than what the buyer is actually paying to the seller.

Falsifying Deposits

Sometimes borrowers state on purchase agreements that a deposit was paid to the seller when, in fact, it was not. This could happen when the purchaser wants to obtain a bond approval.

The bond will be retracted and the sale won't go through when the falsification is uncovered.

Buyer Beware

It can be difficult, if not impossible, for the average homebuyer to pick up on signs of fraud for profit committed by professionals. Buyers should thoroughly vet potential lending institutions, real estate brokers, loan officers, and even appraisers, checking their references.

They might also have an attorney thoroughly review any and all paperwork associated with the transaction.

At the time of this writing, Elizabeth Weintraub, CalBRE #00697006, was a Broker-Associate at Lyon Real Estate in Sacramento, California.