Mortgage fraud is in the news, with politicians and political appointees being accused of having multiple primary residences on loan applications. Interest rates are generally lower on primary residences.
This isn’t meant to be a how-to to but here are some common forms of mortgage fraud:
Mortgage Fraud
Mortgage transactions provide ample opportunities for fraud. They do so because they involve multiple parties and large sums of money. These transactions are part of the lending process for buying a home. Some such schemes are sophisticated and unique, but the following types are the most common:
- Fraudulent Supporting Loan Documentation: A loan applicant submits forged or altered paycheck stubs. They might submit other fraudulent documentation.
- Property Flipping: A piece of real estate is purchased, appraised at a falsely inflated value, and then quickly resold. The fraudulent appraisal makes this practice illegal, as “flipping” during a housing boom is not necessarily illegal.
- Straw Buyers: The borrower’s identity is concealed through the use of a nominee, whose name is used for credit history on the loan application.
- Silent Second: The buyer takes out a second mortgage to cover the down payment on the initial loan. It is illegal because the second, smaller loan is taken out without the initial lender’s knowledge.
- Stolen Identity: A mortgage loan applicant uses a fictitious or stolen identity. If stolen, the true person’s name, personal information, and credit history are used without their knowledge. This variety of mortgage fraud involves identity theft.
- Equity Skimming: An investor uses a straw buyer, false credit reports, and false income documents to get a mortgage in the straw buyer’s name. The straw buyer signs the property over to the investor after closing, relinquishing all property rights. The investor makes no payments but rents the property until it is foreclosed.
- Inflated Appraisal: The appraiser, colluding with the mortgage broker and/or loan officer, provides unrealistically high appraisal value to match the buyer’s offer and complete the deal.
Mortgage fraud is illegal, and there are various penalties at the state and federal level, up to and including large fines and prison sentences. The specific penalties depend on the federal or state laws violated, the amount of money involved, the defendant’s criminal history, and the sophistication of the scheme.
