Mortgage fraud has been declared as one of the rapidly growing crimes (named as white collar crimes) in the country.
After analysis it has been found that every fraud has some kind of material misrepresentation, misstatement or omission relied upon by a lender or underwriter to purchase, insure or fund a mortgage.
But the true level of this type of fraud is largely unknown as majority portion of mortgage industry is void of any kind of mandatory mortgage fraud reporting. And added to that, such frauds in the secondary market are often under reported.
Mortgage fraud can be broadly divided into two categories; fraud for profit & fraud for property.Fraud for property involves borrower as the perpetrator. Borrower makes misrepresentations about his income, value of the property or personal debts. But the borrower is interested in repaying the loan & keeps the property in such kind of frauds. Such kind of fraud comes to about 20% of all mortgage frauds.On the other hand fraud for profit is done by industry professionals. In such frauds there are multiple mortgage transactions & involves several financial institutions. Misrepresentations such as overstating income, assets and collateral, reporting fictitious employment, not fully disclosing borrower’s debts and credit history, borrower assuming identity of another person or stating residential use of property while actually using it as rental and disguising down payment borrowed with fraudulent gift letter.Let us now look at some of the most common fraud schemes:
Air loans: As the name suggests, these loans are non-existent and there is no collateral. An example would be like when a broker invents properties & borrowers, establishes accounts for payments & for escrows maintains custodial accounts.
Silent seconds: It relates to the down payment borrower is required to make. In this type of mortgage fraud, buyer borrows down payment amount from seller by way of a non-disclosed second mortgage. The actual lender believes that the down payment money has been invested by borrower from his own funds, which actually has been borrowed. To conceal its status, this type of second mortgage is not recorded also.
Nominee loans: Borrower’s identity is concealed in this type of fraud scheme by use of a nominee who allows his name & credit history to be used by actual borrower to apply for a mortgage.
Foreclosure schemes: Fraudster locates people who are facing risks of default on their mortgage or who already are in foreclosure. They mislead the homeowner to believe that he can help save their home in exchange for an up front fees and transfer of the deed for their house. Fraudster makes a profit by pocketing the fees paid by homeowner or refinancing the property.
Equity skimming: False income statement and credit reports are used by an investor to obtain mortgage in the name of a straw buyer. After loan closing, straw buyer transfer property ownership over to investor. The investor stops making monthly payments on the mortgage and rents the property until foreclosure starts after several months.
Property flips: In this scheme, property is purchased and is falsely appraised for a higher value purchased then sold within a few days. As the appraisal information is fraudulent such property flipping is considered illegal.
This is just a beginning of analysis of mortgage fraud schemes. This series will continue until we have covered all the necessary information borrowers and homeowners should have to prevent falling prey to any of these mortgage fraud schemes. In our next segment we will look into other type of predatory loan practices and provide useful tips on how borrowers can safeguard themselves against such predatory fraud schemes.
Information presented in this article is mainly based on the useful details provided on this following FBI website’s section on mortgage frauds: