The housing market crash and gradual improvements have given potential homeowners a lot to think about, and mortgage fraud has been at the top of the list. Mortgage fraud is illegal, and buyers should be aware of common scams and schemes in the housing market today.
Profit Fraud
The most expensive form of mortgage fraud involves industry insider fraud, which are situations involving a mortgage broker, loan processor, or other inside professional working together to misrepresent some type of information. Typically, these individuals will receive some kind of monetary payoff for their involvement in the scheme.
Industry insider fraud often involves fraud committed throughout multiple transactions where buyers and borrowers are not aware that the fraud is happening.
Criminal Fraud
This type of fraud generally involves members of crime rings or other organized crime activity laundering money through the real estate industry. For example, one scenario might involve the use of money from drug sales to finance the purchase of a home. These schemes are relatively new and highly complex, easily trapping an unknowing home buyer into a “dirty” purchase.
Individuals connected with organized crime can be extremely crafty when it comes to laundering money through real estate.
Housing Fraud
Housing fraud, unlike profit fraud, usually involves the behavior of the borrowers themselves, although loan officers may be colluding with the applicants as well. Borrowers will attempt to misrepresent their income or assets in order to purchase a property that should be out of their reach. This can be extremely problematic for the lender if the borrower cannot afford the payments, ultimately leading to a default.
Typical housing fraud will include false representations of material by the borrowers, whether it’s regarding their income level, occupation, or other important details.
Specific Fraud Types
Equity Skimming
In equity skimming, an investor will use various tools (like false credit reports, inaccurate income documents, and straw buyers) to get the mortgage. The buyer then signs the rights to the property over to the investor after the house sale has closed. The investor uses the property for rental income until a foreclosure occurs.
Property Flipping
In this scenario, the appraisal represents an inaccurate and inflated value. The home is then resold to someone else.
Fraudulent Documentation
This type of mortgage fraud refers to the mortgage applicant, who submits false information regarding their income or assets as part of the loan application process.
Silent Second
This involves a secret second mortgage that is used for the down payment on the initial mortgage. This process is fraud because the initial lender is not aware of the existence of the second mortgage.
Straw Buyers
During this mortgage application, the true identity of the buyer is hidden by using a nominee. The nominee’s information is the details used to support the loan application.
Inflated Appraisal
Typically, this scenario occurs with the mortgage broker or loan officer working together with the appraiser. The appraiser provides an inflated appraisal value in order to meet the buyer’s initial offer, leading to a sale.
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