Mortgage Fraud: What It Is And How Do You Spot It?

Mortgage fraud is a familiar peril home buyers face. It can be perpetrated by buyers, sellers, phony lenders, investors and other real estate insiders. Mortgage fraud can cost homeowners thousands of dollars and leave them with underwater mortgages, where they owe more on their mortgage than their home is worth. The best way to protect yourself against mortgage fraud is to know what to look for.

What Is Mortgage Fraud?

As the government agency primarily in charge of investigating this type of crime, the FBI defines mortgage fraud – also colloquially referred to as mortgage scams – as any scheme containing “a material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.”

In other words, it is lying or omitting details on a mortgage application to get loan approval or obtain a mortgage with more favorable terms.

However, such a definition implies that only borrowers can commit mortgage fraud. In reality, fraudulent loans also can be perpetrated by mortgage industry professionals who prey on homeowners in distress to make more money. This can include lenders, sellers, developers, investors, appraisers, inspectors, creditors, and real estate agents. Let’s look at why individuals commit fraud and the two primary categories of mortgage fraud.

Why People Commit Mortgage Fraud?

Borrowers and lenders may be motivated to commit mortgage fraud for various reasons. Most of the reasons can be defined by falling into one of two categories: fraud for property and fraud for profit. Let’s briefly go over both.

Fraud For Housing

Fraud for housing – also known as fraud for property – is when borrowers misrepresent or omit information about their financial circumstances to ensure they qualify for loans. Perpetrators of this fraud may exaggerate incomes, borrow assets from others or manipulate appraisers into inflating property values to obtain or maintain homeownership.

Fraud For Profit

Fraud for profit is when professionals within the industry, such as mortgage brokers, lenders, appraisers and attorneys, commit fraud for their own financial gain. Perpetrators of this type of fraud may work independently but also may collude with others working on a transaction to increase commissions and embezzle from lenders or borrowers.

How Common Is Mortgage Fraud?

Mortgage fraud is more common than homebuyers might expect. According to CoreLogic’s annual 2023 Mortgage Fraud Report, 0.75% of all mortgage applications have the characteristics of potential fraud. While that doesn’t sound like a lot, when looked at in the context of all mortgage applications in the quarter, it represents 1 in 134 applications.

Types Of Mortgage Fraud

Some major fraud schemes and scams include inflated appraisals, foreclosure scams, using a false identity or income fraud, asset rental, equity skimming, property flipping and occupancy fraud. Let’s dive deeper into the different types of mortgage fraud and how they play out.

Inflated Appraisals

Lenders rely on appraisals to determine loan limits because they don’t want to lend a borrower more than a home is worth. In some instances of mortgage fraud, the appraisal can be artificially inflated to make the home seem worth more than it actually is. Appraisers can become complicit in this type of fraud when borrowers twist their arms to ensure their loans are high enough to purchase properties in overinflated markets.

Foreclosure Scams

Homeowners at risk of defaulting on their loans or whose homes are in foreclosure are sometimes led to believe that someone can save their home in exchange for a deed transfer and upfront fees. The perpetrator will re-mortgage the property without actually saving the property from foreclosure.

Using A False Identity

A typical loan fraud method is identity theft. This happens when another person’s identity, including the victim’s personal and financial information such as Social Security number, birth date or credit history, is falsely used to apply for a loan application.

Asset Rental

This type of fraud occurs when people borrow the assets of others to make themselves appear more qualified for financing. In these cases, the money is paid back to whomever it came from after the mortgage closes.

Equity Skimming

In situations of equity skimming, an investor uses a straw buyer, a false credit history, and false income information to apply for a loan. After the loan closes, the straw buyer signs the property to the investor, who then rents out the property (without making mortgage payments) until the property is foreclosed.

Property Flipping

Buying a home, fixing it up and quickly selling it at a profit is property flipping. However, it’s not illegal unless the acquisition of the property involves falsifying loan documents, such as income information or appraisals.

Occupancy Fraud                

When obtaining a mortgage, the borrower must explain the intent of the property as either their primary residence, second home or investment property. Occupancy fraud occurs when the borrower misleads the lender about the property’s intended use. For example, occupancy fraud occurs if the borrower tells their mortgage lender the property will be their primary residence when, in reality, it will be rented out to tenants.

Reverse Mortgage Fraud

A reverse mortgage is an option that allows homeowners ages 62 and older to borrow against the equity they’ve built using the home as security. A common scam sees phony contractors convincing older homeowners to take out a reverse mortgage to pay for home repairs. The repairs might be unnecessary, and the scammer might quote a much higher price than the actual cost. Then, the homeowner takes out a reverse mortgage and sacrifices their equity. Some of these scams target veterans, even though the VA doesn’t offer a reverse mortgage option.

How To Prevent Mortgage Fraud

If you’re getting a mortgage, the best thing to do is be honest on your application. Every mortgage lender wants to put people into a house they can afford.

On the other hand, a mortgage is a significant financial transaction involving several people. Some bad actors might wish to take advantage of you. That said, there are several things you can do to protect yourself from becoming a victim of mortgage fraud:

Mortgage Fraud Red Flags

Let’s look at some red flags that could indicate an attempt at mortgage fraud.

For Borrowers

For Lenders

For mortgage lenders, efforts to prevent scams are often supplemented by software designed to detect fraud and mitigate risk. Spotting and rejecting applications from fraudulent borrowers requires constant monitoring and assessment, and automating parts of that process can benefit many lenders.

How To Report Mortgage Fraud

If you suspect you’re a victim of mortgage fraud, you have a few options for reporting the crime. Contacting the FBI field office closest to you is the best place to start. You also can contact a consumer hotline at your state attorney general’s office to file a report and get assistance.

It’s also possible to report your case to the Federal Trade Commission. While the FTC doesn’t investigate individual instances of mortgage fraud, sharing your story can sometimes help reveal systemic patterns and the pursuit of justice on a larger scale. To find out more about avoiding and reporting mortgage fraud, visit ReportFraud.ftc.gov.

You can also report suspected mortgage fraud to Fannie Mae using this form or by calling 1-800-2FANNIE or 1-800-232-6643.

Mortgage Fraud Penalty: What Happens To Those Who Commit The Crime?

Mortgage fraud is a serious federal crime, and penalties can be pursued as misdemeanors or felonies at the state or federal level, depending on who has committed the fraud in a given real estate transaction and the severity of their actions.

Penalties At The State Level

At the state level, fraudulent loan applicants could face heavy fines, restitution charges and prison. In addition to these punishments, fraudulent mortgage lenders, mortgage brokers and other real estate agents or professionals also could face suspension or total revocation of their licenses and lose their ability to practice their profession.

Penalties At The Federal Level

At the federal level, the fines and prison sentences could increase substantially. A federal mortgage fraud conviction could result in up to $1 million in fines and up to 30 years in prison.

FAQ

Here are the answers to some common questions about mortgage fraud.

The Bottom Line

Buying a home is a large investment – for most of us, it’s our most significant. It’s important to look for signs of fraud to avoid becoming a victim. And always make sure to choose a real estate agent and mortgage banker you can trust.