Definition of 'Air Loan'
A mortgage fraud scheme in which a mortgage broker invents a property and a borrower in order to earn profits on completed loan transactions by defrauding lenders. Since the borrower is not real, the broker may set up a system of phone banks and mailboxes that are used to "verify" the borrower's employment, home address, credit history, and so on as well as the property's title history and appraisal value.
Investopedia explains 'Air Loan'
When an air loan inevitably goes into default - since no one is paying the mortgage - the lending bank loses everything because the home they would normally foreclose on does not exist.
The air loan is just one type of mortgage fraud. Others include property flipping using inflated appraisals, silent second mortgages, straw buyers, foreclosure schemes and equity skimming.