Definition of Mortgage Fraud
The intention of mortgage fraud is typically to receive a larger loan amount than would have been permitted if the application had been made honestly. For example, by intentionally falsifying information on a mortgage application. Mortgage fraud schemes include straw buying, air loans, and double-sales.
In addition to individuals committing mortgage fraud, large scale mortgage fraud schemes are not uncommon. In 2008, the U.S. Department of Justice and Federal Bureau of Investigation (FBI) initiated "Operation Malicious Mortgage" as a special operation to investigate and prosecute 144 cases of mortgage fraud. Penalties for mortgage fraud include fines, restitution and prison time with sentences of 28 months on average. There are two distinct areas of mortgage fraud.
Fraud for profit
Perpetrators of this type of fraud are often industry insiders using their specialized knowledge or authority. These insiders include bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the mortgage industry. Fraud for profit aims not to secure housing, but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners. The FBI prioritizes fraud for profit cases.
Fraud for housing
This type of fraud is typically represented by illegal actions taken by a borrower motivated to acquire or maintain ownership of a house. For example, the borrower may misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property's appraised value.
Breaking Down Mortgage Fraud
Mortgage fraud is a financial crime that entrails the falsifying of loan documents, or otherwise trying to illegally profit from the mortgage loan process. The FBI considers fraud to be a material misstatement, misrepresentation or omission in relation to a mortgage loan which is then relied upon by a lender. A lie that influences a bank's decision—for example, about whether to approve a loan, accept a reduced payoff amount, or agree to certain repayment terms—is mortgage fraud. The FBI and other enforcement agencies charged with investigating mortgage fraud, particularly in the wake of the 2008 housing market collapse, have broadened the definition to include fraud targeting distressed homeowners.
Aside from lying on a loan application, other types of mortgage fraud include:
- Straw buyers are loan applicants used by fraud perpetrators to obtain mortgages and are used to disguise the true buyer or the true nature of the transaction.
- An air loan is a loan to a straw or non-existent buyer on a non-existent property.
- A double sale is the sale of one mortgage note to more than one investor.
- Illegal property flipping occurs when property is purchased and resold quickly at an artificially inflated price, using a fraudulently inflated appraisal.
- Ponzi, investment club, or chunking schemes involve the sale of properties at artificially inflated prices, pitched as investment opportunities to naïve real estate investors who are promised improbably high returns and low risks.
- A builder bailout is when a seller pays large financial incentives to the buyer and facilitates an inflated loan amount by increasing the sales price, concealing the incentive, and using a fraudulently inflated appraisal.
- A buy-and-bail is when the homeowner is current on the mortgage, but the value of the home has fallen below the amount owed (underwater), so they apply for a purchase-money mortgage on another home. After the new property has been secured, the buy and bail borrower will allow the first home to go into foreclosure.
- A foreclosure rescue scheme involves foreclosure "specialists" who promise to help the borrower avoid foreclosure. Borrowers often pays for services they never receive and, ultimately, lose their homes.
- In short sale fraud, the perpetrator profits by concealing contingent transactions or falsifying material information, including the true value of the property, so the servicer cannot make an informed short sale decision.
- A non-arm's length short sale scheme involves a fictitious purchase offer made by the homeowner's accomplice (straw buyer) in an attempt to fraudulently reduce the indebtedness on the property and allow the borrower to remain in their home.
- In a short sale flip scheme, the perpetrator manipulates the short sale lender into approving a short payoff and conceals an immediate contingent sale to a pre-arranged end buyer at a significantly higher sales price.
- In a reverse mortgage fraud, the perpetrator manipulates a senior citizen into obtaining a reverse mortgage and then pockets the victim's proceeds.
- In affinity fraud, perpetrators exploit the trust and friendship that exist in groups held together by a common bond. Ethnic, religious, professional or age-related groups are often targeted.
- In reverse occupancy fraud, a borrower buys a home as an investment property and lists rent proceeds as income to qualify for the mortgage. Then, instead of renting the home, the borrower occupies the premises as a primary residence.