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, intentionally falsifying information on a mortgage loan application. There are several types of mortgage fraud schemes including straw buying, air loans, and double-sales.

In addition to individuals partaking in mortgage fraud, large scale mortgage fraud schemes are not uncommon. Mortgage fraud is such a serious problem that the United States Department of Justice and Federal Bureau of Investigation (FBI) initiated "Operation Malicious Mortgage" as a special operation to investigate and prosecute such cases. Penalties for mortgage fraud include stiff fines, restitution, and imprisonment up to 30 years.

There are two distinct areas of mortgage fraud — fraud for profit and fraud for housing. 

  • Fraud for profit: Those who commit this type of mortgage fraud are often industry insiders using their specialized knowledge or authority to commit or facilitate the fraud. Current investigations and widespread reporting indicate a high percentage of mortgage fraud involves collusion by industry insiders, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the 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. The borrower may, for example, 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 involved with falsifying loan documents, or otherwise trying to illegally profit from the mortgage loan process. The FBI characterizes mortgage fraud by some sort of 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—about whether, for example, to approve a loan, accept a reduced payoff amount, or agree to certain repayment terms—is mortgage fraud. The FBI and other entities charged with investigating mortgage fraud, particularly in the wake of the housing market collapse, have broadened the definition to include frauds targeting distressed homeowners.

Aside from lying on a loan application, several other types of mortgage fraud exist, according to Fannie Mae:

  • 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 naive 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 he or she applies 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. The
    borrowers often pays for services that 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
  • 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 scheme, the perpetrator manipulates a senior citizen into obtaining a reverse mortgage loan and then pockets the senior victim’s reverse mortgage loan proceeds.
  • In affinity fraud, perpetrators rely on a common bond and exploit the trust and friendship that typically exist in the group
    of individuals with a common bond to support the scheme. Certain ethnic, religious, professional, or age-related groups are 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. But then instead of renting the home, the borrower occupies the home as a primary residence.