Two Types of Mortgage Fraud
There are two different types of mortgage fraud: fraud for housing and fraud for profit. Fraud for housing is usually perpetrated by a borrower who is looking to purchase a home or maintain property ownership. For instance, the borrower may lie about his or her income and assets on a mortgage application. Also, the borrower may talk the appraiser into misrepresenting a home's appraised value.
Fraud for profit is usually committed by those in the real estate and financial industry who utilize their industry knowledge and authority to facilitate mortgage fraud. Current investigations by the Federal Bureau of Investigation (FBI) shows that a large proportion of mortgage fraud is perpetrated via collusion by insiders of the real estate and financial industries. These insiders commonly include loan officers, bank officials, property appraisers, attorneys, mortgage brokers and other industry professionals involved in the mortgage lending process.
Foreclosure Rescue Fraud
One of the most common mortgage fraud schemes, which industry insiders use, is to pinpoint homeowners who are at risk of foreclosure or defaulting on mortgage payments. The perpetrators will mislead the victims into believing their homes can be saved by transferring ownership of the property to an investor.
The perpetrators then make a profit by selling the home to a straw borrower or an investor, which allows the creation of home equity via fraudulent appraisals. They then steal fees paid by victim homeowners. Sometimes, homeowners are told they can repurchase their home once they reestablish their credit, while continuing to make monthly rent payments. However, when the perpetrators purposely fail to make payments on the mortgage, the property will go into foreclosure.
Loan Modification Fraud
Loan modification scams are similar to foreclosure rescue schemes in that the perpetrators claim to be helping homeowners who have not been able to make their mortgage payments and are close to having their lenders foreclose on their homes. However, the perpetrators charge large upfront fees and usually end up negotiating unfavorable terms for the victims or in some cases, they do no negotiating whatsoever. The victims usually land up losing their homes in the end.
Unlawful Home Flipping
In this type of scam, real estate is purchased, fraudulently appraised at a lofty value and then sold as quickly as possible. Along with the fraudulent appraisal, other false information is commonly provided in the process, such as fraudulent loan documents and inflated purchaser income. Oftentimes, these types of schemes will involve illegal kickbacks to title company employees, loan brokers, investors and appraisers.
Builder Bailout Scams
Builders who face unfavorable market conditions, with high inventory and falling demand, may find themselves incentivized to utilize bailout scams. In this type of scheme, the builders locate buyers who then obtain mortgages. However, these buyers then purposely allow the property to enter foreclosure.
Condo Conversion Scheme
In a declining housing market, real estate developers often have extra inventory of condo units which were previously converted from apartment complexes. In a condo conversion scam, the developers find straw purchasers by offering cashback incentives. This inflates the value of the units, which enables developers to close sales with higher pricing. Failing to inform the lender about the cashback incentives is illegal. However, usually the developers also lie about the buyer's income and assets in order to qualify them for the property purchases, which is also breaking the law.
Home Equity Conversion Mortgage Scam
A home equity conversion mortgage (HECM) is a reverse home loan product which the Federal Housing Administration (FHA) insures for borrowers who are at least 62 years of age, occupy the home as a primary residence and undergo HECM counseling. Basically, HECM provides homeowners with a lump sum payment against the equity of their home. The scam artists recruit senior citizens and convince them to convert their home equity into cash via the HECM program. The perpetrators then keep the cash, while paying a fee to the victim. In some cases, the perpetrators steal the full amount of the cash without the victim's knowledge.
Commercial Property Schemes
Not only is mortgage fraud a problem in the residential market, it is an issue in the commercial real estate space as well. Owners of distressed commercial properties obtain financing using a fraudulent appraisal. Many times, fake leases are used to inflate the property's profitability, which results in an inflated property valuation. This generally ends in the borrower struggling to maintain the property due to having a lower cash flow than stated. Eventually, after the property is foreclosed upon, the lender is usually left with commercial property that has not been kept up and is difficult to rent.
These are just a some of the multitude of ways mortgage fraud can be perpetrated by either a homeowner or real estate industry insiders. It is important for those looking to buy or sell real estate to be aware of these schemes in order to avoid associated legal problems.