Financial Industry & Mortgage Fraud

Financial Industry & Mortgage Fraud

What Is Mortgage Fraud?

The US Department of Justice estimates that between 2005 and 2015, $1 trillion was lost due to mortgage fraud. This includes everything from false documents used to obtain mortgages to outright theft of funds. The FBI reports that mortgage fraud cases have increased by 50% since 2010. The FBI says that in 2014 alone, they investigated over 1,000 cases of mortgage fraud.

Various parties can commit mortgage fraud, including real estate agents, loan officers, appraisers, title companies, attorneys, bankers, and even government officials. It’s also possible for one person to commit multiple acts of mortgage fraud. For example, an individual may use fraudulent documents to get a home loan and then sell the property without paying off the loan.

How is Mortgage Fraud Committed?

 Examples of housing fraud committed by borrowers, often with assistance from loan officers or other personnel, consist of creating false statements about employment and income, debts and credit, or property value and condition. An industry professional committing fraud for profit by making false representations or omitting relevant information about their own or their clients' employment and income, debt or credit, or property value and condition.

A mortgage fraudster will typically make false statements about their client's employment history, current financial status, or past financial situation. They may lie about their income, assets, liabilities, or a combination thereof. They may exaggerate or falsify income and asset information or omit or conceal information about their own or clients' finances.

They may also make false statements about the borrower's ability to repay the loan. If a mortgage fraudster makes false statements about the borrower’s employment history, they could be charged with perjury.

Types of Mortgage Fraud

Mortgage fraud is often a result of greed, dishonesty, and poor business practices. It can happen at any stage of the loan process, from origination to closing. The most common types include:

  • Falsely inflated income claims
  • Improper credit reporting
  • Misrepresentations regarding loan terms and conditions
  • Unauthorized payments
  • Failure to disclose required disclosures
  • Fraudulent appraisal
  • Fraudulent document preparation
  • Fraudulent underwriting

Mortgage and Real Estate Fraud

There are many different types of real estate fraud, including:

  • False documents – A common type of fraud involves presenting false documentation to obtain loans. This includes forged signatures and falsified appraisals.
  • Mortgage flipping – In this scheme, a borrower purchases a property at a low price and then sells it at a higher price. The profit from the sale is used to pay off the loan, leaving the original owner with little or nothing.
  • Mortgage fraud – In this case, the lender does not receive what it paid for. Instead, the borrower uses the money to fund personal expenses.
  • Reverse mortgage fraud – When a borrower takes out a reverse mortgage on their home, they usually do so because they need cash flow and want to stay in their home. However, some people take out these mortgages to avoid paying taxes on the proceeds when they die.
  • Loan modification fraud – Sometimes, lenders modify loans after being sold to investors. These modifications help struggling homeowners who cannot afford their homes. But instead, unscrupulous individuals use them to inflate profits.

Current Mortgage Fraud Trends

Mortgage fraud has become a significant problem in recent years, with some estimates placing it at $1 trillion annually. The most common types of fraud include loan modification scams, which involve lenders offering to modify mortgages so homeowners can avoid foreclosure; fraudulent appraisals, where appraisers inflate property values to obtain higher loans; and identity theft, where people steal someone else's personal information to apply for loans under their name.

Air Loan vs. Appraisal Fraud

Mortgage fraud is often associated with subprime loans, but it doesn’t have to be. The most common type of mortgage fraud involves appraisals. In this case, lenders rely on appraisers who provide fraudulent estimates of the property’s value. This allows them to approve mortgages they wouldn’t otherwise be able to give out.

Appraisal fraud happens when appraisers inflate the value of a home to get a high appraisal score. They do this by using erroneous data, such as inaccurate sales prices and making up numbers. Lenders then use these inflated values to determine whether or not to grant a loan.

Appraisal fraud is usually committed by real estate agents, who may be paid extra for each transaction they close. Other times, appraisers may be pressured into inflating the value of properties because they need to meet a quota.

Appraisal Fraud Scams

The following are some of the most common appraisal fraud scams:

  • “Flip” – An agent tells a homeowner that they will receive a large commission for selling a house quickly. Once the sale closes, however, the agent pockets the money instead of passing along the proceeds to the lender.
  • “Buyer’s Agent” – A buyer’s agent represents both parties in a real estate deal. However, the agent receives a more significant cut of the profits than either party would generally receive.
  • ‘‘Bait and Switch’’ - When a seller lists their home for less than the market value, the seller hopes to attract buyers who want to buy below market price. However, once the seller finds a buyer, the seller changes the terms of the contract to reflect the actual market price.
  •  “Underwater” – When a borrower owes more on a mortgage than the home is worth, the lender considers the loan to be underwater.
  • “Cash-Out Refinance” – Borrowers try to take advantage of low-interest rates by refinancing their existing mortgage at a higher rate. However, the new loan amount is greater than the original balance, so the borrower must first pay off the old loan.

Financial Industry Fraud

The financial industry has been plagued by fraud since the beginning of banking. It was the first industry to adopt modern accounting methods. It was also one of the first industries to have a central bank, which helped protect against fraud.

Today, the financial industry continues to struggle with fraud. Banks and other financial institutions face numerous challenges, such as:

  • Increased risk due to increased globalization
  • High-profile scandals involving banks and brokers
  • New regulations requiring more transparency
  • Increased scrutiny from regulators and law enforcement agencies
  • Increased competition from non-traditional players like online lenders and peer-to-peer lenders
  • Higher costs associated with compliance

Do You Have a Mortgage Fraud or Financial Industry Fraud Case to Report?

The best way to prevent fraud is to educate yourself about it. If you suspect someone has committed fraud against you or that you are being targeted for mortgage fraud or financial industry fraud, contact The Whistleblower Advocates at (833) 310-3147 for a FREE, confidential consultation.

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