Common Types of Mortgage Fraud

March 28, 2019

Mortgage fraud can happen anywhere. At all levels of the real estate industry, it's important to be aware of the different types of mortgage fraud, how they occur and why they occur to protect all parties involved in the real estate transaction. While the significant repercussions associated with fraud can help deter many potential fraudsters, some may still attempt to get away with a number of common schemes.

Why Does Mortgage Fraud Occur?

Some unscrupulous individuals may seek profit at the expense of others. Others may be using real estate transactions to cover up criminal activity. However, many cases of mortgage fraud occur due to the desire to own a home despite not being able to qualify for a loan or purchase one outright.

In some areas, home prices are high and qualifying for a mortgage isn't easy. People who want to buy a home and who are unable to qualify will sometimes turn to fraud to buy the home they want to own. In this way, the most common instances of fraud occur when ordinary people want to buy a home and can't. People are sometimes tempted to falsify documents, inflate assets or misrepresent themselves to get the mortgage they need to buy the house they want. 

Income Fraud

This is one of the most common types of mortgage fraud. It's straightforward and relatively easy to attempt for an average buyer.

To qualify for a mortgage, a homebuyer must have an income of a certain amount, especially if the buyer has many debts. Buyers who are under employed or who are not employed may try to inflate their income by making up sources of income. To do this, the buyer invents an employer and creates false check stubs. 

Occupancy Fraud

Occupancy fraud is a type of fraud wherein the homebuyer disguises the true purpose of the home to ensure they'll qualify for a mortgage. For example, a buyer may purchase a home stating that the home will be used as the buyer's primary residence. This enables the buyer to qualify for a loan with a relatively low interest rate and low down payment. In reality, the homebuyer may intend to use the home as a vacation property, which they can then rent. This type of purchase typically requires a loan with a higher down payment and may involve a higher interest rate as well due to the higher amount of risk involved. 

Some have claimed that occupancy fraud can also happen in the reverse, with the homebuyer stating that they will use the home as a rental property. The rental income that the property would generate is used to qualify for the loan. When the purchase of the home goes through, the buyer then moves into the house and uses it as a primary residence. 

Transaction Fraud

Transaction fraud is a type of fraud that occurs when either the buyer or seller (or both) engage in a fraudulent transaction. Sometimes transaction fraud takes the form of an agreement between the buyer and seller, wherein the seller agrees to sell the house for a very low price. The home, which has been valued at a much higher price, qualifies for a much larger mortgage. The buyer and seller then walk away with extra money.

Another common form of transaction fraud occurs when the true buyer uses a straw buyer to qualify for a mortgage. A straw buyer is a person who is more qualified to buy a house than the true buyer. The straw buyer uses their relatively good credit and high income to purchase the home. When the transaction is finished, the straw buyer transfers the deed of the house to the actual intended buyer. 

Some buyers may not be honest about the source of their down payment funds in certain cases. A loan may be incorrectly classified as a "gift" (or is simply not recorded at all). Some sellers may lend the buyer whatever amount that will allow them to qualify for a loan that they would not have otherwise.

Fraud for Profit

It's important to know that not all mortgage fraud is executed by mortgage borrowers. Fraud for profit is a type of fraud conducted by lenders, real estate professionals, attorneys and mortgage brokers.

Fraud for profit is a type of fraud that occurs when a lending professional helps a borrower get a mortgage or refinance a mortgage—all for the sake of making a profit. Often, fraud for profit occurs when a lender targets a borrower who is in financial distress. For example, this type of fraud may take the form of a refinance or loan modification service in order to profit from borrowers who might not understand their options. Fraud for profit often targets the people who are less capable of protecting themselves from this type of scam, because they have few financial resources to fight back. 

Fraud to Conduct Criminal Business

Some criminal enterprises attempt to utilize the real estate market to their benefit. People who need to launder money will often do so by buying and selling homes. This type of fraud typically involves home flipping—except the "flipper" in these cases isn't looking to turn a profit, they're simply looking to create "layers" between them and illegally obtained funds.

Identifying, Preventing and Reporting Mortgage Fraud

Being able to recognize different kinds of mortgage fraud can help you do your part to prevent it from occurring. Know the rules required to keep your business in good standing in the state where you work. Being on the lookout for fraudulent activity helps the real estate industry retain its good name in the community. Catching fraudulent activity before it has the chance to negatively impact the town or neighborhood where you do business can help you retain the trust of your clients. 

Red Flags to Potential Fraud

  • Power of Attorney used and the attorney in fact is a party to the transaction who will financially benefit (other than a spouse or immediate family member who resides in the property)
  • Recent changes of title where new owner is now selling the property
  • Double escrow concurrent back-to-back transactions with deed transfers to intermediate straw buyers needed to facilitate the flip
  • Funds to closing not coming from the buyer, but some other party involved in the transaction
  • Payouts to third parties especially parties not on the lender’s specific closing instructions
  • Payouts to contractors and repair companies—especially when no on closing instructions
  • “Unusual” sales contract addendums with terms/conditions and or payouts that are not the norm for the local market (this may not have been provided to the lender as a material omission)
  • Buyer is a “real estate investor” where the seller is controlling all aspects of the transaction and who may or may not realize he is acting as a straw buyer (e.g. when speaking to the buyer in coordinating a closing, do they understand the transaction?)
  • Recently recorded liens, often involving disbursement being paid to a participant in the transaction.  

 

Ron Neal has worked as a real estate agent since 1991 and is the founder of The Neal Estate Team. He can be reached at ron.neal.remax@ronneal.com.


Contact ALTA at 202-296-3671 or communications@alta.org.

110111