What is mortgage fraud? Mortgage fraud refers to lying or omitting information to fund or insure a mortgage loan. It results in billions of dollars in annual losses nationwide.
In 2021, fraud risk increased 37% over 2020 levels, CoreLogic found, and the fraud rate averaged 1 in 120 loans — 1 in 23 for investment purchases. The top three states for mortgage application fraud risk the year before? New York, Nevada, and Florida.
The FBI investigates two distinct areas of mortgage fraud: fraud for profit and fraud for housing.
What is Mortgage Fraud?
Fraud for Profit
The FBI says that those who commit this type of mortgage fraud are often industry insiders. Current investigations and reporting indicate that a high percentage of mortgage fraud involves collusion by bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals in the industry.
The FBI points out that fraud for profit is not about getting a home, but manipulating the mortgage process to steal cash and equity from lenders and homeowners.
Fraud for Housing
It’s not only industry insiders who can look to milk the system. With fraud for housing, the perpetrators are borrowers who take illegal actions in order to acquire or maintain ownership of a house.
They could do this by lying about income or presenting false information about assets on their loan application, for example.
Why Is Mortgage Fraud Committed?
Borrowers who know they are not really mortgage-ready — perhaps because of a poor credit history, a low credit score, or a nothing-to-brag-about salary that would likely get them the thumbs down from a lender — may be driven to try to enhance their chances of getting a loan, even by illegal means.
As for industry professionals, be it appraisers, real estate agents, mortgage brokers, or anyone who has a role in the home buying and selling process, they could be motivated by the almighty dollar. If they can look the other way to get the transaction done, or manipulate facts so they get their piece of the action, they may do so.
What Are the Penalties for Mortgage Fraud?
Mortgage fraud is serious. It’s typically a felony. Conviction for federal mortgage fraud can result in a federal prison sentence of 30 years; state convictions can last a few years. If the crime is a misdemeanor and the amount involved is less than $1,000, there can be a one-year sentence.
A conviction on a single count of federal mortgage fraud can result in a fine of up to $1 million. State fines can range from a few thousand dollars for a misdemeanor to $100,000 or more for a felony.
Expect to pay restitution to compensate the victims and to be on probation following jail time.
Types of Mortgage Fraud
Mortgage fraud comes in many flavors. Scammers are big on creativity. The FBI has a list of mortgage scams to watch out for. Here are a few of theirs and others to keep in mind.
There’s nothing innately evil about flipping properties. In fact, adding investment properties to your portfolio can be a way to build wealth if you’re good at it. But then there’s the sinister side of flipping.
It goes something like this: A property is purchased below the market price and immediately sold for profit, typically with the help of a shady appraiser who puffs up the value of the property. This is illegal.
The FBI explains how this works: An investor may use a straw buyer, false income documents, and false credit reports to obtain a mortgage loan in the straw buyer’s name.
After closing, the straw buyer signs the property over to the investor in a quit-claim deed, which relinquishes all rights to the property and provides no guarantee to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several months later.
It’s one thing to borrow something blue on your wedding day, and quite another to borrow or rent the assets of your best friend or loved one to make yourself look better in the eyes of a lender. You “borrow” the asset, maybe a hefty chunk of cash, and after the mortgage closes, you give it back to your partner in crime.
Appraisers have the keys to the kingdom. They state the fair market value of a home. Crooked appraisers can do a couple of things that are illegal. They can undervalue the property so that a buyer gets a “deal,” or more often, they overstate the value of the property. The goal is to help a buyer or seller, or a homeowner planning to refinance or tap home equity.
False Identity/Identity Theft
Identity theft is an epidemic. According to the Federal Trade Commission, in 2020, it received about 1.4 million reports of identity theft, double the number from 2019.
Scammers use financial information like Social Security numbers, stolen pay stubs, even fake employment verification forms to get a fraudulent mortgage on a property they do not own. If you’ve been a victim, report identity theft as soon as possible.
Talk about kicking somebody when they’re down. Predators seek out those who are in foreclosure or at risk of defaulting on their loan and tell them that they can save their home by transferring the deed or putting the property in the name of an investor. It can sound rational when you’re desperate.
The perpetrator cashes in when they sell the property to an investor or straw borrower, creating equity using a fraudulent appraisal and stealing the seller proceeds or fees paid by the homeowners. The homeowners are typically told that they can pay rent for at least a year and repurchase the property when their credit has improved.
But that’s not how the story goes. The crooks don’t make the mortgage payments, and the property will likely wind up going into foreclosure. Heavy sigh.
This may as well be in a movie, because nothing is real with this scheme. The FBI describes an air loan as a nonexistent property loan where there is usually no collateral.
Brokers invent borrowers and properties, establish accounts for payments, and maintain custodial accounts for escrow. They may establish an office with a bank of phones, each one used as the fake employer, appraiser, credit agency, and so on, to deceive creditors who attempt to verify information on loan applications.
A lie can be what you leave out as much as what you say. Given the nature of how self-employed people file taxes, some do not report their full income on their taxes. When it comes to a “stated income” loan, a borrower claims a certain amount of income, and an underwriter makes a decision based on that figure to give them a loan or not.
If the borrower tells a little white lie about their income, it’s not little at all. It’s mortgage fraud.
Repaying Gift Money
You can receive part of a down payment for a home, but the gift is not to be repaid. In fact, when you plan to use gift funds, you’ll need to provide a gift letter that proves the money is not a loan to be repaid.
You may also be asked to provide documentation to prove the transfer of the gift into your bank account. This may include asking the donor for a copy of their check or bank account statement.
If that gift is to be repaid, it is mortgage fraud. It can also put your loan qualification at risk, as all loans need to be factored into your debt-to-income ratio.
Avoiding and Preventing Mortgage Fraud
When it comes to buying or selling a house, there are a lot of moving parts, a lot of cooks in the kitchen. It’s a good idea to, above all, be truthful about everything, and if anyone along the way seems to be pushing you in any other direction, you could pay dearly for taking that bad advice.
You can play the game straight, but what about all the others involved in the process? It’s smart to get referrals for companies and real estate and mortgage pros that you’ll be working with, and to check state and local licenses.
Was your property evaluation, or appraisal, on target? It might be helpful to look at other homes that are similar to see what they have sold for, and recent tax assessments of nearby homes.
Guard your John Hancock. Be careful what you sign, and never sign a blank document or one containing blank lines.
Another no-go is signing over the house deed “temporarily.” This could be a set-up. Someone may be asking you to sign over your house deed as part of a scheme to avoid foreclosure. Know that chances are you’ll lose your house permanently.
Victims of Mortgage Fraud
What do you do if you’re the victim of mortgage fraud? Your local police department may take a report. Your state attorney general’s office may be another good resource.
The FBI, however, is the agency that handles most mortgage fraud investigations. You can go to tips.fbi.gov to report a crime. Other federal agencies also investigate mortgage fraud, but the FBI is likely the best first option.
Mortgage fraud isn’t rare, and both industry insiders and borrowers can be involved. It’s smart to approach the process of getting a home loan with care, asking your lender questions, visiting this help center for home loans, and using a mortgage calculator tool to gauge the effect of different down payments.
When you’re ready to get a rate quote from an honest lender, try applying for a mortgage online with SoFi.
SoFi has a range of fixed-rate home loans at competitive rates. Eligible first-time homebuyers can put just 3% down, and you may qualify to roll closing costs into your loan.
Photo credit: iStock/fizkes
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.