It’s hard to believe that a central collection bureau does not exist for the purpose of tracking all mortgage fraud complaints. Yet, there are multiple sources that claim to have data indicating that mortgage fraud is on the rise.
The Federal Bureau of Investigation is proactively working with the mortgage industry in an effort to curb mortgage fraud crimes. On March 8, 2007, the FBI signed a memorandum of agreement with the Mortgage Bankers Association (MBA) to promote the FBI’s Mortgage Fraud Warning Notice. The Notice states that it is illegal to make any false statement regarding income, assets, debt or matters of identification, or to willfully inflate property value to influence the action of a financial institution. Under the agreement, the MBA and the FBI will make the notice available to mortgage lenders to use it voluntarily as a means of educating consumers and mortgage professionals of the penalties and consequences of mortgage fraud.
Mortgage Fraud is defined as the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan.
Some industry explanations for this increase point to recent high mortgage loan origination volumes that strain quality control efforts, the persistent desire of mortgage lenders to hasten the mortgage loan process, the escalation of home prices in recent years, and the introduction of non-traditional loans which contain fewer quality control restraints such as low documentation and no documentation loans according the Mortgage Asset Research Institute.
Mortgage loan fraud is divided into two categories: fraud for property and fraud for profit.
Fraud for property/housing entails minor misrepresentations by the applicant solely for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan.
Fraud for profit, however, often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. It is this second category that is of most concern to law enforcement and the mortgage industry.
Relaxed Oversight
Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation. Recent events likely resulted in an increase in mortgage fraud as higher housing prices tempted borrowers to commit fraud for property in order to qualify for a mortgage loan. Also, mortgage fraud perpetrators seize the opportunity to take advantage of the relaxed lending practices to commit fraud for profit.
Low-risk, High Rewards
Mortgage fraud is a relatively low-risk, high-yield criminal activity that tempts many. However, according a May 2006 Financial Crimes Enforcement Network (FinCEN) report, finance-related occupations, including accountants, mortgage brokers, and lenders, were the most common suspect occupations associated with reported mortgage fraud. Perpetrators in these occupations are familiar with the mortgage loan process and therefore know how to exploit vulnerabilities in the system.
Mortgage Fraud and Hot Potato
The most common form of mortgage fraud is illegal property flipping which entails false appraisals and other fraudulent loan documents. Combating mortgage fraud effectively requires the cooperation of law enforcement and industry entities. No single regulatory agency is charged with monitoring this crime and state and local agencies are among those investigating mortgage fraud.
Here is a partial list of state and Federal agencies that investigate mortgage fraud: the Securities and Exchange Commission (SEC), the FBI, the Department of Housing and Urban Development-Office of Inspector General (HUD-OIG), the IRS, the US Postal Inspection Service. The trick is to get these agencies to share information.
Emerging Schemes
Recent statistics on foreclosure fraud suggest that exploding figures of foreclosures provide criminals with the opportunity to exploit and defraud vulnerable homeowners seeking financial guidance. The perpetrators convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. This “foreclosure rescue” often involves a manipulated deed process that results in the preparation of forged deeds. In extreme instances, perpetrators may sell the home or secure a second loan without the homeowners’ knowledge, stripping the property’s equity for personal enrichment.
While foreclosure scams vary, they may be used in combination with other fraudulent schemes. For instance, perpetrators may view foreclosure-rescue scams as a new method for fraudulently acquiring properties to facilitate illegal property-flipping and equity-skimming.
Individuals and criminal groups are exploiting the home equity line of credit (HELOC) application process to conduct multiple-funding mortgage fraud schemes, check fraud schemes, and potentially money laundering-related activity. HELOCs are aggressively marketed by lenders as an easy, fast, and inexpensive means to obtain funds. HELOC funds are normally withdrawn on an as-needed basis to conduct home repairs or to pay bills, but fraud perpetrators commonly withdraw the entire amount within a short time period.
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