Mortgage Fraud, It's an inside game.  

By Michael Mapes, The Responsible Mortgage Lender

The increased reliance by both financial institutions and non-financial institution lenders on third-party brokers has created opportunities for organized fraud groups particularly where mortgage industry professionals are involved.  Combating significant fraud in this area is a priority, because mortgage lending and the housing market have a significant overall effect on the nation's economy.

Each mortgage fraud scheme contains some type of "material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan".  A significant portion of the mortgage industry is void of any mandatory fraud reporting.  In addition mortgage fraud in the secondary market is often under reported.  Therefore, the true level of mortgage fraud is largely unknown.  The mortgage industry itself does not provide estimates on total industry fraud.  Based on various industry reports and FBI analysis mortgage fraud is pervasive and growing.

The defrauding of mortgage lenders should not be compared with predatory lending practices which primarily affect borrowers.  Predatory lending typically effect senior citizens, lower income and challenged credit borrowers.  Predatory lending forces borrowers to pay exorbitant loan origination fees and discount points., sub-prime or high interest rates, and in some cases, unreasonable service fees.  These practices often result in the borrower defaulting on his mortgage payment and undergoing foreclosure or forced refinancing.

Although there are many mortgage fraud schemes, some of the current and most recent trends include:  Equity Skimming, property flipping, and mortgage related identity theft.

Equity Skimming:  Is a tried and true method of mortgage fraud.  It involves the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors.  In this scheme an investor may use a stray buyer, false income documents, and false credit reports, to obtain a mortgage loan in the straw buyers' name.  Subsequent to 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 guaranty to title.  The investor does not make any mortgage payments and rents the property until foreclosure take place many months down the road.

Property Flipping:  This practice is best described as purchasing properties and artificially inflating their value through false appraisals.  The artificially valued properties are then repurchased several times for a higher price by associates of the "flipper."  After three or four sham sales, the properties are foreclosed on by victim lenders.  Often flipped properties are ultimately repurchased for 50 - 100% of their original value.

Mortgage Debt elimination Schemes-  Be aware of emails or web-based advertisements that promote the elimination of mortgage loans, credit card and other debts while requesting an up-front fee to prepare documents to satisfy the debt.  The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, bill of Exchange, Due Bill or other similar variations.  These documents do not achieve what they promise.  Borrowers typically end up paying thousands in fees without the elimination or reduction of any debt...

A recent study of mortgage industry fraud schemes identified 26 states as having significant mortgage fraud problems. Although Georgia and Florida ranked high on every study, results also identified 9 states in the South and Southwest, 7 States in the West and 5 States in the Midwest as having mortgage fraud problems.  As the study concluded mortgage fraud is not isolated to one particular area or income group.  

Mortgage Fraud Indicators

• Inflated Appraisals
• Increased commissions/bonuses
• Falsifications on Loan Applications.
• Fake Supporting documents
• Purchase loans disguised as refinances.

Other Common Fraud Schemes

Silent Second - The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage.

Stolen Identity/Fictitious Identity - The applicant's name, personal identifying information and credit history are used with out their knowledge or consent.

Foreclosure Schemes - The perpetrator identifies homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure.  Perpetrators mislead the homeowner into believing that they can save their homes in exchange for a transfer of the deed and up-front fees.  The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner.  

Air Loans- This is a non-existent property loan where there is usually no collateral at all.  An example of this where a broker invents properties and borrowers, establishes accounts for payments, and maintains custodial accounts for escrows.

In most all cases of mortgage fraud the aid and assistance of someone inside the industry is needed.  Loan officers, appraisers, realtors and closing agents have all been at one time implicated in aiding mortgage fraud schemes.  Sometimes these fraud schemes can cost lenders millions in dollars.

The key to preventing mortgage fraud is to do business with reputable people, ask questions, if it sounds too good to be true it probably is, do not sign anything you do not understand and never sign blank documents and be aware of costs or loan terms that are not what you have agreed to.