Understanding Two Categories of Mortgage Fraud and How to Avoid Them

Mortgage fraud is a serious issue that can have devastating consequences for homeowners and the entire financial system. It's estimated that mortgage fraud costs the US economy billions of dollars each year.

There are two main categories of mortgage fraud: residential and commercial. Residential mortgage fraud typically involves falsifying information on a homebuyer's loan application, such as inflating income or down payment amounts.

Commercial mortgage fraud, on the other hand, involves schemes like "flip" scams, where a property is purchased with a low down payment and then quickly resold at a higher price, often with a fake appraisal.

In both cases, the goal is to deceive lenders and gain an unfair advantage in the housing market.

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Mortgage fraud falls into two categories: fraud for profit and fraud for housing. Fraud for profit is often committed by people who work in the mortgage industry, such as loan officers, appraisers, or real estate attorneys.

Fraud for profit typically involves property flipping, where properties are bought and sold in rapid succession at inflated prices. This type of fraud is prioritized by the FBI for investigation.

Fraud for housing is typically committed by borrowers who misrepresent their financial situation to secure a mortgage. This can include income falsification, where borrowers inflate their earnings, and occupancy fraud, where borrowers falsely claim they will occupy a property as their primary residence to obtain better loan terms.

Some common schemes include straw buyer schemes, where a third party is used to purchase property for someone who cannot qualify for a loan. These schemes often involve the unauthorized use of personal information in loan applications.

Advance fee schemes are another type of mortgage fraud, where scammers ask for a fee before closing to guarantee a loan or secure better terms. This is a red flag, as reputable mortgage lenders and brokers don't charge these types of fees.

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Straw buyer schemes are a type of mortgage fraud where someone buys a property for someone who can't qualify for it themselves. The buyer doesn't intend to use or live in the home, but passes it off to the other party after closing.

Identity-related mortgage fraud charges often involve unauthorized use of personal information in loan applications. This can include using someone else's Social Security Number, employment history, or credit information to secure mortgage financing.

Straw buyer arrangements are a common aspect of identity-related mortgage fraud, where someone with good credit credentials agrees to purchase property on behalf of another person who wouldn't qualify for the loan independently.

Law enforcement scrutinizes cases where multiple properties are purchased using the same buyer's credentials or when there appear to be undisclosed agreements between the named borrower and other parties about the true ownership of the property.

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Appraisal fraud is a serious issue that can occur when an appraiser inflates the value of a property to match the home price. This can be done to get a loan approved.

Lenders typically won't lend more than what an appraisal says a home is worth.

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Application Fraud is a serious issue, where borrowers intentionally supply false information about their income or identity to get a mortgage. This can be related to fraud for housing or profit schemes.

Credit and Liabilities are heavily scrutinized in mortgage applications, and borrowers may misrepresent their credit score or debt to qualify for a loan or favorable terms. This can lead to trouble down the line.

Employment Fraud occurs when a borrower or straw buyer misrepresents their employment to the lender, making them appear more financially qualified or concealing an illegal source of loan payments.

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Prospective Borrower Fraud is a serious issue that can lead to mortgage application problems. It involves providing false information about income or identity to get a mortgage.

Application Fraud can occur when a borrower intentionally supplies false information about their income or identity to support a mortgage application. This can be related to fraud for housing or fraud for profit schemes.

Credit and liabilities are crucial in determining mortgage rates and loan decisions. Borrowers may misrepresent their credit score and/or amount of debt to qualify for a loan or favorable loan terms.

Employment Fraud occurs when a borrower or straw buyer misrepresents their employment to the lender. This can be done to make the borrower appear more financially qualified for the loan or to conceal the illegal source of future loan payments.

Fraudulent Identity/Identity Theft/Synthetic Identity is another type of Prospective Borrower Fraud. It involves using misappropriated identification credentials or creating synthetic identities using valid information from disparate sources.

Income and Down Payment fraud involve providing false income information to qualify for a loan. Borrower income and assets may be inflated or completely manufactured, and down payment funds may be disguised as gifts.

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Occupancy fraud is a serious issue in mortgage applications, where individuals falsely claim to live in a property to get more favorable loan terms.

This type of fraud often occurs when someone intends to use a home as a second home or investment property, but tells their lender they'll be using it as their primary residence.

Prosecutors examine documentation related to where borrowers actually lived during relevant periods, including utility bills, tax records, and lease agreements.

They may investigate whether properties were actually used as rental units despite primary residence claims or whether multiple properties were claimed as primary residences simultaneously.

Occupancy fraud is also a common element of schemes where a straw buyer has no true intent to occupy the underlying property.

In fact, straw buyers are often used to conceal fraudulent activities, and may be individuals with good credit who are acting on behalf of another person.

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Foreclosure and Distressed Properties are vulnerable to various types of mortgage fraud.

Fraudsters target homeowners in danger of defaulting on their mortgage loans with false promises of saving their homes. They may claim to transfer a deed or put a property in the name of an investor, only to sell the property and retain the proceeds, leaving the borrower's home to go into foreclosure.

Homeowners can lose their homes and damage their credit records if they fall victim to these schemes.

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Fraudsters often target distressed homeowners with false promises of eliminating mortgage debt or saving their homes. These scams can be financially devastating, causing victims to lose money, their property, and even their credit records.

Debt elimination claims are a common scheme, where scammers demand an up-front fee in exchange for eliminating a borrower's mortgage or other debt. This can include credit card balances, student loans, and auto loans.

Foreclosure assistance offers are another type of scam, where fraudsters promise to save a homeowner's property by transferring a deed or putting it in the name of an investor. In reality, the scammer can then sell the property and retain the proceeds.

Homeowners in danger of defaulting on mortgage loans are particularly vulnerable to these scams. They may be desperate for a solution and not realize the risks involved.

Sovereign citizen fraud is a type of scam that promotes the elimination of mortgage debt based on conspiracy theories about the validity of mortgages. This can be particularly appealing to those who are skeptical of the financial system.

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Foreclosure rescue scams often involve scammers asking for upfront fees and then disappearing without providing any services or results. They may also convince homeowners to transfer the title of their property to them, claiming they can rent it back or buy it at a later time.

In some cases, scammers may even obtain a Home Equity Conversion Mortgage (HECM) in the name of an older homeowner to convert existing home equity into cash. This can be a serious financial loss for the homeowner.

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Builder Bailout is a sneaky tactic used by some developers to inflate property values and secure loans. They do this by offering cashback or upgrades to buyers, making the properties seem more valuable than they actually are.

False information is often provided to appraisers, such as inflated sales prices or fake comparable properties, to make the properties appear more valuable. This can lead to lenders approving loans that are much higher than the property's actual worth.

Builders may also use straw buyers to purchase multiple properties and artificially inflate demand, causing lenders to approve more loans based on the false demand. This can lead to buyers overpaying for properties and facing financial difficulties later on.

Lenders may approve loans for these properties that are much higher than their actual worth, putting buyers at risk of financial difficulties later on.

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Federal Mortgage Fraud is a crime that involves the falsification or omission of information on mortgage loan applications, often with the intent to deceive lenders.

The jurisdiction for Federal Mortgage Fraud is primarily federal due to its involvement with federal funds and institutions.

Federal authorities take these offenses seriously, and the penalties can be severe, including hefty fines and lengthy prison sentences.

Federal Mortgage Fraud cases are usually more severe due to the involvement of federal funds, which can lead to severe legal consequences, including long-term imprisonment and significant fines.

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Here are the key penalties associated with Federal Mortgage Fraud:

The severity of the penalties depends on the scope of the fraud, the amount involved, and whether it crosses state lines.

Real estate fraud can lead to severe penalties, including hefty fines, restitution, and imprisonment.

To avoid mortgage fraud, lenders should verify the identity of borrowers and check for any discrepancies in their credit reports.

Lenders can also use automated systems to detect suspicious activity and flag potential cases of mortgage fraud.

Borrowers can protect themselves by carefully reviewing their loan documents and asking questions if they don't understand something.

A borrower's credit score can be a good indicator of their creditworthiness, but it's not the only factor lenders consider when approving a mortgage.

Lenders often use a combination of credit scores and other factors to determine the risk of a loan.

Borrowers with a history of mortgage fraud may be more likely to engage in other forms of financial deception.

Lenders can share information with each other to help identify potential mortgage fraudsters.

Borrowers who are unsure about their creditworthiness or have questions about the loan process should seek advice from a financial advisor.

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Real estate fraud can lead to severe penalties, including hefty fines, restitution, and imprisonment. The severity depends on the scope of the fraud, the amount involved, and whether it crosses state lines.

Fines can be substantial, and restitution may be required to compensate victims.

Imprisonment is a real possibility, especially for more serious cases of mortgage fraud.

The consequences of real estate fraud can be long-lasting and far-reaching, affecting not only the individuals involved but also the community at large.

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