Types of Mortgage Fraud and How to Avoid Them

Mortgage fraud can be a costly and stressful experience for homeowners.

One type of mortgage fraud is identity theft, where scammers use stolen personal information to obtain a mortgage in someone else's name.

Be cautious of unsolicited phone calls or emails offering unusually low interest rates or other tempting deals that seem too good to be true.

Homeowners can protect themselves from mortgage fraud by regularly checking their credit reports and monitoring their accounts for suspicious activity.

Another type of mortgage fraud is property flipping, where scammers buy a property at a low price and then sell it at a higher price, often using false or inflated information to secure the mortgage.

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Mortgage fraud can take many forms, but some types are more common than others. A straw buyer transaction is one such type, where a person knowingly acts on behalf of the true purchaser, misrepresenting the nature of the transaction.

In a straw buyer transaction, the real buyer might have bad credit or be trying to conceal shaky involvements that may disqualify them from getting a mortgage. The straw buyer will then transfer the property title to the real buyer after the transaction is completed.

Another type of mortgage fraud is inflated appraisals, which are used to support an artificially high value of a property. This can be done by using inappropriate comparable properties or misrepresenting data about the subject property or comparables.

Silent seconds are also a type of mortgage fraud, where a second position mortgage is not disclosed to the senior lender and is not recorded until after the first position mortgage has been recorded. This is often used to disguise the fact that the home buyer has borrowed the down payment.

Here are some common types of mortgage fraud:

Broker-facilitated fraud is a type of mortgage fraud that involves a mortgage broker or other industry professional using their position to commit fraud.

These individuals often target vulnerable homebuyers, such as those who are first-time homebuyers or have poor credit, and take advantage of their lack of knowledge to commit fraud.

The most common type of broker-facilitated fraud is the "silent second" scam, where a mortgage broker takes out a second mortgage on a property without the homeowner's knowledge or consent.

This can be particularly devastating for homeowners, as it can lead to foreclosure and significant financial losses.

A non-arm's length transaction is a type of mortgage fraud where two parties involved in the mortgage loan have a personal relationship, making both the lender and borrower susceptible to manipulation by the other.

This can include family members, business associates, or even friends. Any mortgage transaction between two parties that know each other is considered “non-arm’s length.”

A lack of a real estate agent is another important characteristic to look out for in a non-arm's length transaction. It benefits the perpetrator to have few legally bound entities involved in the transaction who could expose possible manipulations.

In a non-arm's length transaction, the lender and borrower may be more trusting of each other, making it easier for the perpetrator to manipulate the transaction.

Empty and Inflated Appraisal is a common type of mortgage fraud. It involves intentionally arriving at an opinion of value that is higher than the actual value of the property.

Inflated appraisals can be used to support artificially inflated property values. This can be done by using inappropriate comparable properties or misrepresenting data about the subject property or comparables.

A property appraisal that intentionally arrives at an opinion of value that is higher than the actual value of the property is a red flag for mortgage fraud. This type of appraisal can be used to support artificially inflated property values.

In the case of property flipping, inflated appraisals are often used to justify higher sale prices. This can lead to significant losses for the lending industry.

Here are some common methods used to support artificially inflated appraisals:

These methods can be used to deceive buyers and lenders into thinking a property is worth more than it actually is.

Silent Second and Straw Borrower are two types of mortgage fraud that involve deceitful practices in obtaining a mortgage.

A Silent Second is a second position mortgage that's not disclosed to the senior lender and is only recorded after the first position mortgage has been recorded.

This type of mortgage is often used to disguise the fact that the home buyer has borrowed the down payment, which is not a legitimate way to secure a mortgage.

Straw Borrowers, on the other hand, apply for and obtain a mortgage loan with no intention of making the payments, leaving another person responsible for the loan.

Straw Borrowers are often paid to act as the borrower, and this practice is a federal crime.

In both cases, the goal is to deceive the lender and the government, and both Silent Second and Straw Borrower schemes can lead to serious consequences for all parties involved.

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Flip and Flipping is a type of mortgage fraud that's strictly for profit. It involves buying properties and reselling them at artificially inflated prices to unsuspecting buyers.

This type of fraud often involves fraudulent appraisals, doctored loan documentation, or inflated buyer income. In fact, the FBI estimates that 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.

A particularly troublesome aspect of property flipping is that it can taint property sale databases and create the illusion of rising property values in neighborhoods where the flipping takes place. This can make it difficult for buyers and sellers to make informed decisions.

To avoid falling victim to property flipping, it's essential to be aware of the warning signs. These include financial incentives to buyers, investors, brokers, appraisers, and title company employees.

Here are some key lessons learned from a case study:

Foreclosure Rescue schemes often target homeowners facing foreclosure, promising to save their homes in exchange for control or ownership.

These schemes can take many forms, including sale and leaseback transactions or inducing homeowners to quitclaim their property to the rescuer or a third party investor.

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In both cases, the homeowner eventually loses their home, either to foreclosure or to the rescuer.

Equity Skimming is a type of foreclosure scheme where fraudsters gain control of a home in foreclosure and steal the equity from the owner.

This is done under the guise of helping the homeowner avoid foreclosure, making it a particularly insidious type of mortgage fraud.

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Professional identity theft is a type of mortgage fraud that involves stealing the identity of a real estate professional.

This can be used to create false documents such as appraisals or title documents, which are required in mortgage transactions.

It's a serious offense that can have severe consequences for the victim and the perpetrator.

The goal of professional identity theft is to deceive lenders and other parties involved in the mortgage process.

By using a real estate professional's identity, scammers can gain access to sensitive information and commit mortgage fraud.

This type of identity theft is often used in mortgage fraud cases to obtain false documents.

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Cash Back at Closing is a type of mortgage fraud where unauthorized funds are given to the property buyer or a real estate professional at or after the closing of a purchase money mortgage transaction.

Lenders typically do not allow buyers to receive money at closing, except for escrow overages or standard commission rebates.

Cash Back at Closing often involves hiding the funds from the lender and using inflated appraisals to base the loan on.

This type of fraud can result in serious consequences for all parties involved, including the buyer, seller, and lender.

Inflated appraisals are often used to justify the loan, but they can also lead to a buyer paying more for the property than it's actually worth.

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Air loans are a type of mortgage fraud that's particularly insidious, as they're often based on complete fabrications.

Borrowers' identities, title work, pay stubs, bank statements, tax returns, and appraisals are all used to deceive lenders into approving these loans.

The property that collateralizes the loan often doesn't even exist, making it impossible for the borrower to repay the loan.

Lenders rely on these false documents to extend credit, which would not have happened if the truth was known.

This type of mortgage fraud is a serious issue that can have devastating consequences for both the lender and the borrower.

Asset Rental is a type of mortgage fraud that's used to make a borrower appear more financially capable than they really are. This can be done by leasing assets such as savings and investment accounts to meet loan requirements.

The goal of Asset Rental is to deceive lenders into thinking the borrower has sufficient assets to make a down payment or meet reserve requirements. This can be used to qualify for a loan or to meet financial capacity requirements for other purposes like bonding or licensing.

In some cases, Asset Rental is used to make a borrower appear more financially stable than they actually are. This can be done by leasing assets that are not even owned by the borrower.

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Asset Rental can be a serious problem for lenders, as it can lead to a higher risk of loan default. This is because the borrower may not actually have the financial resources to repay the loan.

To avoid falling victim to Asset Rental, it's essential to carefully review loan applications and verify the borrower's financial information.

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Builder Bailout is a type of mortgage fraud that builders or contractors use to get out of high interest construction loans. This often happens during declining real estate markets when prices drop and builders can't sell their existing inventory.

Builders may submit false certifications of work completed to pass inspections or get construction draws. This is a form of fraud that allows them to get the money they need without actually completing the work.

They may also sell homes to their employees or to straw buyers to convert construction financing to permanent financing. This is a way for builders to get out of their construction loans and avoid paying the high interest rates.

Selling unfinished homes or vacant lots as completed homes is another form of builder bailout. This is a way for builders to make a quick profit and avoid the financial burden of their construction loans.

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