Protecting Yourself from Mortgage Fraud
With the rise of mortgage fraud, law enforcement authorities have added breaking down and stopping mortgage fraud to their list of priorities. The FBI reported that lenders (people or companies who issue loans) experienced a lost of nearly $1 billion from mortgage fraud in 2005. However, the exact lost from mortgage fraud each year is uncertain because the mortgage industry fails to provide statistics on the number of frauds committed each year.
Read on to find out what mortgage fraud is and the type of schemes used to defraud someone like you. Discover the signs of mortgage fraud and ways to protect yourself from this type of fraud.
What is Mortgage fraud?
Two basic types of mortgage fraud exist:
- Fraud for Housing
- Fraud for Profit
Fraud for Housing involves a person lying on his or her loan application, to qualify for a loan that he or she otherwise wouldn't have. The motive behind this fraud is to gain ownership of a house by providing false information. The person may either inflate their income to secure a loan for a more luxurious home or use cash back for down payment to receive a lower interest rate or change some other detail about themselves to qualify for a loan.
Often, people who provide false information on loan applications are not aware that they are breaking federal laws and defrauding lenders. Even investors, who are more aware of the mortgage industry than the average person, may convince themselves that they aren't committing a crime by fudging loan applications.
Fraud for Profit usually involves a number of professionals working together to inflate the price of a home or to issue loans based on fictitious homes. Fraud for Profit is also known as "Industry Insider Fraud." The motive behind this fraud is to pocket cash. Commiting this fraud both more complex and criminal in nature.
The professionals involved in this fraud often include a dirty appraiser, a mortgage broker, an outside investor and a straw buyer. A straw buyer is someone, who for a slice of profit, lends his or her identity and good credit to the scheme. A person who gets defrauded by identity theft may unwillingly become a straw buyer in a mortgage fraud scheme. Other professionals who may be part of the fraud include real estate brokers and insiders at companies that lend money. According to FBI investigations, 80 percent of all reported fraud losses involve industry insiders.
Professionals use variations of schemes to pull the Fraud for Profit type of fraud. But, one common outcome of this scam is that investors and professionals often pocket all the cash and leave the straw buyer with the property and no means of paying off the inflated mortgage.
Mortgage Fraud Schemes
Each mortgage fraud scheme entails some kind of deception and misrepresentation or omission of information by a person or lender to receive, purchase, or insure a loan. The FBI reports seeing the following mortgage fraud schemes on the rise:
- Equity skimming: An investor finds a straw buyer and may use fraudulent income documents and fake credit reports to receive a mortgage loan in the straw buyer's name. After closing the sale, the straw buyer hands the property over to the investor in a quit claim deed. This deed diminishes are all rights to the property, so the investor isn't required to pay mortgage and will rent out the place for a couple of months until foreclosure, which occurs when the bank or creditor sells or regains the property.
- Property flipping:A person purchases a property and artificially inflates the value of the property through false appraisals, and then quickly sells the property at a higher price to an associate in the scheme. This re-purchasing of the property may happen several times before the person forecloses the property to a victim lender. The scheme is commonly used to gain profit and includes many professionals from investors to dirty appraisers to company insiders.
- Mortgage related identity theft:When a fake or stolen identity is used on a loan application, including the victims' name, personal information, and credit history. The applicant sometimes may be a part of the identity theft scheme.
Signs of Mortgage Fraud
Some signs of mortgage fraud include:
- Inflated Appraisals: the use of one main appraiser.
- High Commissions or Bonuses: offer higher then normal perks to brokers and appraisers.
- Lying on Loan Applications: buyers told how to or are encouraged to fudge loan applications.
- Fake Supporting Loan Documentation: asked to sign blank bank forms or other forms with missing information.
- Buy Loans Disguised as Refinance: less paperwork and checking involved.
- Investors-Short Term Investments with Guaranteed Re-Purchase: investors are used to inflate property prices.
Preventing Mortgage Fraud
Here are some tips you can use to prevent yourself from becoming defrauded by mortgage fraud:
- Request referrals for real estate and mortgage professionals and check their licenses with the city or state regulatory agencies.
- Avoid getting persuaded by well-practiced sales techniques and unsolicited advertising claimed to be from mortgage professionals.
- Offers of high profits in a short amount of time should signal a problem.
- Examine and read all written information and compare sales in the area and other statements to assess the true value of a property.
- Review the history of the property to check if it has been 'flipped.' If the property has been sold a number of times in a short amount of time this should signal a problem.
- Make sure you understand all the terms of your mortgage before signing the papers. If you don't understand, seek advice from a lawyer or bank employee.
- Refuse to sign papers that include blanks.