Mortgage Fraud

Mortgage fraud, as defined by the Mortgage Bankers Association, is "material misrepresentation – intentionally providing false information to deceive or mislead a lender into extending credit beyond the limits of what would normally be extended if the facts were known."

Mortgage fraud schemes include loan origination, foreclosure rescue, real estate investment, equity skimming, short sale, illegal property flipping and flopping, title/escrow/settlement, commercial loan, and builder bailout schemes.

The damage from mortgage fraud results in a trickle-down effect. Homebuyers who unknowingly fall victim to fraud may lose their homes and see damage done to their credit and personal lives, which might include being subjects themselves of a fraud investigation. Mortgage fraud also hurts taxpayers, because some loans {offered by the Federal Housing Administration (FHA) and Veterans Affairs (VA)} are guaranteed by the federal government which absorbs the loss.

Other entities help to ensure that an adequate supply of both money and lenders is available by buying mortgages on the secondary market {the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac and the Federal National Mortgage Association (FNMA, or Fannie Mae)}. Though not technically guaranteed by the government, taxpayers are impacted when the federal government steps in to bail out these entities in times of crisis {the 2008 subprime mortgage calamity and other financial events}.

Homelessness and neighborhood blight also result due to foreclosed, uninhabited homes, adding burden to taxpayers who fund the state and local governments tasked with addressing these problems.

Moreover, innocent neighborhood homeowners also feel the impact because when area houses are bought and resold at inflated prices, property taxes rise.

This toolkit identifies various mortgage fraud schemes and provides several tools/sources where the user can learn more about them, as education is the best tool for combatting this type of fraud. The table below outlines the fraud schemes, red flags and additional sources.

Short Sale Schemes — Usually an alternative to foreclosure when owners are underwater (can only sell their home for less than the balance remaining on the mortgage). The lender agrees to forgive the difference between the sale price and the amount owed to them.

A disproportionately high rate of short sales related to recently made loans.

A disproportionately high number of short-sales on situations involving a first and second lender in which the first lender's note is insured by the government (FHA or VA). Frequently the proceeds come from a credit card cash advance made to the borrower.

When property values collapse, the second lender may have no equity in the underlying property. The second lender's approval, however, might be required for the short sale to be approved. The mortgagee is forced to give money to the second mortgagor to secure approval. This practice results in the amount of insured deficiency being greater than it should and the government insurer absorbing a greater loss.

Some or all of available money should be remitted to the first mortgage holder.

Secure borrower's credit card statements for sizable cash advances.