You can call it exaggeration, misrepresentation, playing the game, or just fudging, but no matter how you look at it, writing things that aren’t true on a mortgage application is lying. It also happens to be mortgage fraud, and it’s illegal.
Although there are many degrees, from an unwitting consumer boosting their income a tiny bit based on wishful thinking all the way to professional scam artists running elaborate real estate schemes to defraud millions, mortgage fraud is the dirty little secret in the mortgage industry.
Let’s look closer at these two general forms of mortgage fraud:
Fraud for property/housing
When a consumer falsifies documents, lies, or manipulates numbers on a loan application to obtain a primary residence, it’s still technically fraud, even if the consumer is well-intentioned and plans to repay every cent of the loan.
Fraud for profit
The more nefarious form of mortgage fraud includes schemes with the sole purpose of stealing money or making a profit illegally. Law enforcement agencies estimate that roughly 20% of all mortgage fraud is fraud for profit.
In this blog, we’ll cover the former – more elaborate, purposeful major fraud that occurs in the mortgage industry. In part two of this series, we’ll cover the little white lies – and bolder mistruths – that consumers commonly make on their loan applications.
How prevalent is mortgage fraud these days?
Despite the recovery of our housing marketing, mortgage fraud doesn’t seem to be going away. In fact, there were 12,718 indications of fraud on mortgage applicants…and that’s just in Q2 of 2016! That means there were probably almost 50,000 instances of mortgage fraud on apps last year.
With the real estate prices heating up and the housing market perfectly healthy again, you might think that mortgage fraud has declined. Furthermore, with the Stated Income and No Doc loans that enabled the mortgage meltdown largely unavailable, and the somewhat lesser grievance of lying on loans should be passé. Right?
Wrong, as mortgage fraud and lying on applications have increased lately, with con artists and financial thieves seeing an opportunity to cash in with higher home values.
In fact, mortgage fraud rose an estimated 3.9% between 2015 and 2016.
Income fraud was also up an estimated 12.5% between 2015 and 2016.
Transaction fraud was up 3.2% in that same time.
Occupancy fraud was up 2.9% over that period.
How do we define mortgage fraud?
Mortgage fraud entails deliberate falsification, misrepresentation, or action with the aim of financial gain through illegal, illicit, and unethical means within mortgage and real estate transactions. It’s a broad definition that encompasses every consumer who lies about income on their loan application, all the way up to the most sophisticated and treacherous criminals who bilk the banks out of millions of dollars in phantom transactions.
What does mortgage fraud cost us?
The true price tag of mortgage fraud difficult to tally. Only a portion of crimes ever get reported, arrests made, and convictions handed down. Also, the cost of lower-level fraud, like lying on mortgage applications, overestimating appraisals, and the practice of pocket listings, may not have consequences until much later on.
But according to CoreLogic, mortgage application fraud totals more than $30 billion annually.
In one year alone, more than $10 billion in mortgage loans originated based on fraudulent data on applications.
Remember that when people defraud the banks, we all pay a higher price through increased:
- Loan costs to indemnify the banks
- Interest rates
- Insurance premiums
- Cost of additional employees and resources to pursue fraudsters
- Property taxes
- Income taxes to cover defaults and foreclosures on government-backed loans
What types of mortgage fraud exist?
Criminals are getting more and more sophisticated. They’re using cleverly orchestrated schemes, technology, and the internet to hoodwink banks, financial institutions, and other homeowners, and then avoid detection.
These are the most common forms of mortgage fraud:
Loan Origination Schemes
Backward Application Schemes
Fraudulently Inflated Appraisals
Illegal Property Flipping
Title/Escrow/Settlement Fraud
Real Estate Investment Schemes
Short Sale Schemes
Commercial Real Estate Loan Fraud
Foreclosure Rescue
Advance Fee Schemes
Builder Bailout Schemes
Equity Skimming Schemes
Debt Elimination/Reduction schemes
Bankruptcy Fraud
Loan Modification Scams
Rent-to-Own Scams
Multiple Listing Service manipulation and pocket listings
Where does mortgage fraud occur?
Mortgage fraud occurs in every state and every city, but there are some areas that seem to be hotspots of illegal activity. Recently, Nevada jumped ahead of California as the #1 riskiest state for mortgage fraud. California is second, followed by the District of Columbia and then Florida.
However, when it comes to zip codes where mortgage fraud is rampant, California still has four out of the top ten, and ten out of the top 25.
The following five states had the highest estimated value of fraud among mortgage applications per year:
California: $864 million
New York: $278 million
Florida: $273 million
Texas: $261 million
Virginia: $231 million
Who commits mortgage fraud?
Mortgage fraud, in all its forms, is perpetrated by a variety of players. The FBI’s special report on mortgage fraud states that guilty parties include mortgage brokers, loan officers, lenders, appraisers, underwriters, accountants, real estate agents, attorneys, land developers, developers, investors, builders, bankers, escrow and title employees.
Some are consumers who think they are just bending the rules, but more and more, career criminals are committing mortgage fraud, and organized crime syndicates have taken notice and engaged various mortgage and real estate fraud schemes – including to launder drug money or illicit funds.
Who is tasked with fighting mortgage fraud?
There are several organizations that investigate and prosecute fraudulent activities in the U.S. HUD, the Department of Housing and Urban Development, has its own internal mechanisms to find and screen out fraudsters, and pending investigations into single-family residential loans hit an all-time high recently. The same is true of mortgage giants Fannie Mae and Freddie Mac.
Financial institutions like banks and lenders are required to file SAR’s, or Suspicious Activity Reports, when they detect some impropriety, even if it implicates their own employees or dealings. There are now more than 70,000 mortgage fraud –related SAR’s filed every year.
The Internal Revenue Service is active in battling real estate and mortgage fraud, especially from the angle of dissecting the paper trail of financial criminals. Their focus is on finding and collecting evidence to prove tax improprieties and money laundering activities, but there is a huge crossover into real estate and mortgage transactions. The IRS can take civil action by calling for an IRS audit, which happens thousands of times every year.
The Department of Justice pursues criminal charges for mortgage fraud. The DOJ includes the FBI, Federal Bureau of Investigation. Starting in 2010, the DOJ and FBI announced a special joint task force aimed to combat real estate and mortgage fraud, named Operation Stolen Dreams.
***Look for part two of this series, where we’ll cover the little white lies – and bolder mistruths – that consumers commonly make on their loan applications.