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Mortgage Fraud: Don’t Be an Accidental Criminal
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While purchasing a home should be an exciting and rewarding experience, there are myriad pitfalls to avoid. One potential danger is the risk of mortgage fraud — either fraud you perpetrate yourself or fraud you become a victim of.
Before you buy a home or seek to refinance a property you already own, it’s crucial to find out about the types of fraud that exist — and how to avoid them. With the right information on your side, you can avoid committing mortgage fraud unknowingly or becoming the victim of a mortgage-related scam.
- Mortgage fraud: Explained
- Most common types of mortgage fraud
- Mortgage application fraud
- Mortgage closing scams
- Straw buyer fraud
- Foreclosure rescue schemes
- Loan modification scams
- Reverse mortgage scams
Mortgage fraud: Explained
While the goals of mortgage fraud can be different in the end, each type of fraud requires a certain level of dishonesty on behalf of the homebuyer or other people involved in a real estate transaction. Most types of mortgage fraud fall into one of three categories — each one initiated by a different party with different goals.
- Fraud for housing or property: This type of fraud usually involves homebuyers providing inaccurate information about their employment, income or assets so they can qualify for a home loan. Sometimes the false information is submitted in order to get a larger loan than they would otherwise qualify for based on their income, debts and assets.
- Fraud for profit: This type of mortgage fraud usually involves several individuals who play different roles. The involved parties create complex schemes that let them skim profits off the top of a mortgage transaction— whether real or not.
- Fraud for criminal enterprise: Fraud for criminal enterprise can involve a wide range of players who participate in the fraud and may involve money laundering or the “hiding” of dirty money via the purchase and sale of real estate. Organized crime is usually to blame for this type of fraud.
Most common types of mortgage fraud
The descriptions above provide an overview of the three categories of mortgage fraud, but if you break it down further, the most common fraud schemes are actually very specific. Here are the most popular types of fraud you should try to avoid:
Mortgage application fraud
Mortgage application fraud is a type of fraud for housing or property that takes place when a borrower provides false information about their finances or identity to qualify for a home loan. Typical details misrepresented include lies about income, occupancy, employment or other financial obligations a person may have, such as another mortgage.
According to the 2017 Mortgage Fraud Report from CoreLogic, mortgage application fraud is on the rise. CoreLogic’s Mortgage Application Fraud Risk Index ticked up 16.9% from the second quarter of 2016 to the second quarter of 2017, for example, though they note this increase is partially related to an increase in purchase transactions over that period. In the second quarter of 2017, they report that 13,404 mortgage applications in the U.S. — or 0.82% of all mortgage applications — had indications of fraud.
Fortunately, avoiding unintentional mortgage application fraud is easy for the borrower. Read over your entire mortgage application and loan documents to check for completion and accuracy before you sign. If you’re honest and forthcoming about your personal and financial details and never misrepresent your situation, this type of fraud won’t affect you.
Mortgage closing scams
Mortgage closing scams can evolve in several different ways, but they usually unfold in this way: A fraudster or group of fraudsters sends fake emails to a homebuyer who is getting ready to close on their home purchase. The emails look identical to official emails from their mortgage company or real estate agent, and they usually imply there has been a last-minute change in the details on the home closing. The emails usually ask the homebuyer to wire their down payment or closing costs to a new account, which just so happens to belong to a scammer.
The Consumer Financial Protection Bureau (CFPB) suggests several steps you can take to avoid this scam, including exercising extreme caution regarding the details of your home closing. Never reply to an email or call a phone number in an email about your home closing details, they note, since you could get an answer from individuals involved in the fraud. Always call your real estate agent and/or mortgage company directly when it comes time to confirm the details of a wire transfer or other financial transaction.
Also, be careful downloading files or opening attachments in emails regarding your mortgage transaction since files from fraudsters could contain malware. Finally, always confirm receipt of your wire transfer within a few hours of the money being transmitted.
Straw buyer fraud
Straw buyer fraud takes place when a consumer with good credit lets another person use their name and personal details to obtain a mortgage loan. This person doesn’t intend to live in the home or pay for the mortgage themselves; instead, they offer to be a “straw buyer” as a favor. Occasionally, a straw buyer even takes on this role unknowingly when someone uses their personal information and credit to get a home loan without their knowledge.
Sometimes straw buyers are part of a broader mortgage scheme involving other mortgage professionals such as lenders, appraisers and brokers. These schemes can include:
- Property value inflation: An appraiser will inflate a home’s value so it qualifies for a larger home loan
- Equity skimming: Involved parties inflate the value of a home then keep additional equity for themselves, sometimes after renting out the home to the straw buyer
- Loan modification schemes: Participants of the fraud take part in a loan modification scam and split the proceeds of said scam amongst themselves
To avoid becoming a straw buyer, you should always ensure you provide accurate details regarding your finances and employment on loan applications. Also remember that letting someone else use your credit and personal details is fraud, and that you may be held criminally responsible if you participate in this type of scheme.
Since straw buyer fraud is occasionally perpetrated by mortgage loan professionals and not the homebuyer themselves, you also need to make sure you are not a victim of this fraud unknowingly. This requires you to read and thoroughly understand all mortgage loan documents before you sign. If you suspect fraud or need help understanding your mortgage loan documents, seek out a third party or second legal opinion from a professional who is not part of the transaction.
Foreclosure rescue schemes
Foreclosure rescue schemes focus on swindling homeowners who are already in financial distress. Typically, this type of scam involves fraudsters who look for homeowners in or nearing foreclosure so they can offer them “help.”
The assistance they offer usually involves a promise they can stay in their homes and the ability to start over anew. Foreclosure scammers may also promise to help homeowners restore their credit or even get cash out of their home during the deal.
Fraudsters who perpetuate this scam usually contact homeowners via mail, phone or a personal visit. Once they have them on the hook, they usually tell the homeowners to quit speaking with their mortgage company or any credit counselor they’ve been working with. From there, scammers skim profits from the homeowner, either by charging them fake “fees” or by collecting mortgage payments and keeping them for themselves. Ultimately, the homeowner could be scammed out of their property rights altogether or fall victim to the foreclosure process they were already involved in.
The National Foundation for Credit Counseling (NFCC) offers several tips that can help you avoid foreclosure scams, including:
- Taking the time to read through all mortgage loan documents thoroughly
- Never sending your mortgage payment to a third party no matter what they promise you
- Speaking with a certified credit counselor or lawyer before you sign over your home to anyone
- Get all agreements in writing and never rely on anyone’s word or promises
- Don’t sign any paperwork with blank lines or spaces that could be filled in later
- Hire or bring your own translator along if you don’t speak English or the language of the professionals you are working with
- Don’t believe anyone who promises to fix your foreclosure, save your credit or provide you with cash from your foreclosure
Loan modification scams
Loan modification scams are another type of mortgage fraud aimed at homeowners who are nearing foreclosure or struggling to afford their home mortgage payments. The CFPB notes that this type of scam can vary, but usually involves:
- Scammers asking homeowners to pay expensive fees to get help avoiding foreclosure
- Scammers promising to modify your home loan to make it more affordable
- Individuals asking you to sign the title of your property over to them
- Scammers asking you to sign mortgage-related paperwork you don’t understand
- You may be asked to start making mortgage payments to a third party or anyone other than your lender
- Fraudsters telling you to stop making mortgage payments altogether
As an example, the Federal Trade Commission (FTC) recently charged a fraudulent operation with “deceiving financially distressed homeowners by falsely promising to prevent foreclosure and make their mortgages more affordable.”
In this particular scam, the fraudulent operation had charged homeowners in distress $3,900 in advance fees and $650 monthly installments in exchange for legal assistance in which they touted a near-perfect success rate. The scammers also told homeowners they would help them secure a lower interest rate and mortgage payment after they halted their foreclosure.
In reality, the operation was using altered government logos and making multiple false claims. In many cases, they had collected money from distressed borrowers without offering any real assistance or modification to their home loans. In some cases, those involved in the scheme hadn’t even contacted their lenders.
The CFPB notes that if anyone asks you to pay upfront fees, make your mortgage payment to a third party or claims they can modify your loan to help you avoid foreclosure, you should report it immediately by submitting a claim with the CFPB online.
Reverse mortgage scams
Reverse mortgage scams can be perpetrated by individuals who work within or close to real estate or financial services companies. Since reserve mortgages are only available to homeowners ages 62 and older, these scams were created to steal equity from unsuspecting senior citizens.
While reverse mortgage scams can come in different forms, senior citizens are often offered perks under the guise of help or exceptional fortune – things like free homes, opportunities for investment or help with refinancing or avoiding foreclosure. The FBI notes that senior citizens may also have their identities stolen or be used as straw buyers in other real estate scams such as property flipping scams.
Since reverse mortgage scams typically use investment seminars, television, radio, billboard and mail advertisements to lure consumers in, the FBI suggests avoiding all unsolicited advertisements regarding your mortgage or the acquisition of a reverse mortgage. They also suggest you should be suspicious of anyone making outrageous promises, such as their ability to get you into another home without a down payment. Finally, make sure you never sign anything you don’t understand and only inquire about a reverse mortgage with a reputable reverse mortgage lender you have thoroughly researched on your own.
Steer clear of mortgage fraud
At the end of the day, it’s crucial to ensure you don’t play any role — perpetrator or victim — in mortgage fraud. If you fall into this trap, you could easily pay the price. Sharing inaccurate information on a mortgage application or acting as a straw buyer can result in prosecution and jail time. Becoming the victim of mortgage fraud, on the other hand, can lead to catastrophic financial losses and even the loss of your home.
To stay in the clear, make sure you provide accurate and honest information on your mortgage loan application and never sign anything you don’t understand. Avoid working with companies that make outlandish promises and read reviews to make sure any company you’re working with is reputable.
Last but not least, don’t forget this golden rule: When something sounds too good to be true, it usually is.