The Rising Problem of Mortgage Loan Fraud

Mortgage loan fraud has become an increasingly concerning issue in recent years. Though not a new phenomenon, the number of mortgage fraud cases has steadily risen, causing major financial losses for lenders and homeowners alike. In this article, we’ll take a closer look at what exactly mortgage fraud is, what types of fraud are most common, and what some recent major mortgage fraud cases can teach us about this growing problem.

What is Mortgage Loan Fraud?

Mortgage loan fraud refers to any intentional misrepresentation or omission of information provided by a mortgage loan applicant in order to secure a home loan This type of fraud often involves falsifying documents or inflating financial information in order to qualify for a larger loan amount than the applicant could normally obtain.

Some common examples of mortgage fraud include

• Providing false income or employment information
• Lying about assets or down payment funds
• Misrepresenting credit history or debts
• Claiming a fake co-signer or occupant for the property
• Appraisal fraud – inflating the home’s value

The motivation behind mortgage fraud is usually either greed in order to obtain a larger loan amount, or desperation to qualify for a mortgage the applicant otherwise wouldn’t be eligible for. Either way, mortgage fraud harms lenders who end up losing money on defaulted loans, investors whose mortgage-backed securities lose value, and fellow homeowners who may see declining property values in their neighborhoods as a result.

Why Mortgage Fraud is on the Rise

Several factors have contributed to the rise in mortgage fraud in the 21st century:

• Loose lending standards preceding the 2008 financial crisis – Lenders became less stringent in their underwriting as demand for mortgage bonds grew, making it easier for unqualified borrowers to obtain loans. This invited more fraud attempts.

• Surging home prices – As home values rapidly appreciated from 2000-2006, borrowers were motivated to manipulate loan amounts in order to buy more expensive properties.

• Growth of the mortgage lending industry – More lenders and easier access to financing meant more opportunity for mortgage fraud to occur.

• New lending products – Non-traditional mortgages like interest-only loans required less documentation and oversight, allowing fraud to more easily evade detection.

• Economic downturn – During and after the 2008 recession, struggling homeowners were increasingly tempted to falsify information out of growing financial desperation.

While the subprime mortgage crisis led to some reform in lending practices, looser regulations in recent years and continuously rising home prices once again present conditions ripe for mortgage fraud.

Common Mortgage Fraud Schemes

Mortgage fraud can take many forms, but tends to involve one or more of these common schemes:

Income/Employment Fraud

• Claiming a higher income from an employer than what the borrower actually earns
• Fabricating W-2s, paystubs, or bank statements to show fake deposits
• Lying about being self-employed and forging tax returns to verify false income

Asset Fraud

• Exaggerating funds in bank accounts or assets like retirement accounts
• Faking gift letters from relatives pledging down payment money
• Pretending to sell personal assets that the borrower still owns

Appraisal Fraud

• Colluding with an appraiser to over-value the home
• Providing false information about renovations or home features to inflate appraisal
• Using identity theft to find comps that support a bogus appraisal

Identity Fraud

• Using a stolen SSN or assuming another person’s identity to qualify
• Filing loan documents under a fake alias or non-existent person
• Lying about co-borrowers or occupants who don’t actually exist

Occupancy Fraud

• Claiming the home will be a primary residence when it is really an investment property
• Obtaining an FHA loan that requires owner-occupancy under false pretenses

Documentation Fraud

• Forging signatures or fabricating documents from other parties
• White-out or paper-over critical information on bank statements, titles, etc.

Recent Major Mortgage Fraud Cases

To illustrate just how common mortgage fraud has become, here are details on two recent large-scale mortgage fraud schemes that led to criminal charges:

United States v. Barry Drillman

In this case, real estate investor Barry Drillman and a group of co-conspirators were found to have carried out an elaborate fraud scheme from 2018 to 2020 valued at over $165 million in fraudulent loans.

The group secured loans for commercial and multi-family property purchases well above the actual property values by providing lenders with falsified purchase contracts inflating the prices. In one instance, they used a fake buyer identity to obtain a $95 million loan on a property purchased for only $70 million.

Title agencies aided the scheme by conducting double closings – one for the real purchase price, and a second with the bogus loan amount for documents provided to the lender. Drillman pleaded guilty to conspiracy to commit wire fraud and will face up to 5 years in prison.

Consumer Financial Protection Bureau Findings

Though not a criminal case, a 2021 report from the CFPB provided insight into common mortgage fraud trends through their supervisory activities over mortgage servicing companies.

Their review revealed several concerning practices including:

• Charging improper fees to borrowers in forbearance programs
• Miscalculating loan payments or misapplying funds
• Providing inaccurate account information to borrowers
• Failing to properly evaluate loss mitigation applications
• Not terminating private mortgage insurance when required

While these acts may have resulted from human error and poor controls rather than intentional fraud, they still demonstrate the potential for consumer harm that exists in the mortgage industry.

How to Protect Yourself from Mortgage Fraud

As a prospective homebuyer, you can take these steps to avoid becoming a victim or unknowing accomplice to mortgage fraud:

• Be truthful – This may seem obvious, but providing any inaccurate information on your loan application, even if recommended by someone else, can constitute fraud.

• Verify all third-parties – Double check credentials for real estate agents, appraisers, lenders or anyone else involved to ensure they are legitimate.

• Review all documents thoroughly before signing to check for any errors or suspicious changes.

• Watch for red flags like being pushed to accept loan terms you’re uncomfortable with, offers that seem too good to be true, or any hesitation to provide documentation.

• Monitor your credit – Any fraudulent activities in your name could indicate identity theft.

With diligence and caution, homebuyers can recognize situations where mortgage fraud may be at play. Being an informed consumer is your best defense against this prevalent issue. If mortgage fraud is suspected, immediately alert appropriate authorities.

The Bottom Line

Mortgage fraud may seem like a victimless crime, but it has serious implications spanning individual homebuyers, the housing market, financial institutions, and the economy as a whole. Understanding common mortgage fraud tactics can help protect the public against this trend that continues to grow. Through better consumer education, improved lending oversight, and crackdowns on predatory behaviors, the endemic of mortgage fraud can be reduced.