According to CoreLogic®’s 2016 annual report, mortgage fraud has been steadily increasing since 2010. In the second quarter of 2016, 12,718 mortgage applications were estimated to have indications of mortgage fraud, which equates to .7% of all mortgage applications. While that may not seem like a huge number, it adds up. CoreLogic estimated over $19 billion worth of mortgages contained mortgage fraud over a 12-month period ending in the second quarter of 2014.
Types of Mortgage Fraud
According to the FBI, mortgage fraud is simply a “misstatement, misrepresentation, or omission in relation to a mortgage loan which is then relied upon by a lender.” In other words, is there false or misleading information on the mortgage application? Then it may be mortgage fraud. Freddie Mac recognizes different categories of mortgage fraud including fraud for housing and fraud for profit.
Fraud for housing
Fraud for housing is committed with the intent to qualify for a loan amount that is larger than for what a borrower would otherwise qualify. To achieve this, the borrower’s income and/or assets will typically be inflated and further supported by false documentation pertaining to those particular sections in the mortgage application.
Think of this as someone lying on their resume to get a job for which they don’t qualify. However, instead of applying for a job out of their league, the borrower is applying for a house they can’t afford. A mortgage industry professional may be in on it. The fraud usually involves a single loan, but the borrower does intend to repay the loan.
Fraud for profit or “industry insider fraud”
A more complex operation is “industry insider fraud.” This type of fraud usually involves multiple mortgage or banking professionals working together to use their insider knowledge of the mortgage system to benefit from an illegal, and usually quite large, profit. A recent case involved more than $64 million dollars in mortgage fraud and more than 20 defendants were convicted, including loan officers, loan processors, underwriters and real estate developers.
Where is Mortgage Fraud Taking Place?
Mortgage fraud occurs throughout the United States, but these were the top 10 states mortgage fraud was committed from September 2015 to September 2016:
2) New York
3) New Jersey
5) Washington, DC
Emerging Trends in Mortgage Fraud
Understanding the types of mortgage fraud and recognizing if you’re in a hot spot is a good start, but you also have to be aware of the current schemes and their corresponding red flags to be successful in stopping it. Below are three common mortgage fraud schemes and one newly emerging scheme that is on the rise.
1) Straw buyer
A straw buyer is when the intended owner uses someone else’s identity, usually someone with good standing credit, to apply for a mortgage. Shortly after the sale, the deed might be transferred to the intended owner. This can be accomplished through identity theft or the straw buyer may knowingly participate in the scheme.
· Borrower buying a significant distance away or very close to their current residence
· Borrower buying way beyond, or way below, their price range
· Purchase contract includes (or had included) a nonborrower
· Use of gift funds for down payment and/or closing costs with minimum borrower contribution
· Recent mortgage inquiries for other properties
· No real estate agent involved
2) Appraisal Fraud or Inflated Property Value
Appraisal fraud is when a property is deliberately appraised above its true market value. It is common for property flipping schemes to rely on inflated values in order to be profitable but of course not all property flipping is fraud. Honest property flips can be profitable without being fraudulent.
· Seller is an entity
· Data missing on appraisal
· Property is reported as being completely renovated
· Photos look misleading or don’t match property description or listed amenities
· Occupant not properly identified, either as “tenant”, “unknown” or left blank
3) Income Fraud
Income Fraud is when the borrower’s income has been misrepresented to help ensure they’re approved for a loan they desire.
· Applicant’s job title is generic
· Employer unable to be contacted
· Employer and employee names not printed on paychecks
· Assets/credit profile are not commensurate with income
Newly Emerging Scheme – Reverse Occupancy
To understand reverse occupancy fraud, you first need to understand occupancy fraud. Occupancy fraud is when a borrower misrepresents their intended use of a property to gain a loan with better terms. Since investment properties usually have higher interest rates, fees and down payment requirements, the borrower will fraudulently claim the property as owner-occupied, when in reality the borrower will use it as an investment property.
Reverse occupancy is the opposite. A borrower will claim they are purchasing the property as an investment, or a nonowner-occupied property, so they can use the hypothetical rental income from the property to help them qualify for the loan. In reality they intend to occupy the property and not rent it. By doing so, they are willing to pay more to obtain the loan.
· Borrower has no history of owning rental property
· Currently renting with a low rental payment or living rent free
· Home being purchased is a single family, located in a predominantly owner occupied neighborhood with no history of being a rental property
And that’s not all…
Unfortunately, that is just the tip of the iceberg. Other common schemes include: property flipping cash-out purchases, short sale fraud, foreclosure rescue schemes and more.
How to Prevent Mortgage Fraud
With all the different ways mortgage fraud can take shape, how can you prevent it? Complex issues require complex solutions. Below are some general tips and resources to help in the fight against mortgage fraud:
· Employee training and awareness is the best tool you have
· Do not sign blank documents
· Inconsistencies of any kind are the first sign of potential fraud
· If something sounds too good to be true, it probably is
· Hit the books and study Freddie Mac’s fraud prevention document
· Get to know the red flags of mortgage fraud
Take a deeper look at mortgage fraud with our recorded webinar:
Detecting Mortgage Fraud