Integrity breaches and illicit activities in different sectors have left indelible marks on our economy over recent decades. Much of this stems from misconduct within banking, financial, and housing industries. Particularly intriguing are the extensive unethical and criminal practices surrounding mortgage fraud.
Fraud is fundamentally the deliberate act of deception, where dishonest parties misrepresent details to manipulate the outcome. Consequently, mortgage fraud is not just limited to predatory lending practices that ensnare particular borrower categories.
Housing or mortgage fraud can be perpetrated by individuals planning to occupy a property or by investor groups seeking to defraud using rental properties or committing appraisal fraud while flipping homes.
As per the Federal Bureau of Investigation (FBI), mortgage fraud constitutes any "material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan." Interpreting this definition, we realize that mortgage fraud can be perpetrated by individual borrowers and industry professionals alike, with the dollar amounts involved being substantial. To illustrate, in Sacramento, California, seven individuals were found guilty in a $10 million mortgage scam in early 2019.
Mortgage fraud can be divided into two main categories, namely, fraud for profit and fraud for housing.
Remembering the 2008 subprime mortgage debacle, one can quickly grasp the business-wide consequences of such fraudulent activities. Much of this crisis was rooted in widespread mortgage fraud.
Mortgage fraud can be driven by a multitude of motivations, most of which can be encapsulated under 'fraud for housing' and 'fraud for profit.' 'Fraud for housing' is generally perpetrated by borrowers, occasionally with the aid of loan officers or related personnel, who misrepresent or omit essential details about their employment and income, debt and credit, or property value and condition to acquire or retain real estate. 'Fraud for profit' is generally perpetrated by industry insiders who manipulate or omit related details about their personal or their clients' employment and income, debt, and credit, or property value and condition to maximize profits on a loan transaction.
It is critical to highlight here that 'fraud for profit' can be committed by any professional within the loan transaction process. Such professionals can collude as a network, defrauding underwriters, lenders, and borrowers, maximizing fees, and sharing profits on all mortgage-related service.
Notable investor mortgage fraud schemes include property flipping, occupancy fraud, and the straw buyer scam.
Property flipping is generally legal, involving the purchase of a house, refurbishing it, and then reselling it for a profit. However, when a property is purchased below market value and immediately sold at profit with the assistance of a corrupt appraiser who falsely claims that the property value is double the initial purchase amount, it embodies mortgage fraud.
Similarly, different types of property flipping schemes, occupancy fraud, and the straw buyer scam can be considered fraudulent. For instance, in the case of the same-day close property flipping scheme, both the chain of title and the appraisal often include fraudulent information.
Another prevalent form of investor mortgage fraud is the air loan scam, which is a loan that's taken for a nonexistent borrower or property. This scam typically involves a network of individuals working together to create a faux borrower and chain of title and to secure a title and property insurance binder.
Despite the heavy penalties for mortgage fraud, some forms of predatory lending and foreclosure rescue practices hinge on these schemes. These activities played a large part in the Great Recession.
Undoubtedly, more has to be done to curb mortgage fraud. Stricter laws, uniform legislation, and increased industry accountability would be a good place to start. By doing this, we can continue apprising the markets and decreasing mortgage fraud.