There are countless schemes for illegally obtaining funds through mortgage fraud tactics. However, all fraudulent schemes share the use of one or more of the following deceptive and illegal practices. Some of the practices commonly used in fraudulent lending transactions include the following.
Mortgage Fraud Tactics
Inflated appraisals have historically been one of the most common elements of fraudulent lending transactions. State and federal laws have been enacted and stringent appraiser guidelines have been put in place to combat appraisal fraud.
Appraisal fraud occurs when an appraiser places a much higher value on a property than can be justified. In some cases, the values of properties used to secure mortgages are inflated by unscrupulous appraisers for as much as 100% of their true market values.
The most common fraudulent practice is to use inappropriate comparables to come up with a home’s price. This can occur when an appraiser is improperly influenced by a seller, borrower, realtor or mortgage loan originator.
Many cases involve a borrower who needs a debt consolidation refinance but does not have enough equity to make the loan work. For example, the borrower might owe $170,000 on a first mortgage and need a second mortgage for $30,000 to consolidate debt. If the property appraisal comes back too low, the loan may not be made.
The borrower or the mortgage loan originator might be tempted to exert pressure on the appraiser to return a favorable value. Experts say it is not very difficult because appraisal estimates rely, to some degree, on a subjective evaluation of property and market conditions. Fraud is the result, whether the appraiser is motivated to use inappropriate comparables by compassion or the offer of compensation.
At first glance, the process might look harmless. After all, it helps borrowers to get the loans they want. In reality, an over-inflated appraisal could trap consumers with too much debt and possibly force them to default. In the case of default, the note holder may not be able to recoup the outstanding balance from the reduced equity in the property.
Most appraisal fraud is identified using forensic reviews. Forensic reviews are retrospective examinations of appraisal data using public databases to verify the information that was provided. They occur without the client and timing pressures of the original appraisal and without fee limitations.
Property flipping occurs when a property is bought and resold within a very short period of time. Some property flips occur within the same week, and even on the same day. The resale usually involves the use of an inflated appraisal of the property’s value.
For most elaborate mortgage fraud schemes to succeed, a real estate attorney or title agent must be involved. Flipping is easy to see when examining a chain of title. In addition, legal definitions and title histories must be fabricated when using non-existent properties.
Mortgage fraud tactics occur when title or closing agents perform a variety of tasks to facilitate the fraudulent transaction. These tasks might include any or all of the following:
- Changing the dates on deeds so land flippers can conceal the fact that they are reselling properties or selling properties prior to having acquired them
- Notarizing the signatures of buyers on documents when those persons did not actually appear before them or when those persons used obviously fictitious identity documents
- Preparing fictitious leases
- Preparing false HUD-1 statements and false mortgages
- Recording a mortgage or deed of trust that has not been funded
A straw buyer is an individual who accepts a fee, or other compensation, to provide his/her name, social security number, and other personal information for use on a mortgage application.
Although it appears that the straw buyer is applying for a purchase money mortgage and although the mortgage application may indicate that the buyer intends to reside in the home, the straw buyer does not intend to own or possess the property used to secure the loan.
Straw buyers walk away from these transactions, often unaware that they are liable for fraud and for making false statements to the government. The parties to the scheme pocket most of the money obtained through the loan, the property used to secure the loan lies vacant, and the loan typically goes into foreclosure.
A straw seller is an individual who accepts a fee to falsely claim ownership to a property. Falsified or fabricated title documents, including sham warranty deeds, are created to support the fraudulent claim that the straw seller is the owner and occupier of the property securing the loan. Straw sellers may appear at closings where the property, which they claim to own, is transferred to straw buyers.
When a fictitious borrower obtains a mortgage loan and “secures” it with fictitious property, the loan is known as an air loan. Fraudsters may even use fictitious employers, appraisers, and credit agencies in order to obtain verification necessary to process the loan application.
Identity theft occurs when a fraudster uses another individual’s name, social security number, driver’s license number, and other personal information to secure credit or make purchases. The use of the information is made without the knowledge of the individual whose personal information is included in fraudulent loan applications or other documents. Pay stubs, tax returns and bank statements are forged, and identity thieves have multiple sources for false driver’s licenses and Social Security cards.
Sale or Assignment of a Sales Contract
Instead of flipping a property by reselling it, some fraudulent real estate investors may obtain a contract on a property with an inflated value, and offer to sell the sales contract or assign it to an unwitting buyer for a fee.
The “investor” walks away from the transaction with several thousand dollars in his/her pocket, and the new buyer closes on a property that has an inflated price, and only a fraction of the value that the buyer anticipated.
Fraudulent real estate brokers or investors may try to unload property with an inflated value and questionable title history on an unsuspecting buyer. When these buyers ask to inspect the property, the seller may discourage an inspection or rush the potential buyer through the home. A hasty inspection is most likely to occur when a faulty appraisal has inflated and grossly misrepresented the value of the property.
Studies have shown that fraudulent information on the loan application is the most common type of mortgage fraud involving borrowers. Inconsistent information is present in over 35% of cases. This might include stated incomes that are too high for the industry or region, residence histories that overlap, or inconsistent asset statements. For example, a borrower who consistently spends their checking account balance down to zero is unlikely to have $50,000 in savings.