Types of Mortgage Fraud

Mortgage fraud comes in many different shapes and sizes. Listed below are some of the most common schemes in America today:

1. Fraud for Property, also known as Fraud for Housing, usually involves the borrower as the perpetrator on a single loan. The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value. The borrower wants the property and intends to repay the loan. Sometimes industry professionals are involved in coaching the borrower so that they qualify. This can be done in a few different ways:

Occupancy fraud: When the borrower wants to obtain a mortgage to acquire a piece of property as an investment yet states on the loan application that the borrower will occupy the property as a primary residence or second home. Because lenders typically charge higher rates for non-occupied properties and on average offer higher loan amounts, borrowers can obtain cheaper and larger loans for misrepresenting their personal information

Income fraud: when the borrower misrepresents his income levels to get a larger/cheaper loan. Often seen with so-called "stated income" loans, where borrower merely states the income necessary to obtain a certain amount at a certain rate. Rampant income fraud was seen as one of the biggest catalysts of the subprime mortgage crisis, because many loans offered by banks came with low "teaser" rates that, after two years, suddenly shot up a few percentage points. Because many individuals had lied about their incomes, they were suddenly unable to pay for their own houses and defaults on subprime mortgages began to skyrocket.

Employment fraud: when borrowers lie about their employment, such as working for a fake company or being higher-up in their company than is actually true, in order to justify their falsified income statement.

Hiding liabilities: One of the most frequent criterion used by lenders it the debt-to-income ratio, i.e., how much money a borrower already owes versus how much he or she makes a year. In order to dupe lenders, borrowers may lie about debts they owe on other mortgages, credit cards, cars, etc.

Appraisal fraud: When home value is deliberately over- or under-appraised. When overstated, the borrower receives more money that can be used to refinance his home. Understatements can be used to get a lower price on a foreclosure or to decreased the amount owed on a loan the mortgage when modifying a loan.

Shotgunning fraud: Receiving multiple loans for the same property all at the same time, thus obtaining funds in much greater excess of the value of the original loan.

Flipping: Not the same as the legal version of "flipping a house," when a property is legally purchased, improved, then sold for a profit. Illegal flipping involves lying about improvements (usually through fraudulent appraisal).

2. "Fraud for Profit" involves industry professionals. There are generally multiple loan transactions with several financial institutions involved. These frauds use numerous gross misrepresentations including: income, asset value, collateral, and length or type of employment. The borrower's debts are not fully disclosed, nor is the borrower's credit history, which is often altered. Often, the borrower assumes the identity of another person (straw buyer). The borrower states he intends to use the property for occupancy when he/she intends to use the property for rental income, or is purchasing the property for another party (nominee). Appraisals almost always list the property as owner-occupied. Down payments do not exist or are borrowed and disguised with a fraudulent gift letter. The property value is inflated (faulty appraisal) to increase the sales value to make up for no down payment and to generate cash proceeds in fraud for profit.