What Is Mortgage Fraud?
Fraud is a deception deliberately practiced to secure unfair or unlawful gains. Because of the large amount of money involved in buying and selling homes, mortgage fraud occurs more often than many people realize. This article will discuss the various types of mortgage fraud that currently take place.
1) One category of mortgage fraud in which homebuyers can become entangled with the law is “Failure to Qualify” or “Fraud for House.” How does it work? Very simply, the borrower provides false information of various types. This information may fall under the categories of income, down payment source, employment misrepresentation or intent to occupy, to name just a few.
2) “Silent Second” fraud occurs when a seller lends money to a buyer for down payment through an unrecorded second mortgage. In this situation, the lender is taking a risk he is not aware of, because he thinks the borrower is actually investing his own money. This misrepresentation of the borrower’s financing is fraudulent and illegal.
3) “Fraud for Profit” involves an entire network of industry insiders and can technically come under racketeering statutes. Because of the various real estate agents, appraisers, lenders and closing attorneys involved in different cases, there are many varieties of illegal operations. A few of these are listed below:
• Flipping: In “flipping,” there is a fraudulent appraisal as well as a highly inflated sales price. (By the way, the term is sometimes used in the popular media to refer to legally acquired properties being improved, then quickly resold. That type of “flipping” is perfectly legitimate, and should in no way be confused with the fraudulent practice we are referring to here.)
• Straw Buyers are sometimes used to hide the true borrower’s identity. This type of fraud for profit occurs because the true buyer would not be able to qualify for a mortgage. There are a couple of versions of this particular scam. In one scenario, the “straw buyer” does not even realize that he is being duped. In these instances, the buyer believes he or she is taking out a mortgage on a home when in fact the supposed “loan payments” are actually being used to rent a property. Ultimately, the lender forecloses on the loan. In another version, the buyer is in fact aware of the scheme, and receives a portion of the profits.
• Appraisal Fraud is one of the more common types of mortgage scams. A dishonest appraiser may inflate property values, and the seller pays a portion of the proceeds back to that appraiser. The borrower usually makes none of the payments and the property goes to foreclosure immediately.
• Foreclosure Schemes: Here a fraudulent individual contacts a homeowner in the early stages of foreclosure. The scammer claims he can help clear the debt – if the homeowner will simply pay an upfront fee. Once the homeowner pays the money, unfortunately, the fraudster disappears. In an even more sophisticated scam, an individual tells the homeowner that he can help refinance the loan, thus preventing loss of the home. It is only after the homeowner signs several documents that he finds out he has in fact sold his home. Sadly, the victim of the fraud can be legally evicted from the home he and his family no longer own.
The above are just some of the schemes that can take place. To prevent yourself from becoming a victim of these and other fraudulent practices, awareness is key. Be sure you are doing business with institutions that have a solid reputation in your geographic community or on the internet. Is the institution you are considering doing business with a member of any standards and practices organization such as the Better Business Bureau Online?
Be a proactive homebuyer. Don’t give a fraudulent operator the chance to take advantage of you. The more you learn, the more secure you will be.
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