Common forms of mortgage fraud
Mortgage fraud can take
countless forms, says Ann Fulmer, an attorney,
mortgage fraud investigator and founder of the
Georgia Real Estate Fraud Prevention and Awareness
Coalition. Homebuyers can run afoul of the law
under a broad category called "fraud to
qualify" or "fraud for house."
In these cases, the borrower typically provides
false information, such as income, source of
down payment, employment or intent to occupy
the fraud might be in the form of what's called a silent second. The seller lends
the buyer money for a down payment through an unrecorded second mortgage. When
this happens, the lender thinks the borrower is investing his own money. Why would
lenders care? "The critical issue is the risk the lender is taking,"
Fulmer says. "It misrepresents the financing picture of the borrower."
Whatever the form of fraud, the goal is the same: to obtain
a mortgage for which the borrower would not legitimately qualify. In these cases,
the borrower wants the house and plans to repay the loan.
Then, there is "fraud for profit," a much more sophisticated version
of mortgage fraud that involves industry insiders, such as real estate agents,
appraisers, lenders or closing attorneys.
While there are
an infinite number of variations on fraud for profit, these are among the most
- Flipping. This term
has gotten confused because of TV shows, such as "Flip This House,"
which isn't flipping at all. Those types of deals, in which houses are acquired
legitimately, improvements are made and the houses are resold quickly, are known
in the business as quick turns. "There is nothing wrong with that,"
Fulmer says. "It becomes illegal when people start lying about the improvements,
the value of them or (lying) to qualify the buyer." Flipping involves a fraudulent
appraisal and a grossly inflated sales price.
buyers. One of the most frequent types of fraud occurs when "straw
buyers" are used to hide the identity of the true borrower, who would not
qualify for the mortgage. "The perpetrators use a straw buyer because they
have good credit and can get the loan," Fulmer says. Straw buyers may be
duped into thinking that they're investing in real estate that will be rented
out, with the rental payments paying the mortgage. In fact, no payments are made
and the lender forecloses on the loan. Or, sometimes, straw buyers are in on the
scam and are getting a cut of the proceeds. "People may see this as a way
to make a lot of money," Fulmer says. "In one case, a number of straw
buyers purchased numerous properties and received boatloads of money back."
- Appraisal fraud. Appraisal fraud
is a part of most mortgage fraud scams. A dishonest appraiser inflates the value
of the property. When the seller gets the check at the closing for a bogus amount,
he pays off the appraiser and anyone else involved in the scam. Usually, the borrower
doesn't make any payments and the house goes to foreclosure.
schemes. These are particularly evil because they prey on people with big
enough financial problems that they're in danger of losing their home. A homeowner
in the early stages of foreclosure may be contacted by a fraudster who says he
can help the homeowner get rid of his debt and save his house for an upfront fee,
which the fraudster takes and then disappears. In another scheme, a homeowner
is approached by a con artist who offers to help them refinance the loan. "They
sign all these documents and find out later that they actually sold the house
-- to the fraudster. Then they face eviction. That's a lovely one."