Here is everything you need to know about how to detect—and avoid—mortgage fraud
Mortgage fraud comes in many forms. The good news is that there are also many ways to spot it and ultimately avoid it.
But what is mortgage fraud? What are common types of mortgage fraud? And how do you detect and avoid mortgage fraud?
In this article, we will answer these questions and more. Here is everything you need to know about mortgage fraud.
Mortgage fraud is a crime that involves either lying or omitting information relating to a mortgage loan.
When a mortgage lender approves a mortgage based on false information, or without all of the pertinent information, then it is considered mortgage fraud.
Mortgage fraud: two types
There are two different types of mortgage fraud:
- Mortgage fraud for housing
- Mortgage fraud for profit
Here is a closer look at each.
Fraud for housing
Mortgage fraud for housing is when a borrower acts illegally to purchase or keep their property. Most of the time, borrowers lie about the information on their mortgage application. One example of this is to overstate how much income they make. Another is trying to influence an appraiser to hit a value that will enable them to borrow more money.
Fraud for profit
This type of mortgage fraud is when mortgage and housing industry insiders use specialized knowledge or authority to misuse the mortgage process. This is done usually to steal funds from mortgage lenders or homeowners in fraud-for-profit schemes. According to the FBI, most of these cases involve the following:
- Mortgage brokers
- Bank officers
- Home appraisers
- Loan officers
- Other mortgage- and housing-related professionals
The most common form of mortgage fraud, especially individual scams, are income and/or asset falsification and identity theft. Identity theft is when the real homebuyer obtains financing fraudulently, using an unaware or unwilling victim’s information. This information often includes birth dates, Social Security numbers, and addresses.
Identity theft for mortgage purposes can also include stolen bank records, pay stubs, W-2s, tax returns, and falsified employment verification letters. Remember: even property ownership records are vulnerable to falsification. Borrowers can get a fraudulent mortgage on a home they neither occupy nor own.
Mortgage fraud: how to educate clients
One of the biggest threats of mortgage fraud in the industry is the classic wire fraud according to Bruce Phillips, SVP and Chief Information Security Officer at Williston Financial Group. Phillips estimates that the losses from business email compromises equaled more than $1 billion in 2018.
“It’s continuing to increase, and I don’t see an end in sight to this because they’re making money at it,” Phillips said. “As a matter of fact, what we’re seeing is the number of actors that have joined in and now are playing in this pool has increased."
Phillips said that the nature of the attacks has also changed. It used to be that nearly all wire fraud attempts were to redirect the funds out of escrow; now, the scams are direct to buyers and sellers. It’s much easier to get consumers to slip up, but it can be more devastating since there is no recourse once the money is gone.
“There are so many pieces of paper you have to sign, there’s so many things you’re being told about, and they’re coming from so many different angles, that how do you educate them in that?” Phillips said.
“And that’s probably one of the biggest challenges we have, whether you’re a real estate agent, a mortgage broker, a mortgage lender, a title and escrow officer, we all have to singing from the same playbook and try to get into their moment so that they recognize that this is happening.”
Mortgage fraud: 4 tips for electronic communication
Most consumers are aware of the risks and the need for constant vigilance regarding electronic communication. Phillips suggests four tips for electronic communication to help guard against mortgage fraud:
1. Don't trust email
This may be the toughest, since most people use email for most of their communication. But it is not a secure way of communication—and it can be dangerously easy to spoof. Using email to relay any kind of sensitive information is a big risk.
2. Call before wiring money
When transferring large sums of money, instruct consumers to call an established number of the institution. This will confirm that the name and account number of the bank from the wire instructions is correct. It might be even harder than the conversation about email because the new wave of homebuyers does everything on their phone—except make a call, Phillips said.
3. Free Wi-Fi has its risks
Under no circumstances should anyone conduct business over free Wi-Fi unless operating using virtual private network (VPN) software to encrypt data.
If you use your phone for most of your business or personal communication, having a PIN or passcode doesn’t just protect it in the event of loss. Phillips said that having that extra layer of protection encrypts everything on the phone. No PIN/password, no encryption.
4. Multi-factor authentication
For both originators and consumers, multi-factor authentication (MFA) is a must. If you do not have it activated, Phillips suggested: “Stop what you’re doing now and go turn it on. That’s number one. Number two, if you haven’t changed your passwords in the last 90 days, change them. And number three, don’t ever reuse passwords.”
You become vulnerable to mortgage fraudsters when you apply for a mortgage or become a homeowner. Mortgage fraud perpetrators will likely call you on the phone, send emails, snail mail, and potentially even knock on your door.
The FBI commits most of its resources to detecting fraud for profit. However, mortgage lenders devote a significant amount of time and resources to spotting fraud for housing, i.e., lying on the loan application to boost the odds of approval.
Knowing the signs will help you avoid being a victim of fraud. Here are ways to detect mortgage fraud:
Foreclosure rescue scam
Mortgage fraudsters look for foreclosure notices in public records and then swoop in as if they are saving the day. Here is a checklist of how the foreclosure rescue scam typically works:
- Fraudster says they can save your property if you transfer ownership to them or an investor
- They charge an upfront fee that is non-refundable
- They say the fee will be put toward making negotiated payments to your mortgage lender
- The sell the property to another mortgage fraudster and keep the proceeds
- They hire their own appraiser, who then provides a bogus value
- They do not make payments and the property goes into foreclosure
Loan modification scam
With a loan modification scam, mortgage fraudsters make a similar pitch as the foreclosure rescue scam. This type of scam is usually made by a company that claims to staff specialized attorneys. These so-called specialized attorneys negotiate mortgage modifications that give payment relief to homeowners that are struggling financially. Usually, a substantial upfront fee is requested. However, the modification terms, if negotiated at all, are not helpful.
Property flipping fraud
It is perfectly legal to purchase a property and sell it quickly for a profit. It is illegal, however, if you falsify loan documentation. It is also illegal if you inflate appraised values with the help of mortgage and housing professionals looking for commissions and kickbacks.
Air loan schemes
Air loan schemes are slightly more sophisticated than the previous three. Air loan schemes involve creating property essentially out of thin air. In some cases, they include establishing offices with phone banks to simulate fake appraisers, credit agencies, and employers. Mortgage fraudsters in this case invent properties and borrowers to fool mortgage companies into lending them money.
Equity skimming fraud
A straw buyer is a person that does not exist, or they apply using falsified income, assets, and credit information to qualify for a mortgage. After closing, the straw buyer transfers ownership to the fraudulent investor. The investor then keeps the loan funds and never makes a loan payment.
Reverse mortgage fraud
A reverse mortgage is designed to give borrowers who are 62 years old or older an easy qualifying option for tapping into their home equity. Mortgage fraud scammers often convince elderly homeowners they need to manage the funds obtained through the reverse mortgage. Since there is no monthly payment required, mortgage lenders usually don’t know about the scheme until the elderly borrower passes away.
Avoiding some types of mortgage fraud is easier than others. When talking about fraud for housing, you can simply tell the truth on your loan application. You can be upfront about any private loans or plans for living on the property.
When it comes to fraud for profit, on the other hand, there are tips to help you spot six common instances of mortgage fraud.
1. Upfront fees
Do not pay an advance fee to anyone when negotiating a loan modification, refinance, or foreclosure on your property. Why? These services are offered free from counselors certified by the U.S. Department of Housing and Urban Development (HUD). You can find a local counselor by checking their website.
2. Guaranteed results
You may be unable to pay your mortgage according to your original loan terms. In that case, there is no guarantee that you or anyone else will be able to negotiate new loan terms.
3. Mortgage payment transfers
Do not transfer or assign your mortgage payments to another person to pay.
4. Ownership or deed transfers
Do not transfer the ownership of your property to anyone else—especially if you are feeling pressured. If you are unsure where to turn to for help, contact an HUD counselor immediately.
5 Government-approved loan programs
“Government-approved” or “official government” loan programs may have one thing in common—they are all scams. These can include headlines like “VA approved”, “FHA approved”, or even suggest they are part of a program offered by the president of the United States.
6. Financial info requests
This is mainly referring to over-the-phone financial information requests, also known as “call-spoofing” scams. These involve callers impersonating bank officials, government officials, or anyone in an authority position. They will be looking to get your personal information. The best thing to do in this situation is to hang up the phone when they start asking personal questions.
Mortgage fraud comes in many different forms, including through electronic communication. The good news is there are also many ways to spot it—and ultimately avoid it. It is therefore critical that you educate yourself and your client on the dangers of mortgage fraud.
Remember: the more knowledge you have, the better off you will be.
To find out more about how to spot and avoid mortgage fraud, get in touch with one of the mortgage professionals we highlight in our Best of Mortgage section. Here you will find the top performing mortgage professionals across the USA.
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