From Wikipedia, the free encyclopedia Mortgage fraud
Mortgage fraud
Mortgage fraud is crime in which the intent is to mate- fraud because in most cases the borrower would not have
rially misrepresent or omit information on a mortgage qualified for the loan had the true income been disclosed.
loan application to obtain a loan or to obtain a larger loan The "mortgage meltdown" was caused, in part, when
than would have been obtained had the lender or bor- large numbers of borrowers in areas of rapidly increasing
rower known the truth. home prices lied about their income, acquired homes
In United States federal courts, mortgage fraud is they could not afford, and then defaulted.
prosecuted as wire fraud, bank fraud, mail fraud and Employment fraud: This occurs when a borrower
money laundering, with penalties of up to thirty years claims self-employment in a non-existent company or
imprisonment.[1] As the incidence of mortgage fraud has claims a higher position (e.g., manager) in a real compa-
risen over the past few years,[2] states have also begun to ny, to provide justification for a fraudulent representa-
enact their own penalties for mortgage fraud.[3] tion of the borrower’s income.
Mortgage fraud is not to be confused with predatory Failure to disclose liabilities: Borrowers may conceal
mortgage lending, which occurs when a consumer is mis- obligations, such as mortgage loans on other properties
led or deceived by agents of the lender. However, preda- or newly acquired credit card debt, to reduce the amount
tory lending practices often co-exist with mortgage of monthly debt declared on the loan application. This
fraud. omission of liabilities artificially lowers the debt-to-in-
come ratio, which is a key underwriting criterion used to
Types determine eligibility for most mortgage loans. It is con-
sidered fraud because it allows the borrower to qualify
Occupancy fraud: This occurs where the borrower wishes for a loan which otherwise would not have been granted,
to obtain a mortgage to acquire an investment property, or to qualify for a bigger loan than what would have been
but states on the loan application that the borrower will granted had the borrower’s true debt been disclosed.
occupy the property as the primary residence or as a sec- Fraud for profit: A complex scheme involving mul-
ond home. If undetected, the borrower typically obtains a tiple parties, including mortgage lending professionals,
lower interest rate than was warranted. Because lenders in a financially motivated attempt to defraud the lender
typically charge a higher interest rate for non-owner-oc- of large sums of money. Fraud for profit schemes fre-
cupied properties, which historically have higher delin- quently include a straw borrower whose credit report is
quency rates, the lender receives insufficient return on used, a dishonest appraiser who intentionally and sig-
capital and is over-exposed to loss relative to what was nificantly overstates the value of the subject property, a
expected in the transaction. In addition, lenders allow dishonest settlement agent who might prepare two sets
larger loans on owner-occupied homes compared to of HUD settlement statements or makes disbursements
loans for investment properties. When occupancy fraud from loan proceeds which are not disclosed on the settle-
occurs, it is likely that taxes on gains are not paid, result- ment statement, and a property owner, all in a coordinat-
ing in additional fraud. It is considered fraud because the ed attempt to obtain an inappropriately large loan. The
borrower has materially misprepresented the risk to the parties involved share the ill-gotten gains and the mort-
lender to obtain more favorable loan terms. gage eventually goes into default. In other cases, naive
Income fraud: This occurs when a borrower over- "investors" are lured into the scheme with the organiz-
states his/her income to qualify for a mortgage or for er’s promise that the home will be repaired, repairs and/
a larger loan amount. This was most often seen with or renovations will be made, tenants will located, rents
so-called "stated income" mortgage loans (popularly re- will be collected, mortgage payments made and profits
ferred to as "liar loans"), where the borrower, or a loan will be split upon sale of the property, all without the
officer acting for a borrower with or without the borrow- active participation of the straw buyer. Once the loan is
er’s knowledge, stated without verification the income closed, the organizer disappears, no repairs are made nor
needed to qualify for the loan. Because mortgage lenders renters found, and the "investor" is liable for paying the
have begun to tighten underwriting standards and "stat- mortgage on a property that is not worth what is owed,
ed income" loans are less available, income fraud is in- leaving the "investor" financially ruined. If undetected, a
creasingly seen in traditional full-documentation loans bank may lend hundreds of thousands of dollars against
where the borrower forges or alters an employer-issued a property that is actually worth far less and in large
Form W-2, tax returns and/or bank account records to schemes with multiple transactions, banks may lend mil-
provide support for the inflated income. It is considered lions more than the properties are worth. The Robert
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From Wikipedia, the free encyclopedia Mortgage fraud
Douglas Hartmann case is a notable example of this type technique will frequently claim innocence based on cler-
of scheme. ical errors, bad record keeping, or other smokescreen ex-
Appraisal fraud: Occurs when a home’s appraised val- cuses in an attempt to obfuscate the true coordination &
ue is deliberately overstated or understated. When over- intent inherent in this version of mortgage fraud. This
stated, more money can be obtained by the borrower in "gaming" or exploitation of a structural weakness in the
the form of a cash-out refinance, by the seller in a pur- US legal system is a critical precursor to "shotgunning"
chase transaction, or by the organizers of a for-profit and considered white-collar crime when implemented in
mortgage fraud scheme. Appraisal fraud also includes a systemic fashion.
cases where the home’s value is deliberately understated Identity theft: Occurs when a person assumes the
to get a lower price on a foreclosed home, or in a fraud- identity of another and uses that identity to obtain a
ulent attempt to induce a lender to decrease the amount mortgage without the knowledge or consent of the vic-
owed on the mortgage in a loan modification. A dishonest tim. In these schemes, the thieves disappear without
appraiser may be involved in the preparation of the making payments on the mortgage. The schemes are usu-
fraudulent appraisal, or an existing and accurate ap- ally not discovered until the lender tries to collect from
praisal may be altered by someone with knowledge of the victim, who may incur substantial costs trying to
graphic editing tools such as Adobe Photoshop. prove the theft of his/her identity.
Cash-back schemes: Occur where the true price of Falsification of loan applications without the knowl-
a property is illegally inflated to provide cash-back to edge of the borrower : The loan applications are falsified
transaction participants, most often the borrowers, who with out the knowledge of the borrower when the bor-
receive a "rebate" which is not disclosed to the lender. As rower actually will not qualify for a loan for various rea-
a result the lender lends too much, and the buyer pockets sons. for example parties involved will make a commis-
the overage or splits it with other participants, including sion out of the transaction. The business happens only
the seller or the real estate agent. This scheme requires if the loan application is falsified. For example borrower
appraisal fraud to deceive the lender. "Get Rich Quick" applies for a loan stating monthly income of $2000 (but
real-estate gurus’ courses frequently rely heavily on this with this income $2000 per month the borrower will not
mechanism for profitability. qualify), however the broker or loan officer falsified the
Shotgunning: Occurs when multiple loans for the income documents and loan application that borrower
same home are obtained simultaneously for a total earns a monthly income of $15,000. The loan gets ap-
amount greatly in excess of the actual value of the prop- proved the broker/loan officer etc. gets their commis-
erty. These schemes leave lenders exposed to large losses sion. But the borrower struggles to repay the loan and
because the subsequent mortgages are junior to the first defaults the loan eventually.
mortgage to be recorded and the property value is in-
sufficient for the subsequent lenders to collect against
the property in foreclosure. The Matthew Cox and Robert
Other background
Douglas Hartmann cases are the most notable example of
this type of scheme.
Working the gap: A technique which entails the ex-
cessive lien stacking knowingly executed on a specific
property within an inordinately narrow timeframe, via
the serial recording of multiple Deeds of Trust or As-
signments of Note. When recording a legal document in
the United States of America, a time gap exists between
when the Deed of Trust is submitted to the Recorder of
Deeds & when it actually shows up in the data. The pre-
Mortgage fraud by borrowers from US Department of the Trea-
cision timing technique of "working the gap" between
sury[4]
the recording of a deed & its subsequent appearance in
the recorder of deeds database is instrumental in prop-
Mortgage fraud may be perpetrated by one or more par-
agating the perpetrator’s deception. A title search done
ticipants in a loan transaction, including the borrower;
by any lender immediately prior to the respective loan,
a loan officer who originates the mortgage; a real estate
promissory note, & deed recording would thus erro-
agent, appraiser, a title or escrow representative or at-
neously fail to show the alternate liens concurrently in
torney; or by multiple parties as in the example of the
the queue. The goal of the perpetrator is the theft of
fraud ring described above. Dishonest and unreputable
funds from each lender by deceit, with all lenders simul-
stakeholders may encourage and assist borrowers in
taneously & erroneously believing their respective Deeds
committing fraud because most participants are typically
of Trust to be senior in position, when in actuality there
compensated only when a transaction closes.
can be only one. White-collar criminals who utilize this
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From Wikipedia, the free encyclopedia Mortgage fraud
During 2003 The Money Programme of the BBC in
the UK uncovered systemic mortgage fraud throughout
See also
HBOS. The Money Programme found that during the in- • Housing market crisis in the United Kingdom (2008)
vestigation brokers advised the undercover researchers • Phillip E. Hill, Sr.
to lie on applications for self-certified mortgages from, • United States housing bubble
among others, The Royal Bank of Scotland, The Mortgage • MERS
Business and Birmingham Midshires Building Society.[5]
In 2004, the FBI warned that mortgage fraud was be-
coming so rampant that the resulting "epidemic" of
Notes
crimes could trigger a massive financial crisis.[6] Accord- [1] For example, http://www.usdoj.gov/usao/gan/
ing to a December 2005 press release from the FBI, "mort- press/2006/04-19-06b.pdf
gage fraud is one of the fastest growing white collar [2] Mortgage Assets Research Institute (MARI). (2009).
crimes in the United States".[7] Eleventh Periodic Mortgage Fraud Case Report To:
The number of FBI agents assigned to mortgage-re- Mortgage Bankers Association.
lated crimes increased by 50 percent between 2007 and [3] For example, http://www.legis.state.ga.us/legis/
2008.[8] In June 2008, The FBI stated that its mortgage 2005_06/pdf/sb100.pdf
fraud caseload has doubled in the past three years to [4] Reported Suspicious Activities
more than 1,400 pending cases.[9] Between 1 March and [5] http://www.bbc.co.uk/pressoffice/pressreleases/
18 June 2008, 406 people were arrested for mortgage stories/2003/10_october/29/
fraud in an FBI sting across the country. People arrested money_programme_mortgage.shtml
include buyers, sellers and others across the wide-rang- [6] "FBI warns of mortgage fraud ’epidemic’". CNN.
ing mortgage industry.[8] February 6, 2004.
[7] http://www.fbi.gov/pressrel/pressrel05/
quickflip121405.htm
Fraud Enforcement and Recov- [8] ^ "FBI Cracks Down On Mortgage Fraud". CBS news.
ery Act of 2009 2008-06-19. http://www.cbsnews.com/stories/
2008/06/19/national/main4194649.shtml.
In May 2009, the Fraud Enforcement and Recovery Act of [9] FBI — Mortgage Fraud Takedown - Press Room -
FERA,
2009, or FERA Pub.L. 111-21, 123 Stat. 1617, S. 386, pub- Headline Archives 06-19-08
lic law in the United States, was enacted. The law takes a [10] FERA section 3
number of steps ([1]) to enhance criminal enforcement of
federal fraud laws, especially regarding financial institu-
tions, mortgage fraud, and securities fraud or commodi- External links
ties fraud. • REPORTING MORTGAGE FRAUD to HUD’s Office of
Significant to note, Section 3 of the Act authorized Inspector General
additional funding to detect and prosecute fraud at vari- • "Mortgage fraud: New and improved Lenders have
ous federal agencies, specifically: tightened standards, but scam artists have found
• $165,000,000 to the Department of Justice, new ways to beat the system.", CNN Money. October
• $30,000,000 each to the Postal Inspection Service and 17. 2008.
the Office of the Inspector General at the United • "Stimulus gives rise to consumer scams". Philadelphia
States Department of Housing and Urban Inquirer. March 7, 2009.
Development (HUD/OIG) • Semi-Annual Reports to Congress and other
• $20,000,000 to the Secret Service mortgage fraud information from the Office of
• $21,000,000 to the Securities and Exchange Inspector General, U.S. Department of Housing and
Commission Urban Development
These authorizations were made for the federal fiscal
years beginning October 1, 2009 and 2010, after which
point they expire, and are in addition to the previously
authorized budgets for these agencies.[10]
Retrieved from "http://en.wikipedia.org/w/index.php?title=Mortgage_fraud&oldid=450712625"
Categories:
• Finance fraud
• Consumer fraud
• Mortgage
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From Wikipedia, the free encyclopedia Mortgage fraud
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