Loan and Mortgage Fraud

 

Loan and Mortgage Fraud

                                                                                                                   By Prakriti Jhingran

Introduction:

What is Mortgage Fraud? 

Fraud in its simplest form is deliberate misrepresentation and deception.  One party deceives another by misrepresenting information, facts, and figures. So, mortgage fraud is not just predatory lending practices that target certain borrowers.

According to the Federal Bureau of Investigation (FBI), it is any sort of "material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan." It can be seen that mortgage fraud can be committed by both individual borrowers and industry professionals. 

There are two distinct areas of mortgage fraud:

1. Fraud for profit: Those who commit this type of mortgage fraud are often industry insiders using their specialized knowledge or authority to commit or facilitate the fraud. Current investigations and widespread reporting indicate a high percentage of mortgage fraud involves collusion by industry insiders, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the industry. Fraud for profit aims not to secure housing, but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners. The FBI prioritizes fraud for profit cases.
2. Fraud for housing: This type of fraud is typically represented by illegal actions taken by a borrower motivated to acquire or maintain ownership of a house. The borrower may, for example, misrepresent income and asset information on a loan application or entice an appraiser to manipulate a property’s appraised value.

Why Commit Mortgage Fraud?

Borrowers and professionals are motivated to commit mortgage fraud for many reasons. We can describe most of those reasons by defining two primary types :

1) fraud for housing 

2) fraud for profit

Fraud for housing is committed by borrowers who, often with the assistance of loan officers or other personnel, misrepresent or omit relevant details about employment and income, debt and credit, or property value and condition with the goal of obtaining or maintaining real estate ownership. Fraud for profit is committed by industry professionals who misstate, misrepresent or omit relevant details about their personal or their clients' employment and income, debt, and credit, or property value and condition with the goal of maximizing profits on a loan transaction.

 

Common Mortgage Fraud Schemes and Scams

The most common investor mortgage fraud schemes are different types of property flipping, occupancy fraud, and the straw buyer scam.

 

Combating Mortgage Fraud

It is very important to prevent the occurrence of such frauds in the first place. There is no shortage of legislation at the local, state or federal level designed to reduce mortgage fraud. States have taken a big step recently by requiring loan officer licensing and continuing education. Additionally, real estate, title, and insurance agencies are licensed and monitored by government agencies. Many states also require periodic auditing of mortgage-lending companies' activities and transactions to monitor compliance.

Professional organizations such as the Mortgage Bankers Associations (MBA) and National Association of Mortgage Brokers (NAMB) have a code of conduct and best practices that are peer-monitored. The FBI's Economic Crimes also monitors complaints and suspicious activity in the mortgage industry.

In Conclusion:

The good news is we can improve the markets by reducing mortgage fraud. Individuals must set realistic expectations for borrowing and homeownership experience. Investors should set realistic goals for profit. Industry professionals must pursue higher personal standards and submit to peer organization accountability. Governments need to make the legislation more uniform and reconcile law enforcement with active investigations.