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Mortgage fraud refers to an intentional misstatement, misrepresentation, or omission of information relied upon by an underwriter or lender to fund, purchase, or insure a loan secured by real property. Criminal offenses may be prosecuted in either federal or state court, and are typically charged under wire fraud,
bank fraud Bank fraud is the use of potentially illegal means to obtain money, assets, or other property owned or held by a financial institution, or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many in ...
,
mail fraud Mail fraud and wire fraud are terms used in the United States to describe the use of a physical or electronic mail system to defraud another, and are federal crimes there. Jurisdiction is claimed by the federal government if the illegal activit ...
, or money laundering statutes, with penalties of imprisonment for up to 30 years per offense. As the incidence of mortgage fraud has risen over the past few years, states have also begun to enact their own penalties for mortgage fraud. Mortgage fraud is not to be confused with
predatory mortgage lending Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 2006 ...
, which occurs when a consumer is misled or deceived by agents of the lender. However, predatory lending practices often co-exist with mortgage fraud.


Types

Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher
delinquency Delinquent or delinquents may refer to: * A person who commits a felony * A juvenile delinquent, often shortened as delinquent is a young person (under 18) who fails to do that which is required by law; see juvenile delinquency * A person who fai ...
rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. In addition, lenders allow larger loans on owner-occupied homes compared to loans for investment properties. When occupancy fraud occurs, it is likely that taxes on gains are not paid, resulting in additional fraud. It is considered fraud because the borrower has materially misrepresented the risk to the lender to obtain more favorable loan terms. Income fraud: This occurs when a borrower overstates his/her income to qualify for a mortgage or for a larger loan amount. This was most often seen with so-called " stated income" mortgage loans (popularly referred to as " liar loans"), where the borrower, or a loan officer acting for a borrower with or without the borrower's knowledge, stated without verification the income needed to qualify for the loan. Because mortgage lenders today do not have "stated income" loans, income fraud is seen in traditional full-documentation loans where the borrower forges or alters an employer-issued
Form W-2 Form W-2 (officially, the "Wage and Tax Statement") is an Internal Revenue Service (IRS) tax form used in the United States to report wages paid to employees and the taxes withheld from them. Employers must complete a Form W-2 for each employee ...
, tax returns and/or bank account records to provide support for the inflated income. All lenders obtain an official IRS transcript that must match the borrower provided tax returns. It is considered fraud because in most cases the borrower would not have qualified for the loan had the true income been disclosed. The "mortgage meltdown" was caused, in part, when large numbers of borrowers in areas of rapidly increasing home prices lied about their income, acquired homes they could not afford, and then defaulted. Many of the past problems no longer exist. Employment fraud: This occurs when a borrower claims self-employment in a non-existent company or claims a higher position (e.g., manager) in a real company, to provide justification for a fraudulent representation of the borrower's income. Failure to disclose liabilities: Borrowers may conceal obligations, such as mortgage loans on other properties or newly acquired credit card debt, to reduce the amount of monthly debt declared on the loan application. This omission of liabilities artificially lowers the
debt-to-income ratio In the consumer mortgage industry, debt-to-income ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. (Speaking precisely, DTIs often cover more than just debts; they can include pri ...
, which is a key underwriting criterion used to determine eligibility for most mortgage loans. It is considered fraud because it allows the borrower to qualify for a loan which otherwise would not have been granted, or to qualify for a bigger loan than what would have been granted had the borrower's true debt been disclosed. Fraud for profit: A complex scheme involving multiple parties, including mortgage lending professionals, in a financially motivated attempt to defraud the lender of large sums of money. Fraud for profit schemes frequently include a
straw borrower A straw borrower is a United States term for an individual whose name, social security number, and credit history are used to hide the identity of the organizers of a for-profit mortgage fraud scheme. Straw buyers are also used in order to obtain ...
whose
credit report :''This article deals with the general concept of the term credit history. For detailed information about the same topic in the United States, see Credit score in the United States.'' A credit history is a record of a borrower's responsible repay ...
is used, a dishonest appraiser who intentionally and significantly overstates the value of the subject property, a dishonest settlement agent who might prepare two sets of HUD settlement statements or makes disbursements from loan proceeds which are not disclosed on the settlement statement, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan. The parties involved share the ill-gotten gains and the mortgage eventually goes into default. In other cases, naive "investors" are lured into the scheme with the organizer's promise that the home will be repaired, repairs and/or renovations will be made, tenants will located, rents will be collected, mortgage payments made and profits will be split upon sale of the property, all without the active participation of the straw buyer. Once the loan is closed, the organizer disappears, no repairs are made nor renters found, and the "investor" is liable for paying the mortgage on a property that is not worth what is owed, leaving the "investor" financially ruined. If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth far less and in large schemes with multiple transactions, banks may lend millions more than the properties are worth. A detailed case study of the complex ''United States v. Quintero-Lopez'' case spans activity over years (Bell, 2010). Appraisal fraud: Occurs when a home's appraised value is deliberately overstated or understated. When overstated, more money can be obtained by the borrower in the form of a cash-out refinance, by the seller in a purchase transaction, or by the organizers of a for-profit mortgage fraud scheme. Appraisal fraud also includes cases where the home's value is deliberately understated to get a lower price on a foreclosed home, or in a fraudulent attempt to induce a lender to decrease the amount owed on the mortgage in a loan modification. A dishonest appraiser may be involved in the preparation of the fraudulent appraisal, or an existing and accurate appraisal may be altered by someone with knowledge of graphic editing tools such as
Adobe Photoshop Adobe Photoshop is a raster graphics editor developed and published by Adobe Inc. for Microsoft Windows, Windows and macOS. It was originally created in 1988 by Thomas Knoll, Thomas and John Knoll. Since then, the software has become the indu ...
. Appraisal Independence is current law. Cash-back schemes: Occur where the true price of a property is illegally inflated to provide cash-back to transaction participants, most often the borrowers, who receive a "rebate" which is not disclosed to the lender. As a result, the lender lends too much, and the buyer pockets the overage or splits it with other participants, including the seller or the real estate agent. This scheme requires appraisal fraud to deceive the lender. "Get Rich Quick" real-estate gurus' courses frequently rely heavily on this mechanism for profitability. Shotgunning: Occurs when multiple loans for the same home are obtained simultaneously for a total amount that may be in excess of the actual value of the property. These schemes leave lenders exposed to large losses because the subsequent mortgages are junior to the first mortgage to be recorded and the property value is insufficient for the subsequent lenders to collect against the property in foreclosure. As a result of this fraud lenders may be required to litigate the issue of which lender has first priority to the property. Working the gap: A technique which entails the excessive lien stacking knowingly executed on a specific property within an inordinately narrow timeframe, via the serial recording of multiple Deeds of Trust or Assignments 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 precision timing technique of "working the gap" between the recording of a deed & its subsequent appearance in the recorder of deeds database is instrumental in propagating the perpetrator's deception. A title search done by any lender immediately prior to the respective loan, promissory note, & deed recording would thus erroneously fail to show the alternate liens concurrently in the queue. The goal of the perpetrator is the theft of funds from each lender by deceit, with all lenders simultaneously & erroneously believing their respective Deeds of Trust to be senior in position, when in actuality there can be only one.
White-collar criminals White collar may refer to: * White-collar worker, a salaried professional or an educated worker who performs semi-professional office, administrative, and sales-coordination tasks, as opposed to a blue-collar worker, whose job requires manual labor ...
who utilize this technique will frequently claim innocence based on clerical errors, bad record keeping, or other smokescreen excuses in an attempt to obfuscate the true coordination & intent inherent in this version of mortgage fraud. This " gaming" or exploitation of a structural weakness in the US legal system is a critical precursor to "shotgunning" and considered white-collar crime when implemented in a systemic fashion. Identity theft: Occurs when a person assumes the identity of another and uses that identity to obtain a mortgage without the knowledge or consent of the victim. In these schemes, the thieves disappear without making payments on the mortgage. The schemes are usually not discovered until the lender tries to collect from the victim, who may incur substantial costs trying to prove the theft of his/her identity. Falsification of loan applications without the knowledge of the borrower: The loan applications are falsified without the knowledge of the borrower when the borrower actually will not qualify for a loan for various reasons. for example parties involved will make a commission out of the transaction. The business happens only if the loan application is falsified. For example, borrower applies for a loan stating monthly income of $2000 (but with this income $2000 per month the borrower will not qualify), however the broker or loan officer falsified the income documents and loan application that borrower earns a monthly income of $15,000. The loan gets approved the broker/loan officer etc. gets their commission. But the borrower struggles to repay the loan and defaults the loan eventually.


Prevalence

Mortgage fraud may be perpetrated by one or more participants in a loan transaction, including the borrower; a loan officer who originates the mortgage; a real estate agent, appraiser, a title or escrow representative or attorney; or by multiple parties as in the example of the fraud ring described above. Dishonest and unreputable stakeholders may encourage and assist borrowers in committing fraud because most participants are typically compensated only when a transaction closes. During 2003 '' The Money Programme'' of the
BBC #REDIRECT BBC Here i going to introduce about the best teacher of my life b BALAJI sir. He is the precious gift that I got befor 2yrs . How has helped and thought all the concept and made my success in the 10th board exam. ...
in the UK uncovered systemic mortgage fraud throughout HBOS. The Money Programme found that during the investigation brokers advised the undercover researchers to lie on applications for self-certified mortgages from, among others, the Royal Bank of Scotland, The Mortgage Business and
Birmingham Midshires Birmingham Midshires is an online trading name of Bank of Scotland plc (part of Lloyds Banking Group). It is headquartered at Pendeford Business Park, Wolverhampton. It previously had 67 branches throughout England and Wales. Previously, Bir ...
Building Society. In 2004, the
FBI The Federal Bureau of Investigation (FBI) is the domestic intelligence and security service of the United States and its principal federal law enforcement agency. Operating under the jurisdiction of the United States Department of Justice, t ...
warned that mortgage fraud was becoming so rampant that the resulting "epidemic" of crimes could trigger a massive financial crisis. According to a December 2005 press release from the FBI, "mortgage fraud is one of the fastest growing white-collar crimes in the United States". The number of FBI agents assigned to mortgage-related crimes increased by 50 percent between 2007 and 2008. In June 2008, The FBI stated that its mortgage fraud caseload has doubled in the past three years to more than 1,400 pending cases. Between March 1 and June 18, 2008, 406 people were arrested for mortgage fraud in an FBI sting across the country. People arrested include buyers, sellers and others across the wide-ranging mortgage industry.


Fraud Enforcement and Recovery Act of 2009

In May 2009, the
Fraud Enforcement and Recovery Act of 2009 The Fraud Enforcement and Recovery Act of 2009, or FERA, , is a public law in the United States enacted in 2009. The law enhanced criminal enforcement of federal fraud laws, especially regarding financial institutions, mortgage fraud, and securiti ...
, or FERA, , , public law in the United States, was enacted. The law takes a number of steps to enhance criminal enforcement of federal fraud laws, especially regarding
financial institution Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...
s, mortgage fraud, and
securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in lo ...
or commodities fraud. Significant to note, Section 3 of the Act authorized additional funding to detect and prosecute fraud at various federal agencies, specifically: * $165,000,000 to the
Department of Justice A justice ministry, ministry of justice, or department of justice is a ministry or other government agency in charge of the administration of justice. The ministry or department is often headed by a minister of justice (minister for justice in a ...
, * $30,000,000 each to the
Postal Inspection Service The United States Postal Inspection Service (USPIS), or the Postal Inspectors, is the law enforcement arm of the United States Postal Service. It supports and protects the U.S. Postal Service, its employees, infrastructure, and customers by enfor ...
and the Office of the
Inspector General An inspector general is an investigative official in a civil or military organization. The plural of the term is "inspectors general". Australia The Inspector-General of Intelligence and Security (Australia) (IGIS) is an independent statutory of ...
at the United States Department of Housing and Urban Development (HUD/OIG) * $20,000,000 to the
Secret Service A secret service is a government agency, intelligence agency, or the activities of a government agency, concerned with the gathering of intelligence data. The tasks and powers of a secret service can vary greatly from one country to another. Fo ...
* $21,000,000 to the Securities and Exchange Commission 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.FERA section 3


See also

* Federal Bureau of Investigation * Phillip E. Hill Sr. *
Affordability of housing in the United Kingdom The affordability of housing in the UK reflects the ability to rent or buy property. There are various ways to determine or estimate housing affordability. One commonly used metric is the median housing affordability ratio; this compares the medi ...
*
Mortgage Electronic Registration Systems Mortgage Electronic Registration Systems, Inc. (MERS) is an American privately held corporation. MERS is a separate and distinct corporation that serves as a nominee on mortgages after the turn of the century and is owned by holding company MERSC ...
* United States housing bubble * Taylor, Bean & Whitaker, top-10 U.S. wholesale mortgage lending firm that ceased business following fraud revelations http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/


Further reading

* Koller, Cynthia A. (2012). "White Collar Crime in Housing: Mortgage Fraud in the United States." El Paso, TX: LFB Scholarly. * Patterson, Laura A., & Koller, Cynthia A. Koller (2011). "Diffusion of Fraud Through Subprime Lending: The Perfect Storm." In Mathieu Deflem (ed.) Economic Crisis and Crime (Sociology of Crime Law and Deviance, Volume 16), Emerald Group Publishing Limited, pp. 25–45.


Notes


External links


"Mortgage fraud: New and improved Lenders have tightened standards, but scam artists have found new ways to beat the system."
''
CNN CNN (Cable News Network) is a multinational cable news channel headquartered in Atlanta, Georgia, U.S. Founded in 1980 by American media proprietor Ted Turner and Reese Schonfeld as a 24-hour cable news channel, and presently owned by t ...
Money''. October 17. 2008.
"Stimulus gives rise to consumer scams"
'' Philadelphia Inquirer''. March 7, 2009.
Semi-Annual Reports to Congress and other mortgage fraud information from the Office of Inspector General, U.S. Department of Housing and Urban Development
{{DEFAULTSORT:Mortgage Fraud Finance fraud Consumer fraud Mortgage