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Mortgage Fraud

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Occupancy fraud: Frequently this is seen where the borrower wishes to obtain a mortgage to acquire an investment property, but instead the borrower claims on the loan application that they will occupy the property as their primary residence or second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinqency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction.

Employment/income fraud: Borrowers may overstate income in order to qualify for a larger loan amount. This is most often seen with so-called "stated income" mortgage loans, where the borrower declares their income without verification. It is sometimes seen in traditional full-documentation loans where the borrower alters an employer-issued Form W-2 to overstate income. Another example is to claim income from self-employment without documentation to prove that the borrower's business even exists.

Failure to disclose liabilities: Borrowers may conceal obligations, such as mortgage loans on other properties or newly acquired credit card debt, in order to reduce the amount of monthly debt declared on the loan application. This is pertinent because the debt-to-income ratio is a key underwriting criterion to determine eligibility for most mortgage loans, and the omission of liabilities artificially lowers the debt ratio, allowing the borrower to qualify for a bigger loan.

Mortgage fraud ring: A more complex scheme involving multiple parties in a financially motivated attempt to defraud the lender of large sums of money. One possible scheme includes a straw borrower whose credit report is used, a dishonest appraiser who intentionally and significantly overstates the value of the subject property, a dishonest attorney who prepares two sets of HUD closing documents, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan. If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth far less. The parties involved share the ill-gotten gains and disappear without making payments on the mortgage.

Appraisal fraud: If a home's appraised value is deliberately overstated, more money can be obtained by the borrower in the form of a cash-out refinance or obtained by the seller in a purchase transaction. A dishonest appraiser may inflate the value, or someone with knowledge of graphic editing tools such as Adobe Photoshop can alter an appraisal. In many cases of mortgage fraud, the appraisal is involved.

Shotgunning: When a person takes out multiple loans for the same home simultaneously the term is shotgunning. Typically after committing the mortgage fraud, the person or persons leave the country.

Identity Theft: When a person assumes the identity of a home owner and takes out a mortgage on their property. Sometimes this is part of a mortgage fraud ring where a seller assumes the identity of the home owner, and a buyer who seeks the mortgage to buy the house; both of whom are using false identities, share the ill-gotten gains and disappear without making payments on the mortgage.