Did you know that the U.S. government has a division specifically devoted to fighting housing and mortgage fraud? This is just one of the ways that they protect people from being taken advantage of in the housing market. In this blog post, we will discuss what housing and mortgage fraud are, and how the government is working to prevent them. We will also talk about some of the common scams that occur in these markets, and what you can do to protect yourself.
Mortgage Fraud occurs when someone makes a purposeful misstatement, misrepresentation, or omission in relation to a mortgage loan that the lender relies upon. This false statement is used to influence a bank’s decision to approve a loan, accept a reduced payoff amount, or agree to certain repayment terms. The perpetrators of the fraud are usually people involved in the loan originating process, such as bank officers, appraisers, mortgage brokers, attorneys, loan originators, and others.
There are two distinct areas of mortgage fraud: fraud for profit and fraud for housing.
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.
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.
Common Mortgage Fraud Schemes:
Foreclosure rescue schemes: The perpetrators identify homeowners who are in foreclosure or at risk of defaulting on their mortgage loan and then mislead them into believing they can save their homes by transferring the deed or putting the property in the name of an investor. The perpetrators profit by selling the property to an investor or straw borrower, creating equity using a fraudulent appraisal, and stealing the seller's proceeds or fees paid by the homeowners. The homeowners are sometimes told they can pay rent for at least a year and repurchase the property once their credit has been reestablished. However, the perpetrators fail to make the mortgage payments and usually the property goes into foreclosure.
Loan modification schemes: Similar to foreclosure rescue scams, these schemes involve perpetrators purporting to assist homeowners who are delinquent in their mortgage payments and are on the verge of losing their home by offering to renegotiate the terms of the homeowners’ loan with the lender. The scammers, however, demand large fees upfront and often negotiate unfavorable terms for the clients, or do not negotiate at all. Usually, the homeowners ultimately lose their homes.
Illegal property flipping: Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is the fraudulent appraisal information or false information provided during the transactions. The schemes typically involve one or more of the following: fraudulent appraisals; falsified loan documentation; inflated buyer income; or kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees.
Many types of housing fraud the government goes after are investigated by The Department of Housing and Urban Development ("HUD") and the Department of Justice using the False Claims Act. The federal government insures some types of mortgages through the US Housing and Urban Development’s (HUD) Federal Housing Administration (FHA), the Section 8 Program, and other programs. When fraud occurs with a federally backed mortgage through one of these programs, people with information about the misconduct can file a whistleblower lawsuit through the False Claims Act and potentially receive a reward from the government. Usually, the people best suited to file such a lawsuit are other people involved in the loan process who can provide evidence of the false statements made to the government.
The most common type of HUD fraud include:
Fraudulent origination or underwriting of FHA loans: this can range from failing to implement quality control programs that ensure loans qualify for FHA assistance, to not having adequately certified employees in charge of the underwriting process.
False statements regarding the value of property for FHA loans: this can be done by manipulating the appraisal process of a property.
False claims submitted under FHA insurance: submitting false certifications to the FHA saying loans were eligible for FHA mortgage insurance, causing the FHA to pay hundreds of millions of dollars in ineligible claims.
Violations of HUD guidelines: refusing to rent or sell homes to people based on race, color, national origin, religion, sex, familial status, or disability.
Providing Section 8 housing to individuals who do not qualify: making false statements regarding income or family size, or altering documents with the intent of leaving out or hiding information.
Mortgage fraud committed by lenders can also violate the Dodd-Frank Act, which was created after the financial crisis of 2008. One of the main purposes of the Act is to prevent predatory mortgage lending, ensuring that customers are always protected. It prohibits mortgage originators from earning high commissions for originating mortgages with higher fees and ensures that they won’t steer customers towards high-paying loans that are more beneficial to the originator. People and corporations found to violate the Dodd-Frank Act’s provisions can be subjected to economic sanctions by the Consumer Financial Protection Bureau (CFPB), who oversees the enforcement of the Act, or can potentially earn a reward if government money was involved.