How To Avoid Mortgage Fraud During Mortgage Process
How To Avoid Mortgage Fraud During Mortgage Process
This BLOG On How To Avoid Mortgage Fraud During Mortgage Process Was UPDATED On April 11th, 2019
What Is Mortgage Fraud And How To Avoid Mortgage Fraud?
Mortgage fraud seems like such a strong term. It applies to professional white collar criminals. But that is not always the case. A hard working home buyer with no criminal record or even a parking ticket can commit mortgage fraud without them realizing that they are committing mortgage fraud. How To Avoid Mortgage Fraud is important for both borrowers and mortgage professionals.
Who Investigates Mortgage Fraud?
The law enforcement agency that enforces mortgage fraud is not the local police station or small town sheriff.
- It is the FBI, as well as investigators from HUD, are the federal agencies in charge of investigating mortgage fraud
- These are federal agents who have a no tolerance policy with regards to mortgage fraud
- Part of the reason for the 2008 real estate and mortgage meltdown was due to mortgage fraud
- Violations of mortgage laws and rules were often done with no accountability by the following:
- Home buyers
- real estate agents
- title companies
Common Mortgage Fraud Practice
- Mortgage brokers practiced creative financing where there was no urgency on how to avoid mortgage fraud
- The following was common:
- fake tax returns
- false bank statements
- straw buyers
- lax underwriting procedures
- inflated appraisals
- lying on mortgage applications
- multiple flipping was a common practice
Those in a mortgage transaction need to pay attention to How To Avoid Mortgage Fraud during the mortgage process. What was common yesterday is no longer accepted today. The 2008 Real Estate and Mortgage Meltdown cost trillions of dollars. The entire mortgage and real estate industries went through a major overhaul due to the Real Estate and Credit Meltdown. Tens of thousands of folks got arrested, indicted, and sentenced to federal prison for committing mortgage fraud. Unfortunately, the practice of mortgage fraud still exists today. Many do not realize how serious mortgage fraud is and have no intention on how to avoid mortgage fraud during real estate transactions.
Lying On A Mortgage Application
Lying on a mortgage application or providing misleading information in order to deceive an underwriter’s decision in approving a mortgage loan in order to get a mortgage loan approval is not a way on how to avoid mortgage fraud. The above acts is a classic example committing mortgage fraud. Mortgage Fraud is a felony punishable up to 30 years in federal prison.
- No matter how big or small the deception is, if anyone tries to attempt to deceive a mortgage lender in order to get loan approval, they are committing mortgage fraud
- The deception needs to be intentional and minor mistakes does not constitute mortgage fraud
- Many borrowers think it is no big deal fudging on their mortgage application which was common prior to the 2008 Real Estate and Mortgage Collapse
- Or taking the suggestion of their realtor or mortgage loan originator to either omit or lie about a question on a mortgage application
- However, even though borrowers did not initiate the idea but were told by the realtor and/or mortgage loan originator in intentionally lying on a mortgage application to influence a lender in deception, all parties are guilty in committing mortgage fraud can
- All cases of mortgage fraud allegations will be investigated by the mortgage fraud task force of the FBI
- All mortgage fraud allegations are investigated by regulators and mortgage lender’s compliance departments to see the validity of the accusation
Definition Of Mortgage Fraud
Mortgage fraud is define by the Federal Bureau of Investigation Mortgage Fraud Task Force as ” any material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or issue a loan.” This statement is in black and white. The reason most borrowers are tempted to lie is to make their applications look as vanilla as possible and show the underwriter that they are a good credit risk. Lenders understand that borrowers could have had extenuating circumstances before. They take all the negatives into account when underwriting borrowers credit and income profile. What was common practice before is no longer allowed now. Borrowers should always be concerned about how to avoid mortgage fraud during the mortgage application and approval process.
Examples of occupancy fraud include when a non-owner occupant states that they will be an owner occupant.
- Case scenarios like these are very common where a parent or relative states that they are an owner occupant
- But actually are purchasing the home for a family member, relative, or friend because the other party does not qualify for a residential mortgage loan due to the following:
- credit issues
- income qualification issues
- or other issues
- Many owner occupancy fraud violators do not get caught and life goes on
- However, if the mortgage loan ever goes bad, that is when mortgage fraud investigators catch the owner occupancy fraud
Kickbacks From Seller To Buyer
Another way on how to avoid mortgage fraud is not accepting kickbacks. Kickbacks that are not disclosed is another example of mortgage fraud.
- A common practice is when a seller kicks back sellers concessions towards the buyers closing costs when there is leftover funds
- FHA allows up to a 6% sellers concession towards a buyers closing costs
- Conventional loan programs permit up to a 3% sellers concession towards the buyers closing costs
- Any leftover in sellers concession credits need to go back to the seller
- Sellers concessions cannot be credited to the home buyer
- An example of this case study is when a seller offers a 6% sellers concession to the buyer but the actual sellers concession used is 2%
- The unused 4% sellers concession needs to go back to the seller
- If the seller gives the buyer the unused 4% sellers concession credit, both the seller and buyer is committing mortgage fraud
- If this idea was initiated by the real estate agent, mortgage loan originator, title agent, or attorney, then everyone involved has committed mortgage fraud
- If nobody finds out about it, then no problem
- However, if someone talks and the lender or mortgage regulators find out, then all parties are in trouble and can be charged with mortgage fraud
Inflated Purchase Price
Another case scenario for kickbacks is when the seller agrees to inflate the purchase price hoping for the appraisal to come in at a higher value than the actual purchase price.
- The seller then gives a kickback for the difference between what the mortgage lender valued the property and the actual sales price
- The real estate purchase contract will state the inflated purchase price but the actual purchase price will be much lower
- After closing, the seller gives the home buyer the kickback and the mortgage lender funding the loan does not know about this
Disclosing Second Liens
An undisclosed second mortgage on a home purchase is another form of mortgage fraud.
- For example, say that the home buyer needs to come up with a 3.5% down payment but does not have his or her own funds
- FHA allows up to 100% of the funds to be gifted by a family member
- Gift funds cannot be paid back nor can it be a loan from the donor of the gift funds
If the mortgage loan borrower receives gift funds and signs a sworn statement that the down payment is a 100% gift from a family member. It cannot be paid back. But in actuality, if the gift funds is a loan and a separate loan agreement is adhered to, whether oral or written, and the home seller agrees to give back the gift funds back to the donor with interest, this is another form of mortgage fraud. All parties here, from the donor, buyer, seller, have committed mortgage fraud. If the loan officer was aware of this, then the loan officer is guilty as well.