Mortgage fraud is when someone, directly or indirectly, participates by misstatement, false representation, or omission when applying for a mortgage loan to deceive the bank or lender to obtain a loan approval under pretenses. Wendy Lahn, the chief legal officer at Gustan Cho Associates, explains what mortgage fraud is.
Mortgage fraud constitutes when someone lies in order to deceive and/or influence a lender’s decision in favor of the loan application for approval, favorable rate, and term, or other favorable influence of the lender.
Whether the applicant intends to make good on the loan but has lied to get a lower rate, occupancy type, false documentation, or other favorable terms constitutes mortgage fraud. In the following paragraphs, we will cover mortgage fraud and how to avoid committing fraud unintentionally and intentionally.
Who Investigates Mortgage Fraud?
Anyone who participates with the main perpetrator, including third-party vendors, is committing mortgage fraud. Mortgage fraud is a federal crime punishable by up to 30 years in federal prison for each count if convicted.
The FBI is the main federal law enforcement agency investigating mortgage fraud. Other law enforcement agencies and the FBI, with jurisdiction to enforce mortgage fraud, include the CFPB, HUD, FDIC, IRS, and local, county, and state law enforcement financial crimes units.
Mortgage fraud is a felony. It is a federal crime, and people who commit mortgage fraud will be charged, prosecuted, and sentenced to prison. Violators of mortgage fraud can get fined and banned from working in the mortgage industry. Angie Torres of Gustan Cho Associates explains about committing fraud in the mortgage industry:
Mortgage fraud has been increasing throughout the United States. Even as the processes and compliance backups used to catch them are, fraudsters are becoming more advanced by the day in what used to be an industry unwilling to change before the crisis. Many people desperately needing housing may be committing housing fraud without knowing it is a serious federal crime.
What Is Occupancy Fraud?
No matter how minor it may be, any intent to deceive a bank or lender in getting a mortgage loan approval under pretenses is considered fraud. It can be as simple as lying about lying the applicant being an owner-occupant primary residence home when they intend to use the property as an investment property. Owner-occupant homes have lower down payment requirements and mortgage rates than investment properties. This article will discuss Government Cracking Down On Mortgage Fraud On Home Purchases.
Mortgage Fraud Defined
Mortgage Fraud is widely considered the hardest crime to prove. This is because you need an element vital for conviction: motive and knowledge. The person(s) committing these acts must know they are committing the crime of defrauding an institution or private party to be charged. Now the government, in not so many words, has its own two types of fraud. The first, fraud for housing, is not typically prosecuted.
Can I Get Prosecuted For Housing Mortgage Fraud?
When a buyer falsifies his or her employment and alters his or her own W2 to purchase a home or intend to live in, the feds and or banks generally will not proceed with charges. If they claim they will occupy the residence as an owner-occupied to get a better rate with a lower down payment and looser guidelines, to buy that house or have someone else occupy it for their profit, that is another story.
Types Of Mortgage Fraud
What are the most common types of fraud: occupancy is one. People losing their homes would knowingly recruit a family member or close friend to purchase the home from them at an inflated agreed-upon price. The proposed seller would give the higher sale proceeds as an incentive to the buyer and keep some for him/herself.
Occupancy fraud, straw homebuyer fraud, and appraisal fraud are the most common types of fraud in the real estate and mortgage business.
They would then agree on a side deal to continue making payments while that payment history would report under the relative’s credit report. Eventually, a large number went into FC. Lenders and appraisers are required to inform and or know when this is a non-arms length transaction (where buyer and seller already know each other)
Appraisal Mortgage Fraud
Appraisal fraud is common too, even after HVCC, where appraisals were ordered through an automated system eliminating any cohesion or communication between realtor/loan officer/appraiser. To get a value, you need comparable sales, which translation means(looks like a house, similar model, size, close to, and recent sale). These attributes determine the house’s likelihood of selling and worth the same price.
How Scammers Can Artificially Inflate Home Prices
During the crisis, investors, sometimes many at once, would buy homes in distressed areas for 5-40k under an LLC. They would then presumably fix the home up. Violators of fraud will bring in a straw buyer or a person who had little motivation to live in the home other than they would be getting money under the table.
Fraud in the mortgage industry does not apply only to licensed loan officers. Buyers, sellers, realtors, attorneys, appraisals, contractors, and others can be charged and arrested for mortgage fraud.
A homebuyer would list the home for 250-375k(actual examples). When enough buyers bought into the scam, you created an artificial market in a distressed area that those values would never support, much less the rents in that area. This was common with condos back in the day, but with stringent FHA spot approval, less than 20% of condo units in many cities even have FHA approval for financing. These businesses could get away with this for some time, as they would continue to set up a new LLC every few months and pick different areas not yet targeted before authorities and watchdog groups would catch on.
Elderly Abuse Fraud
Elderly abuse/fraud: In the reverse mortgage world, These investors would buy a home for similar prices as stated above, then get a senior to live in the house and go onto the title for a few months(FHA requires 90 days to do reverse on title). They would then refinance into reverse with a payoff to a loan no one knows even exists(where is this payoff coming from?). The appraisals, in reverse, go off value, but the loans go off maximum borrowing, so the older someone is, the more they get back, as they are less likely to outlive what they take out as cash or an equity line.
What Determines Fraud?
For fraud to be a crime about lending, a wire or money has to exchange hands. This typically happens at a title company’s office or attorney’s office. A closer orders wire on a transaction, at least one of the parties involved knows it is not for the purposes disclosed, and you have fraud. Alex Carlucci of Gustan Cho Associates explains what determines fraud as follows:
Federal sentences for wire fraud can range from 3-15 years. The more you commit, the more time you get and the more fines you pay. Bottom line. As you dig into fraud, you realize it is not about being desperate when guidelines contract. Rather it is about one’s constant need to subvert rules in place. There was rampant fraud before the crisis when you didn’t need to commit it.
Why did people have to lie about W2s when they stated they were available? Why lie about occupancy when a high LTV non-owner was available? The answer is simply some people would rather cheat the system(outlaw mentality ) than play by its rules. The best answer I hear is: well, the banks and Wall Street are worse. Maybe so, but that is not a defense the judge or jury typically wants to hear when your case is called. If you have any questions about the topic of fraud or any other questions about content published on GCA Mortgage Group, please get in touch with us at GCA Mortgage Group at 262-627-1965. Text us for a faster response. Or email us at firstname.lastname@example.org. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.
April 30, 2023 - 5 min read