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Looking Mortgage Fraud in the Face

VP Joan Ferenczy Mortgage fraud doesn't look like a TV crime scene with yellow tape and flashing lights. It generally doesn't show up on security camera footage or in the sort of dramatic photos that make the front page or go viral on the Internet. That's because mortgage fraudsters, like any predators, rely on camouflage to hide their intentions and lull their victims into a false sense of security.

Freddie Mac's fraud investigation team has over 20 years of field experience uncovering such "camouflage" and helping law enforcement agencies prosecute mortgage fraudsters.

In our experience, mortgage fraud is more likely to look like a simple clerical error on a settlement sheet. Or a forgettable – or doctored – photo of a bathroom or a kitchen in an appraisal.

Here are three examples of mortgage fraud from our files that we're using at training sessions across the country with real estate professionals who are in a position to spot and stop fraudsters from victimizing more borrowers – and further undermining the integrity of the real estate industry.

Altered Bank Balance

This phony bank statement was submitted with a loan file (top). By inserting a few digits, the fraudsters turned small monthly deposits of $182 and $84 into major deposits of $1,182 and $2,084. They also misrepresented a $67.03 balance as $43,067.03. Investigators later discovered the true size of the deposits and the account balance (bottom).

Altered Bank Statements

Phony Amenities and Repairs

To justify a higher price and bigger mortgage, fraudsters submitted the photos of the full kitchen and bathroom on the left with a loan application for the kitchen-less, bathroom-less unit on the right. A site visit by investigators revealed the truth.

The Phantom Renovation

Turning Phony Sales Concessions into Extra Profit

Unscrupulous companies or individuals in the business of putting short sales together may try to fraudulently pad their profits by doctoring HUD-1 Settlement Statements to camouflage extra fees they're charging the borrower as phony sales concessions from the seller.

The HUD-1 is a standard document that itemizes all of the financial details of the transaction, including the sales price and seller contributions (such as discounts), as well as the fees the borrower is being charged by the real estate sales agents and mortgage lender. Buyers have the right to examine the HUD-1 the business day before the settlement and ask questions about any fees or seller contributions they don't understand.

Manipulating the Short Sale HUD-1

In the above example, page one of the HUD-1 shows a $5,800 credit from the seller supposedly made to help the buyer purchase the home. Page two shows an identical $5,800 fee paid out of the buyer's funds to the company that arranged the short-sale. What makes this fraudulent is that the actual purchase contract between the seller and the buyer shows no such concession was ever asked for or agreed to.

In other words, the short-sale facilitator is adding $5,800 to his or her bottom line by creating the illusion of a sales concession that the buyer didn't request and did not receive.

Protecting the Public

By showing real estate professionals and the homebuying public what fraud looks like, we can empower them to take action when they see something inappropriate.

Over the past year, we have trained thousands of real estate agents and brokers through special seminars and Freddie Mac's web site, where we post the latest fraud prevention information and best practices.

If you see fraud being committed – or aren't sure and want clarification – call the Freddie Mac Fraud Hotline at 1-800-4FRAUD-8 or 1-800-437-2838 and contact your local FBI office, state attorney general, and Real Estate Board.


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