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Emerging fraud trends: Types of mortgage fraud

Mortgage fraud continues to be one of the fastest growing crimes in the United States and is generally classified into one of three categories:

  • Fraud for housing or property
  • Fraud for profit
  • Fraud for criminal enterprise

Each fraud type is unique based upon the intent of the fraud scheme and the perpetrators involved.

Fraud for housing

Fraud for housing, also known as fraud for property, is mainly committed by borrowers. Fraud schemes in this category often entail a borrower providing false information about employment, income or assets in order to qualify for a loan. A borrower, wanting to purchase a property that they know they cannot afford, may fabricate income and/or falsify assets in the mortgage application documents to qualify for a larger loan amount.  This is an example of fraud for housing.

An example of fraud for housing

Alaskan Woman Sentenced for Loan Application Misrepresentations (September 2007,Anchorage, Alaska)

In this case, the defendant committed bank fraud by providing false information to the mortgage lender in an attempt to obtain a home mortgage.  To obtain a loan, the defendant, claiming to be employed, submitted a pay stub to document the amount of income she allegedly earned.  It was later learned that she had been terminated from her employer for unlawfully transferring funds to her personal bank account.

The woman was sentenced in federal court to 37 months in prison on one count of forgery, one count of computer fraud and one count of bank fraud.

Common themes of fraud for housing schemes

  • Perpetrators may include the borrower and/or loan officer
  • Normally involves a single loan
  • Contains loan-level misrepresentations to qualify
  • Borrower intends to repay – the loan usually does not default
  • The appraised value is not typically inflated at origination

Fraud for profit

Fraud for profit, also known as “industry insider fraud”, is the most costly type of fraud.  These schemes often involve a group of people who play multiple roles in the fraud.  The initiators often receive a larger percentage of the profit while others may be paid several thousand dollars for their part in the misrepresentation. For example, a mortgage broker may partner with a loan processor to create a fictitious credit profile and collude with an appraiser to inflate the property value.   

An example of fraud for profit

Thirty-one Defendants Charged in Massive Mortgage Fraud Scheme (December 2007, Miami, Florida)

This scheme involved fraudulent mortgage loans obtained for the purchase of 27 properties located throughout southern Florida. 

According to the indictment, the scheme involved sellers of residential properties who were willing to overstate the true selling price of their properties, and straw buyers who were paid to participate in the fraudulent purchase of the selected properties.  The loan officers involved submitted fraudulent mortgage loan applications, which included false employment verifications, pay stubs, income and funds on deposit, and IRS Forms W-2.

Additionally, to support the overstated sales prices on the properties and the fraudulent mortgage applications for the straw buyers, fraudulent appraisals attesting to the inflated property values were prepared.  False settlement statements/HUD-1s were created to conceal from the lender the existence of the credit given to the buyer from the seller, and the alleged funds provided by the straw borrower.  

Common themes of fraud for profit schemes

  • Often involves multiple industry professionals/insiders
  • Fraud is committed throughout multiple transactions
  • Includes numerous misrepresentations and omissions
  • The borrowers involved may be unaware of the scheme
  • Participants are often well compensated for the role they played
  • Property appraisals contain misrepresentations or value issues
  • Participants may include straw borrowers who do not intend to repay the loan

Fraud for criminal enterprise

Fraud for criminal enterprise is a growing trend involving participants attracted by the opportunity for greater profits, fewer dangers than commonly associated with violent crime, and reduced sentencing or jail time.   

An example of fraud for enterprise

St. Louis Man Sentenced to Almost 25 Years in $4.5 Million Cocaine Trafficking and Mortgage Fraud (March 2005, St Louis, Missouri)

In this case it was determined that the defendant attempted to launder the proceeds of his drug activity by using cash to invest in real estate.  In one instance, he delivered more than $500,000 to a mortgage broker for real estate investments.  The defendant was sentenced to six years in prison, and three years of supervised release for conspiracy to distribute drugs and conspiracy to engage in money laundering. 

Common themes of fraud for criminal enterprise schemes

  • Perpetrators of this type of fraud often include members of crime organizations who temporarily conceal the identity, source and/or destination of money by laundering it through real estate transactions. This includes three basic steps of money laundering:
    • Placement – placing large amounts of illegally obtained funds into the financial system by virtue of mortgage fraud
    • Layering – buying properties with “dirty” money and reselling them without intent to inflate value
    • Integration – requesting the refund of principal reduction payments
  • Property flipping is the fraud scheme commonly employed

Important Freddie Mac fraud prevention resources

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