Mortgage fraud causes billions in losses across the United States every year. Some of it targets lenders. Some of it targets borrowers. Some involves both parties being deceived by a third party in the middle. Understanding the warning signs of mortgage fraud matters regardless of which side of the transaction you're on.
Coventry Enterprises LLC has developed a working knowledge of fraud patterns through years of reviewing real estate transactions. This overview covers the most common warning signs Jack Bodenstein and the team encounter.
Income and Employment Inflation
Inflating income or fabricating employment history to qualify for a larger loan is among the most common forms of mortgage fraud. Borrowers who do this at the direction of a loan officer, broker, or real estate agent are often told it's standard practice or that everyone does it. It isn't, and not everyone does. It is also a federal crime that can result in prosecution regardless of whether the loan performs.
Warning signs include: a loan officer who suggests using a different employer name or different income figures than you actually have, income verification documents that appear altered, or a loan approval that comes back much larger than expected based on your actual financial picture.
Inflated Appraisals
A legitimate appraisal is based on comparable sales, property condition, and market data. A fraudulent appraisal is adjusted to meet a target value that supports a specific loan amount. Signs of an inflated appraisal include: comps that don't actually match the subject property, condition ratings that don't reflect what you observed during inspection, and appraiser selection by a party with a financial interest in the transaction rather than through an independent selection process.
Undisclosed Second Mortgages
A first mortgage lender approves a loan based on the borrower's stated down payment. The down payment actually comes from a second mortgage arranged by the seller, broker, or a third party, which is not disclosed to the first lender. The first lender thinks they have a borrower with skin in the game. The actual LTV is much higher than represented. This is fraud against the first lender and creates significant borrower risk as well.
Straw Buyers
A straw buyer is someone who purchases property on behalf of someone else who cannot qualify for financing. The straw buyer has no intention of occupying or managing the property. Their credit and income profile are used to obtain a loan that the actual party then controls. The straw buyer takes on legal and financial liability for a property they don't actually own or control. This arrangement is fraud.
Property Flipping Fraud
Rapid property flipping with artificially inflated values involves buying a property at one price, getting a fraudulent appraisal at a much higher value, and quickly selling to a straw buyer who obtains a large mortgage. The profit is extracted, the straw buyer is left with a property worth far less than the loan, and default follows. The inflated sale price then becomes a comparable that affects legitimate valuations in the neighborhood.
Builder Bailout Schemes
Developers unable to sell finished properties may arrange fraudulent transactions to pay off construction loans. Buyers are offered incentives, cash back at closing, or free upgrades not disclosed to the lender. The sales price is inflated to cover these undisclosed concessions. The lender funds a loan based on a purchase price that doesn't reflect the true transaction value.
Coventry Enterprises LLC provides mortgage fraud awareness and loan review. See also: toxic lending, bad loan types, and our dedicated mortgage fraud page.