Examples of Mortgage Fraud
Again i know this post may seem like it doesnt belong on a credit repair scams website, however somone left a comment requesting i write something on mortgage fraud, so here we are and his comment can be seen under the post Investment Scams.
Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinquency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. It is considered fraud because the borrower has materially misrepresented the risk to the lender in order to obtain more favorable loan terms.
Income fraud: This occurs when a borrower overstates his/her income in order to qualify for a mortgage or for a larger loan amount. This was most often seen with so-called “stated income” mortgage loans (popularly referred to as “liar loans”), where the borrower, or a loan officer acting for a borrower with or without the borrower’s knowledge, stated without verification the income needed to qualify for the loan. Because mortgage lenders have begun to tighten underwriting standards and “stated income” loans are less available, income fraud is increasingly seen in traditional full-documentation loans where the borrower forges or alters an employer-issued Form W-2, tax returns and/or bank account records to provide support for the inflated income. It is considered fraud because in most cases the borrower would not have qualified for the loan had the true income been disclosed. The “mortgage meltdown” was caused, in part, when large numbers of borrowers in areas of rapidly increasing home prices lied about their income, acquired homes they could not afford, and then defaulted.
Employment fraud: This occurs when a borrower claims self-employment in a non-existent company or claims a higher position (e.g., manager) in a real company, in order to provide justification for a fraudulent representation of the borrower’s income.
Failure to disclose liabilities: Borrowers may conceal obligations, such as mortgage loans on other properties or newly acquired credit card debt, in order to reduce the amount of monthly debt declared on the loan application. This omission of liabilities artificially lowers the debt-to-income ratio, which is a key underwriting criterion used to determine eligibility for most mortgage loans. It is considered fraud because it allows the borrower to qualify for a loan which otherwise would not have been granted, or to qualify for a bigger loan than what would have been granted had the borrower’s true debt been disclosed.
Fraud for profit: A complex scheme involving multiple parties, including mortgage lending professionals, in a financially motivated attempt to defraud the lender of large sums of money. Fraud for profit schemes frequently include a straw borrower whose credit report is used, a dishonest appraiser who intentionally and significantly overstates the value of the subject property, a dishonest settlement agent who might prepare two sets of HUD settlement statements or makes disbursements from loan proceeds which are not disclosed on the settlement statement, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan. The parties involved share the ill-gotten gains and the mortgage eventually goes into default. In other cases, naive “investors” are lured into the scheme with the organizer’s promise that the home will be repaired, repairs and/or renovations will be made, tenants will located, rents will be collected, mortgage payments made and profits will be split upon sale of the property, all without the active participation of the straw buyer. Once the loan is closed, the organizer disappears, no repairs are made nor renters found, and the “investor” is liable for paying the mortgage on a property that is not worth what is owed, leaving the “investor” financially ruined. If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth far less and in large schemes with multiple transactions, banks may lend millions more than the properties are worth.
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