Prefer to hear an audio version? Click here to listen to the post.
What Is Mortgage Fraud? Understanding Risks, Types, and How to Prevent It
Although fraud has always been present in financial lending, fraud has recently emerged as a significant threat to the integrity of the housing market. According to CoreLogic’s 2024 Mortgage Fraud Report, approximately 0.81% of all mortgage applications in the second quarter of 2024 contained indications of fraud, equating to about 1 in every 123 applications. This statistic radically underscores the need for both mortgage lenders and home borrowers to be vigilant and informed about the various forms of mortgage fraud. If you see something, say something.
What is Mortgage Fraud?
Mortgage fraud is the intentional misrepresentation or omission of information by applicants, professionals, or other parties involved in the mortgage process to secure a loan or profit illicitly. The Federal Housing Finance Agency (FHFA) categorizes mortgage fraud into two primary types:
- Fraud for Profit: Typically perpetrated by industry insiders such as appraisers, brokers, or loan originators, this type aims to exploit the mortgage lending process for financial gain.
- Fraud for Housing: Usually committed by borrowers, this involves illegal actions to acquire or maintain ownership of a home, such as misrepresenting income or employment information.
Common Types of Mortgage Fraud
Understanding the various schemes employed in mortgage fraud is essential for prevention. Some prevalent types include:
- Income and Employment Fraud: Applicants falsify income levels or employment details to qualify for loans beyond their legitimate borrowing capacity.
- Occupancy Fraud: Borrowers claim they will occupy a property as their primary residence to secure favorable loan terms, while intending to use it as an investment property.
- Appraisal Fraud: This occurs when property values are intentionally inflated or deflated to benefit the buyer, seller, or other parties involved.
- Identity Theft: Fraudsters assume another person’s identity to obtain a mortgage, leaving the victim unaware until they face unexpected debts or legal actions.
- Foreclosure Rescue Scams: Desperate homeowners are deceived into transferring property ownership or making upfront payments to fraudsters promising foreclosure assistance.
- Email compromise fraud: Hackers intercept wire instructions, swap in fraudulent account details, and leave borrowers unknowingly wiring funds straight into a scammer’s hands. Once the money goes, recovering it is next to impossible.
The Rising Threat of Fraud in the Mortgage Industry
Despite a slowdown in home sales recently, fraud risk has been escalating. CoreLogic’s Mortgage Application Fraud Risk Index reported an 8.3% increase nationwide over the past year, with a 1.1% rise since the previous quarter. Some of the factors contributing to this uptick include rapid resales with rising prices, an increase in high-activity buyers, and transactions exhibiting multiple high-risk indicators.
Real-World Examples
The impact of mortgage fraud extends beyond statistics, affecting real individuals and communities. Notable cases include:
- Wire Fraud Schemes: In West Virginia, a woman lost her $255,000 life savings due to a real estate wire fraud scam. She received an email, seemingly from her title company, with instructions on wiring the funds for closing on her new home. Unbeknownst to her, scammers had hacked into the email system and manipulated the transaction details. (The most recent edition of “The Mortgage Minute” – Mortgage Maker AI’s weekly newsletter – detailed an example of an email wire fraud scheme and how the mortgage lender prevented the fraud. Click here for more details).
- Title Fraud: Scammers have attempted to seize high-profile properties, such as Graceland and Spelling Manor, by filing fraudulent deeds. These incidents highlight the growing threat of deed fraud, where scammers use forged documents to illegitimately take ownership of properties.
Preventative Measures
Both lenders and borrowers can take proactive steps to mitigate the risk of mortgage fraud:
For Lenders:
- Implement Strict Verification Processes: Thoroughly verify all applicant information, including income, employment, and occupancy details.
- Utilize Advanced Fraud Detection Tools: Employ technology solutions that analyze data patterns to identify potential fraud indicators.
- Conduct Regular Training: Educate staff on emerging fraud schemes and red flags to improve their ability to detect suspicious activities.
For Borrowers:
- Verify Communication Channels: Confirm the authenticity of communications, especially those involving financial transactions, by contacting known representatives directly by phone, or in person.
- Monitor Financial Accounts: Regularly review bank and credit accounts for unauthorized activities.
- Obtain Title Insurance: This provides protection against potential title defects or fraud that could jeopardize property ownership.
Mortgage fraud poses a significant threat to the stability of the housing market and the financial well-being of individuals. By understanding the various types of fraud and implementing vigilant prevention strategies, both lenders and borrowers can protect themselves from falling victim to these schemes. Staying informed and proactive is essential in safeguarding the integrity of mortgage transactions.
For more insights on mortgage practices and how processes and due diligence can aid in fraud prevention, explore our resources at Mortgage Maker AI.
About The Author
