Mortgage Fraud And You
With stricter lending standards in place following the housing market crash of 2008, many borrowers have committed some form of mortgage fraud. In fact, seventy-four percent of fraud cases reported to LexisNexis Risk Solutions in 2013 included a falsified application. Borrowers may not even give a second or third thought to telling a little white lie on a mortgage application. Common mistruths include, but are not limited to the following: employment history, income and whether or not they are buying a first or second home. These elements are all large factors in determining the credit worthiness of a borrower that ultimately helps to determine the interest rate and loan type. In addition, some borrowers are partaking in credit documentation fraud which encompasses the borrower submitting falsified records to the bank in order to verify their loan application.
With the new regulations and stricter lending standards, the mortgage industry has attempted to curtail mortgage fraud. But, it may not be all on the borrower as some mortgage professionals are also committing mortgage fraud in order to get a deal done. Since the housing crisis, a variety of measures have been put in place in order to deter bad behavior on the part of the real estate and mortgage professionals and the borrower. Falsified documents and doctored closing documents were almost commonplace as well as higher valuations of a property made by appraisers. An approximate 11,000 mortgage applications had some form of either serious misrepresentation or fraud in the second quarter of 2014 according to a CoreLogic Report. We read one estimate of $19.8 billion in mortgage debt for residential mortgage loan applications with fraudulent information over a 12-month period that ended in the second quarter of 2014.
Truth or Consequences
Each year, financial institutions lose billions of dollars due to mortgage fraud. Lying on mortgage applications is one of the biggest contributors to mortgage fraud in the United States. By falsifying information to obtain a mortgage, the consequences vary from fines to imprisonment depending upon the severity of the case. The maximum federal penalty for mortgage fraud is 30 years in federal prison, up to $1,000,000 in fines or a combination of both. The Federal Bureau of Investigations (FBI) is responsible for handling mortgage fraud cases. When an applicant lies on an application, they may be charged with one or more federal criminal statutes related to mail, wire or bank fraud. Other common fraud cases involve falsifying names, aliases, social security numbers, identification documentation and addresses.
Types of Mortgage Fraud
By definition, there are two primary types of mortgage fraud. The first is “fraud for profit” which typically involves industry insiders such as loan officers, appraisers, real estate agents and escrow/title representatives that have a motivation for money. The second is “Fraud for housing” commonly involves a homebuyer who that acts as a straw buyer. Which means that they buy on the behalf of an unqualified person. Additional “fraud for housing” schemes may encompass occupancy fraud which is when a mortgage applicant pretends that the property will serve as a primary residence in order to receive a better loan term.
Lenders have the responsibility of verifying all claims made by a borrower as the lender looks at the mortgage application for any discrepancies and inconsistencies which could be a big red flag. A lender may do research in order to determine if the borrower is overstating their income and will also ask for documentation in order to verify checking and savings account balances. Tax return and employment verification are also ways in which a lender can verify borrower claims. While some borrowers don’t purposely commit fraud, the lender must do their best to verify everything in order for the borrower to securely get a loan. As an example, if a borrower overstates his or her income then that could result in a future loan default because of the cost and not being able to afford the higher payment on less income than what was stated. Mortgage fraud is serious and not something anyone should take lightly.
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