What we collectively refer to as mortgage fraud includes various illegal schemes involving some type of misrepresentation or misstatement on mortgage documents. For example, a home buyer, mortgage broker and/or other real estate professional who submits fake W-2 forms or procures an inflated property appraisal has engaged in mortgage fraud.
In general, fraud involves two parties: the party providing false information and the party that relies on that information to complete a transaction. Such crimes commonly are prosecuted as wire fraud, bank fraud and conspiracy (federal statutes do not directly reference "mortgage fraud").
The Fraud Enforcement and Recovery Act (FERA) enacted in 2009 expanded the reach of federal law enforcement officials in enforcing mortgage fraud laws. Sentences under FERA can include $1 million fines and 30-year prison sentences. Some states also have laws that address crimes related to mortgage fraud.
An investigation may also lead to additional charges of bankruptcy fraud or tax fraud. Although unscrupulous mortgage brokers, appraisers, real estate attorneys and other real estate professionals tend to be the ones targeted by investigations, home buyers are sometimes arrested for providing inaccurate information.
Law enforcement officials recognize two main categories of mortgage fraud:
- Fraud for Housing: A situation where a borrower submits false, incomplete or inaccurate information in order to qualify for a loan or to obtain more favorable terms when buying home.
- Fraud for Profit: A situation where a real estate professional (appraiser, mortgage broker, etc.) commits fraud in order to extract money from a property or transaction.
Common Types of Mortgage Fraud
Mortgage transactions, which involve multiple parties and large sums of money, provide ample opportunities for fraud. Some such schemes are extremely sophisticated and unique, but the following types of mortgage fraud are the most common:
- Fraudulent Supporting Loan Documentation: Loan applicant submits forged or altered paycheck stubs, or otherwise fraudulent documentation.
- Property Flipping: A piece of real estate is purchased, promptly appraised at a falsely inflated value, and then quickly resold. The fraudulent appraisal is what makes this practice illegal, as "flipping" during a housing boom is not necessarily illegal.
- Straw Buyers: Borrower's identity is hidden through the use of a nominee, in whose name and credit history the loan application is made.
- Silent Second: Buyer takes out a second mortgage to cover the down payment on the initial loan. It is illegal because the second, smaller loan is taken out without the initial lender's knowledge.
- Stolen Identity: Mortgage loan applicant uses a fictitious or stolen identity. If stolen, the true person's name, personal information and credit history is used without their knowledge.
- Equity Skimming: An investor uses a straw buyer, false credit reports and false income documents to obtain a mortgage in the straw buyer's name. Straw buyer signs property over to investor after closing, relinquishing all property rights. Investor makes no payments but rents the property until it is foreclosed.
- Inflated Appraisal: Appraiser, colluding with the mortgage broker and/or loan officer, provides unrealistically high appraisal value in order to match the buyer's offer and complete the deal.
State Mortgage Fraud Laws
More than one-third of U.S. states, including California, Florida and New York, have laws prohibiting at least one form of mortgage fraud. The New York law (NY Penal Code, article 187), for example, defines "residential mortgage fraud" as an intentional act that involves statements that contain materially false information or that conceal information for purposes of misleading another party. The crime is prosecuted as a class A misdemeanor all the way up to a class B felony, depending on the severity of the offense.
Federal sentences tend to be more severe than state sentences for equivalent mortgage fraud convictions. Talk to a local attorney to find out more details about the laws in your state.
Civil Liability for Mortgage Fraud
Those accused of committing mortgage fraud may also be held liable for monetary damages incurred by the lender. Civil claims may be based on contractual theories, misrepresentation and/or deceit, conspiracy to defraud the lender or breach of trust. Third parties involved in the fraudulent transaction, such as mortgage brokers or appraisers, may also be liable for damages.