Signs of Mortgage Fraud
Did you know that financial crimes are one of the fastest growing areas of illegal activity in America today? And that among them, mortgage fraud is at the top of the list? So what is mortgage fraud and what are some common “red flags” that indicate fraudulent activity?
Basically, mortgage fraud requires two parties: the first party makes a false statement, and the second relies on it to conduct a mortgage transaction. For example, a homebuyer may provide a mortgage lender with misleading or outright false information that causes the lender to approve the loan or give the buyer more favorable loan terms than would have been possible otherwise.
Mortgage fraud is not only prevalent; it’s expensive. According to experts, about 25% of all foreclosures are due to fraud. And each fraudulent mortgage costs the mortgage lender 37% of the loan amount. So for every $100,000 loaned, that’s a $37,000 loss.
Even if the borrower intends to pay off the mortgage, if it was obtained under false pretenses, it’s still fraud. One common example is a borrower who finances an investment property, but states that it’s the borrower’s primary residence. Mortgage lenders charge more to finance investment properties because they are riskier loans. In this scenario, the lender gives the borrower loan terms that would never have been offered if the lender knew the borrower’s true intentions.
Here are other, common examples of mortgage fraud:
· Sales price above fair market value: Why would a buyer pay more than a home is worth on today’s market? It can happen, when the buyer and seller is collaborating in fraudulent activity.
· Sales commissions too high: Why would a buyer be willing to pay a higher-than-normal commission to a real estate agent? Again, it’s a possible sign that there’s fraud behind the scenes. (Of course, a buyer can pay a higher commission for other reasons as well; it’s just a warning sign that would be wise to heed.)
· Inflated appraisal of home value: An appraiser may collaborate with the buyer to provide a misleading appraisal to the lender. One common scenario involved property flipping: a property is purchased and then appraised at a fraudulent level. The property is then sold quickly at this inflated price.
· Stolen identity: A borrower may use a stolen (or fictitious) identity on the mortgage application. Victims of identity theft will have their name, personal information and credit history stolen and used without their knowledge.
· Straw buyer: The mortgage is obtained using someone’s name and credit history other than the true buyer’s.
Just being aware of these possible red flags will make you more prepared for the homebuying process. Ask questions, get involved, and make the effort to understand the process when buying a home.