It is a big deal. So-called "creative financing" went out in the 1970s, along with bell bottoms. If the lender subsequently discovers any part of your loan application is false, not only can it demand immediate full payment of your loan, but you could pay six-figure fines, find FBI ringing your doorbell and / or go to jail.
What Constitutes Mortgage Loan Fraud
Here are a few examples of common mortgage fraud:
- Undisclosed kickbacks.
If you strike a deal with a home seller to give you a big wad of cash or to slip a check across the closing table, say, to pay for a new roof, and if the lender doesn't know about it -- because it's not disclosed in the purchase contract nor addendum nor your estimated closing statement -- it's mortgage fraud.
- Silent second mortgage.
A borrower without a down payment can commit mortgage fraud by borrowing the down payment from the seller in exchange for giving the seller a silent second mortgage, which is unrecorded (or records after closing) and hidden from the lender.
- Falsifying employment income.
Stated income loans were originally created for self-employed individuals whose income is difficult to verify, but some employed borrowers inflate their income above and beyond a W-2.
- Non-owner occupant claiming occupancy.
Lenders offer higher interest rates and less favorable terms to non-owner occupants because the lender's risk is higher. If you don't intend to live in the property, don't promise that you will.
- Down payment gifts you will repay.
Both parties, the giver and the recipient, commit loan fraud if the gift is to be repaid. Gifts cannot be repaid.
- Inflated purchase price.
If you have two purchase contracts and send the false contract with the higher sales price to the lender in hopes of obtaining a higher appraisal, it's mortgage fraud.
- Falsifying deposits.
Dishonest borrowers who do not have an earnest money deposit might state in the contract that the deposit was paid outside of escrow, which is fraudulent.
Professional Mortgage Fraud
Length of time in the business is no guarantee that your "trusted adviser" isn't a crook. A Pennsylvania mortgage broker got 30 years behind bars after defrauding more than 800 borrowers in a Ponzi scheme, which somehow kept all the balls in the air for 20 years. A Kansas City, Missouri, appraiser pleaded guilty to mortgage fraud and was sentenced to 20 years in prison, plus a $500,000 fine. Schemes are happening every day. The newspapers are filled with similar stories.
Mortgage Fraud in Sacramento, California
I helped a young couple buy a home in Sacramento, CA, that had gone into foreclosure and, by accident, stumbled upon a mortgage fraud scheme. It wasn't too difficult to piece together the previous scenario.
Let's say it last sold in November for $600,000. The listing agent was a mortgage broker with no traceable track record of selling real estate. He also represented the buyer. Although I possess no concrete knowledge that the mortgage broker arranged the financing, it would seem likely, given the fact that arranging loans was his primary business.
I'd venture to guess that earning both sides of the real estate commission, plus pocketing the loan points -- the sum of which easily totals more than $40,000 -- could have been the monetary factor for mortgage fraud.
The home was listed for four months without any offers at $550,000, but it suddenly sold at $600,000 -- in a buyer's market when property values were falling, not rising. The buyer never occupied the property at closing but instead rented it out.
The $50,000 difference lined the pockets of somebody. Could be the mortgage broker, the appraiser, the seller, the buyer or all four of them.
The buyer collected rent and never made one mortgage payment on his 100%-financed loans totaling $600,000. This was easy to figure out because a November closing meant the first mortgage payment was payable in January. Lenders typically wait two to three months after borrowers default before filing the Notice of Default.
In March, a Notice of Default was filed, and the home was foreclosed upon in June. The lender evicted the tenants and put the home on the market in July. My buyers purchased this home in August for about $400,000.
If You Suspect Mortgage Fraud
If you are approached by a real estate professional who asks you to be part of a mortgage fraud scheme, report the perpetrators to the FBI. Remember, if it sounds too good to be true, it is likely a scam. Moreover, know that mortgage fraud is a prosecutable crime and against the law. If you suspect that you are being asked to break the law, at the very least, talk to a reputable real estate lawyer or the licensing authority in your state before moving forward with your plans.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.