Mortgage Lender Fraud: A Growing Concern for Homebuyers

Purchasing a home, whether as a residence or an investment, is a complex process, even for the savviest of buyers. Adding to the stress are various fraudulent attempts that have increased in numbers over the years.

High interest rates, poor credit histories, and greater technological interventions have all contributed to a growing wave of scams, especially when it comes to mortgages. Although the schemes targeting financial institutions often grab media attention, borrowers are just at risk of encountering fraud.

According to Federal Trade Commission (FTC) reports, advance fee loan scams alone siphoned $75 million from victims in 2023. But such predatory lending practices that exploit the vulnerable are nothing new. They’ve existed for centuries, or even longer. What has changed is the level of sophistication and the tools and techniques adopted to defraud people.

If you’re planning to buy a property any time soon, knowing the fraud risks attached to a mortgage is critical for sidestepping costly trouble. So, let’s take a deep dive into mortgage lender frauds and how you can protect yourself against them.

Types of Mortgage Lender Scams

From first-time property buyers to seasoned investors, anyone can get scammed during the various stages of the mortgage process.

The mortgage fraud schemes that frequently target homebuyers include:

• Loan Flipping

This is a common mortgage loan fraud involving repeated refinancing of a property. Also called churning, it allows dishonest lenders to profit from recurring loan fees.

• Advance Fee Scam

Upfront payments to receive information or submit a loan application are a sure sign of a scam, particularly when they’re involved in the early stages of the mortgage process.

• Foreclosure Rescue Scheme

Under the guise of helping a borrower avoid foreclosure, unscrupulous loan officers could scam victims by charging extra fees or getting the title transferred to them.

• Information Phishing

Shady actors could steal a borrower’s social security number, bank account details, and other identifiable and sensitive data that can be useful for committing financial crimes.

• Reverse Mortgage Loan Fraud

In this type of scam, lenders charge unnecessary fees or tie homeowners into an inflated loan amount by overvaluing their home’s property value. Elderly homeowners are particularly vulnerable to such schemes.

Spotting Mortgage Loan Scams: The Telltale Signs to Know

According to mortgage industry insiders, the following practices could often serve as red flags of a fraudulent financial institution, lender, or mortgage broker.

• Unusually attractive terms, such as below-market rates and guaranteed mortgage loans.
• Willingness to offer a mortgage to a loan applicant despite a low credit score.
• Limited-time offers that put pressure on potential borrowers to close the mortgage transaction in a hurry.
• Vague lending information about the exact terms and payment process.
• Reluctance to provide a good faith estimate (GFE) or the issuance of a GFE that seems different from what is given by the U.S. Department of Housing and Urban Development.

• Overly high balloon payments to be paid at the end of the loan payment period.
• Requests for unnecessary personal information that could expose you to identity theft.
• Exclusion of prepayment options such as purchasing points.
• Penalties for prepayment of the loan.
• Advance fees for providing information and processing the mortgage application.
• Unethical practices such as appraisal fraud or the willingness to turn a blind eye to forged loan documentation that indicates a significantly higher sales price.

How Can You Protect Yourself From Shady Lenders and Mortgage Brokers?

Here’s what you can do to separate the shifty actors in the industry from the reliable lenders and brokers.

• Clarify Information

Loan applicants have a responsibility to ensure they understand the loan transaction process. So, ask the loan officer about their terms, rates, fees, penalties, prepayment options, and other details to seek clarification in advance.

• Be Skeptical About Exceptionally Lucrative Deals

Most naive real estate investors fall for too-good-to-be-true offers that are often available for a limited time. But these are tricks dubious lenders rely on to defraud unsuspecting borrowers.

• Compare Rates and Terms

Assess your mortgage options to get an idea about the general market terms and rates and the amount you can borrow. Don’t hesitate to get a second opinion if you have industry contacts.

• Get to Know Who You’re Dealing With

If you’re approached by an unknown lender, reverse search their contact details on Nuwber to learn more about them. You should also research them online, read reviews, and look them up in the Better Business Bureau directory. 

• Read the Small Print

Never place your signature on a document before reading it carefully. Seeking support from a certified mortgage professional and an attorney is best so you could review all materials in detail.  

• Keep Your Personal Data Safe

Certain documents, like bank statements, are required for processing a loan. However, avoid disclosing unnecessary details that could compromise your personal safety.

To Conclude

Deceptive lenders commit mortgage fraud and dupe innocent borrowers in a variety of ways. They could add undisclosed fees, charge upfront payments, or phish for sensitive data in the guise of helping you secure a loan.

Sometimes, they may even convince you to misrepresent information by, for example, lying about your income or putting forward a fraudulently inflated appraisal.

Falling for such practices could have costly repercussions that could impact your financial standing and, in some instances, get you tied up in criminal cases.

Although it’s difficult to entirely prevent mortgage fraud, you can protect yourself against it by taking precautionary measures.

Asking questions and carefully reviewing documents to understand the finer details of the loan process and agreement is one critical step. You must also rely on sufficient research to select a reputed lender in the mortgage banking industry and compare rates and terms to get an idea of the options available to you.

FAQ

What types of mortgage fraud are committed by borrowers?

Straw buyer schemes are one of the most common mortgage fraud types reported nowadays. In this scam, straw buyers purchase the property on behalf of someone else, often an individual with a bad credit history.

Occupancy fraud occurs when a person falsely claims to buy a house as their primary residence instead of an investment property. This allows them to obtain favorable bank status.

Some homeowners resort to buy-and-bail borrower schemes when their home value drops below the owed amount. In such moments, the borrower may take out a new mortgage for a house bought at a lesser price and allow the old one to go into foreclosure.

What is meant by mortgage fraud for housing vs. fraud for profit in the mortgage industry?

Fraud for housing is typically committed by home buyers to fraudulently acquire the ownership of a property.

For example, a person could lie about their income (also known as income fraud), falsify documents, use a stolen identity, or misrepresent their asset ownership details to improve their chances of obtaining a mortgage and, thereby, purchasing a house.

In mortgage fraud for profit, bad actors manipulate the mortgage lending process for monetary gains. Shady loan originators, brokers, appraisers, real estate agents, and homebuyers could all be behind this type of deception. Property flipping at an artificially inflated price is a good example of it.

How does an air loan work?

An air loan is a mortgage scam that targets lenders with a fictitious real estate transaction. It’s an elaborate scheme where an unscrupulous individual disguised as a broker arranges the purchase of a non-existent house on behalf of a non-existent borrower to profit from the arrangement.

To make the fraudulent transaction successful, they’ll go to great lengths to falsify each small detail by, for example, creating fake identities and forging employment records, title histories, and appraisal reports.

Ultimately, there’s no real borrower to make the payments. So, the lender loses out when the mortgage goes into default. And since the property doesn’t exist, either, they won’t have any collateral to recover losses.

How could I protect myself from dubious real estate agents?

It’s not just lenders and brokers who could defraud you when it comes to real estate transactions. Even dishonest real estate agents could trick you if you’re not careful.

They might, for example, represent both the buyer and the seller and propose artificially inflated prices to house hunters to boost their commission. Wire fraud and fake listings are common, too.

To avoid these, you must always do sufficient research and verify key information, such as market prices and title histories.

Don’t forget to ask around for recommendations when selecting a real estate agent and check their past track record to ensure they are legitimate.

What should I do if I fall for a mortgage fraud?

Reporting scams to the relevant authorities is critical whether you’ve fallen victim or suspect a fraudulent attempt.

To begin with, alert your local law enforcement agency. The Federal Bureau of Investigation, FTC, and Consumer Financial Protection Bureau also investigate mortgage fraud. So, informing them could be useful, too.

Then, speak to a HUD-certified loan counselor and attorney for advice on options available to you.

In addition, talk about the incident with friends and family and share it on social media. This could help others avoid such scams and, hopefully, catch the fraud perpetrators.

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