In the aftermath of the mortgage crisis of the late 2000s, the broad ecosystem of mortgage fraud has been the subject of much scrutiny and hand-wringing. Generally committed by home-buyers or mortgage brokers against banks and other loan initiators, mortgage fraud is a fairly common form of criminal activity that saps mortgage lenders' profits to the tune of billions of dollars per year. Mortgage fraud also indirectly hurts honest borrowers and brokers by making lenders more wary of their motives.
Mortgage Fraud: A Basic Framework
Mortgage fraud comes in many different forms that share several points of commonality. For starters, these schemes all involve misrepresentation or outright fraud on the part of an individual or conspiracy. Since it generally involves willful deception of national or regional lenders that operate in multiple legal jurisdictions, mortgage fraud is a federal felony that's punishable by steep fines and lengthy jail sentences.
Freddie Mac separates mortgage fraud into three basic categories. Each sub-type can take a number of related forms.
Generally committed by borrowers and sometimes abetted by real estate brokers, housing fraud involves the willful submission of falsified income statements, asset holdings or employment documents to mortgage lenders in order to obtain extravagant or otherwise unaffordable housing.
Although this is a relatively small-scale form of mortgage fraud, its perpetrators are far more likely than regular borrowers to default on their obligations. Housing fraud is often committed by those who have recently been terminated by their employers. Others may misrepresent their income or employment status for the purposes of obtaining a large mortgage on a valuable house that can quickly be "flipped" for a profit.
Criminal Enterprise Fraud
Often perpetrated by real estate brokers or loan officers, this type of fraud can build huge conspiracies that may defraud lenders of millions of dollars. In typical cases, multiple sellers receive kickbacks for overvaluing their properties' sale prices. At the same time, complicit "straw buyers" provide fraudulent income statements to obtain loans based on these valuations. These buyers generally receive fees for their participation as well. Meanwhile, property appraisers are paid to conduct fraudulent pre-sale appraisals that conceal the fraud. To maximize their profit potential, these schemes generally involve high-value properties.
"Shotgunning" is recognized as a smaller-scale version of this broad type of mortgage fraud. Unlike large-scale "fraud for profit" schemes, shotgunning is generally the work of an enterprising individual or couple. "Shotgunners" earn a profit from their borrowing activities by obtaining multiple loans on the same piece of property. Ultimately, they may borrow far more than the property's value would normally allow and pocket the proceeds. When a shotgunning scheme collapses or becomes apparent to investigators, the perpetrator's junior creditors are often forced to take significant losses.
Money Laundering Fraud
This type of mortgage fraud generally stems from a broader criminal conspiracy. In many cases, drug traffickers and other black market operators choose to leverage their illicit earnings for additional profit by laundering them through large-scale real estate investment schemes. This may require the consent of a real estate broker or loan officer who accepts large amounts of illegally obtained cash to fund a mortgage's down payment.
In most cases, conspirators resell the properties that they obtain through money laundering mortgage fraud without fraudulently inflating their values. These individuals or groups typically attract attention by purchasing and flipping multiple properties at once without making significant improvements to them.
Mortgage fraud is a complex and fast-growing area of jurisprudence. Although larger and more financially damaging conspiracies can be quite complex and difficult to pull off, more simplistic instances of housing fraud or shotgunning can be accomplished by individual actors.
Fortunately, recognizing telltale signs of mortgage fraud is not rocket science. Vigilant actors who subject income statements, employment records, and other key pieces of information to careful scrutiny may put themselves in a position to prevent or uncover the commission of a serious crime. In our next post, we'll explain how to keep your home -- and yourself -- safe from dangerous mortgage fraud.
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