Every year, mortgage fraud and predatory lending affect tens of thousands of American borrowers and homeowners. Their collective impact is remarkably diffuse. First-time home-buyers, longtime homeowners, and retirees who own their homes free and clear are all at risk of falling victim to various mortgage fraud schemes.
It's essential that homeowners, home-buyers, and honest real estate professionals take steps to recognize and avoid common instances of mortgage fraud. Whereas some types of fraud may be initiated by devious home-buyers or criminal conspiracies bent on laundering illicit profits through real estate transactions, some of its most systematic and damaging iterations may be perpetrated by slick, seemingly buttoned-up lenders.
Shady Loans and False Statements
While many instances of lender-initiated mortgage fraud don't appear to be illegal at first glance, they generally have an unethical sheen that should raise a red flag in the minds of prospective borrowers.
For instance, tempting "no-money-down" loans may feature cripplingly high interest rates that become unmanageable for borrowers of modest means. Similarly, mortgage loans that don't require a credit check often carry outrageous back-end fees that borrowers can't possibly afford. Some lenders blatantly conceal the true lifetime cost of a loan in dense layers of legalese and use pressure tactics to entice borrowers who don't fully comprehend the nature of the agreement to accept an "expedited" closing process.
Other examples of mortgage fraud are more clear-cut. Some brokers may convince or even bribe prospective home-buyers into concealing the origin of their down payment or misrepresenting their income or employment status. Borrowers who agree to do so may be regarded as complicit in any crimes that are subsequently found to have occurred.
"Fill-in-the-Blanks" Agreements
Some lenders and brokers are even more brazen in their attempts to ensnare borrowers in fraudulent mortgage schemes. Despite seemingly obvious risks, many borrowers are compelled to sign mortgage agreements with blank sections or lines. After securing the victim's signature, the perpetrator of this type of fraud may add language that increases the lifetime cost of a loan.
In some cases, lenders or brokers bury these blank spaces deep within the body of the agreement and rely on the reluctance of harried borrowers to read through the entire document. In others, they may resort to pressure tactics or convincing sell jobs to convince borrowers that "fill-in-the-blanks" mortgages lack risk. Of course, borrowers should avoid signing any incomplete mortgage documents.
Reverse Mortgages
Reverse mortgages are a fast-growing subset of lender-initiated mortgage fraud. Typically used as home equity loans for homeowners who have paid off their mortgages in full, reverse mortgages are not inherently illegal. However, they often carry hefty upfront fees and high interest rates that can dramatically increase the total cost of the loan over time.
Since reverse mortgage companies make monthly payments to their clients, homeowners who take out these loans might not recognize that they're being cheated until they're deep in debt. Although it's difficult to generalize about different types of reverse mortgages, homeowners should be wary of private lenders who use diversionary or high-pressure tactics to encourage borrowers to close deals quickly. Many financial experts encourage prospective reverse mortgage holders to deal exclusively with low-interest, government-administered refinancing programs.
Refinancing and Modification Scams
Struggling borrowers who face foreclosure or bankruptcy may be inclined to believe the rather transparent lies of scam artists who administer fraudulent loan modification and refinancing programs. In many cases, refinancing scams are breathtakingly simple: They may be perpetrated by fly-by-night operators who promise meaningful monthly payment reductions in exchange for an upfront fee and then disappear without holding up their end of the bargain.
More complex refinancing scams may require homeowners to transfer their title deeds to their refinancing agent. These scams generally end when agents sell their clients' homes to settle their delinquent mortgage debts and then pocket the proceeds. It goes without saying that homeowners who would like to remain in their homes should never sign over their homes to any organization that promises mortgage relief. Direct negotiations between borrowers and lenders generally offer the quickest and most effective path to sustainable refinancing that reduces the risk of foreclosure.
Final Thoughts
Although it can be difficult for cash-strapped borrowers and homeowners to resist the seductive promises of shady lenders and brokers, avoiding mortgage fraud is not overly difficult. An old adage may be useful here: If it sounds too good to be true, it probably is.
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