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Find Out if You Were
a Victim of Mortgage Fraud
Mortgage fraud may be
perpetrated by one or more participants in a loan
transaction, including the borrower; a loan officer
who originates the mortgage; a real estate agent,
appraiser, a title or escrow representative or
attorney; or by multiple parties as in the example
of the fraud ring described above. Dishonest
stakeholders may encourage and assist borrowers in
committing fraud because most participants are
typically compensated only when a transaction
closes.
Abusive or unfair
lending practices
There are many lending practices which have been
called abusive and labeled with the term "predatory
lending." There is a great deal of dispute between
lenders and consumer groups as to what exactly
constitutes "unfair" or "predatory" practices, but
the following are sometimes cited.
* Unjustified risk-based pricing. This is the
practice of charging more (in the form of higher
interest rates and fees) for extending credit to
borrowers identified by the lender as posing a
greater credit risk. The lending industry argues
that risk-based pricing is a legitimate practice;
since a greater percentage of loans made to less
creditworthy borrowers can be expected to go into
default, higher prices are necessary to obtain the
same yield on the portfolio as a whole. Some
consumer groups argue that higher prices paid by
more vulnerable consumers cannot always be justified
by increased credit risk.
* Single-premium credit insurance. This is the
purchase of insurance which will pay off the loan in
case the homebuyer dies. It is more expensive than
other forms of insurance because it does not involve
any medical checkups, but customers almost always
are not shown their choices, because usually the
lender is not licensed to sell other forms of
insurance. In addition, this insurance is usually
financed into the loan which causes the loan to be
more expensive, but at the same time encourages
people to buy the insurance because they do not have
to pay up front.
* Failure to present the loan price as negotiable.
Many lenders will negotiate the price structure of
the loan with borrowers. In some situations,
borrowers can even negotiate an outright reduction
in the interest rate or other charges on the loan.
Consumer advocates argue that borrowers, especially
unsophisticated borrowers, are not aware of their
ability to negotiate and might even be under the
mistaken impression that the lender is placing the
borrower's interests above its own. Thus, many
borrowers do not take advantage of their ability to
negotiate.
* Failure to clearly and accurately disclose terms
and conditions, particularly in cases where an
unsophisticated borrower is involved. Mortgage loans
are complex transactions involving multiple parties
and dozens of pages of legal documents. In the most
egregious of predatory cases, lenders or brokers
have been not only misled borrowers but also
actually altered documents after they have been
signed.
* Short-term loans with disproportional high fees,
such as payday loans, credit card late fees,
checking account overdraft fees, and Tax Refund
Anticipation Loans, where the fee paid for advancing
the money for a short period of time works out to an
annual interest rate significantly in excess of the
market rate for high-risk loans. The originators of
such loans dispute that the fees are interest.
* Servicing agent and securitization abuses. The
mortgage servicing agent is the entity that receives
the mortgage payment, maintains the payment records,
provides borrowers with account statements, imposes
late charges when the payment is late, and pursues
delinquent borrowers. A securitization is a
financial transaction in which assets, especially
debt instruments, are pooled and securities
representing interests in the pool are issued. Most
loans are subject to being bundled and sold, and the
rights to act as servicing agent sold, without the
consent of the borrower. A federal statute requires
notice to the borrower of a change in servicing
agent, but does not protect the borrower from being
held delinquent on the note for payments made to the
servicing agent who fails to forward the payments to
the owner of the note, especially if that servicing
agent goes bankrupt, and borrowers who have made all
payments on time can find themselves being
foreclosed on and becoming unsecured creditors of
the servicing agent. Foreclosures can sometimes be
conducted without proper notice to the borrower. In
some states there is no defense against eviction,
forcing the borrower to move and incur the expense
of hiring a lawyer and finding another place to live
while litigating the claim of the "new owner" to own
the house, especially after it is resold one or more
times. When the debtor demands that the current
claimed note owner produce the original note with
his signature on it, the note owner typically is
unable or unwilling to do so, and tries to establish
his claim with an affidavit that it is the owner,
without proving it is the "holder in due course",
the traditional standard for a debt claim, and the
courts often allow them to do that. In the meantime,
the note continues to be traded, its physical
whereabouts difficult to discover. |
Examples of mortgage fraud
Occupancy fraud: This occurs where the borrower
wishes to obtain a mortgage to acquire an investment
property, but states on the loan application that the
borrower will occupy the property as the primary residence
or as a second home. If undetected, the borrower typically
obtains a lower interest rate than was warranted. Because
lenders typically charge a higher interest rate for
non-owner-occupied properties, which historically have
higher delinquency rates, the lender receives insufficient
return on capital and is over-exposed to loss relative to
what was expected in the transaction. In addition, lenders
allow larger loans on owner-occupied homes compared to loans
for investment properties. When occupancy fraud occurs, it
is likely that taxes on gains are not paid, resulting in
additional fraud. It is considered fraud because the
borrower has materially misrepresented the risk to the
lender to obtain more favorable loan terms.
Income fraud: This occurs when a borrower overstates
his/her income to qualify for a mortgage or for a larger
loan amount. This was most often seen with so-called "stated
income" mortgage loans (popularly referred to as "liar
loans"), where the borrower, or a loan officer acting for a
borrower with or without the borrower's knowledge, stated
without verification the income needed to qualify for the
loan. Because mortgage lenders have begun to tighten
underwriting standards and "stated income" loans are less
available, income fraud is increasingly seen in traditional
full-documentation loans where the borrower forges or alters
an employer-issued Form W-2, tax returns and/or bank account
records to provide support for the inflated income. It is
considered fraud because in most cases the borrower would
not have qualified for the loan had the true income been
disclosed. The "mortgage meltdown" was caused, in part, when
large numbers of borrowers in areas of rapidly increasing
home prices lied about their income, acquired homes they
could not afford, and then defaulted.
Employment fraud: This occurs when a borrower claims
self-employment in a non-existent company or claims a higher
position (e.g., manager) in a real company, to provide
justification for a fraudulent representation of the
borrower's income.
Failure to disclose liabilities: Borrowers may
conceal obligations, such as mortgage loans on other
properties or newly acquired credit card debt, to reduce the
amount of monthly debt declared on the loan application.
This omission of liabilities artificially lowers the
debt-to-income ratio, which is a key underwriting criterion
used to determine eligibility for most mortgage loans. It is
considered fraud because it allows the borrower to qualify
for a loan which otherwise would not have been granted, or
to qualify for a bigger loan than what would have been
granted had the borrower's true debt been disclosed.
Fraud for profit: A complex scheme involving multiple
parties, including mortgage lending professionals, in a
financially motivated attempt to defraud the lender of large
sums of money. Fraud for profit schemes frequently include a
straw borrower whose credit report is used, a dishonest
appraiser who intentionally and significantly overstates the
value of the subject property, a dishonest settlement agent
who might prepare two sets of HUD settlement statements or
makes disbursements from loan proceeds which are not
disclosed on the settlement statement, and a property owner,
all in a coordinated attempt to obtain an inappropriately
large loan. The parties involved share the ill-gotten gains
and the mortgage eventually goes into default. In other
cases, naive "investors" are lured into the scheme with the
organizer's promise that the home will be repaired, repairs
and/or renovations will be made, tenants will located, rents
will be collected, mortgage payments made and profits will
be split upon sale of the property, all without the active
participation of the straw buyer. Once the loan is closed,
the organizer disappears, no repairs are made nor renters
found, and the "investor" is liable for paying the mortgage
on a property that is not worth what is owed, leaving the
"investor" financially ruined. If undetected, a bank may
lend hundreds of thousands of dollars against a property
that is actually worth far less and in large schemes with
multiple transactions, banks may lend millions more than the
properties are worth. The Robert Douglas Hartmann case is a
notable example of this type of scheme.
Appraisal fraud: Occurs when a home's appraised value
is deliberately overstated or understated. When overstated,
more money can be obtained by the borrower in the form of a
cash-out refinance, by the seller in a purchase transaction,
or by the organizers of a for-profit mortgage fraud scheme.
Appraisal fraud also includes cases where the home's value
is deliberately understated to get a lower price on a
foreclosed home, or in a fraudulent attempt to induce a
lender to decrease the amount owed on the mortgage in a loan
modification. A dishonest appraiser may be involved in the
preparation of the fraudulent appraisal, or an existing and
accurate appraisal may be altered by someone with knowledge
of graphic editing tools such as Adobe Photoshop.
Cash-Back Schemes: Occur where the true price of a
property is illegally inflated to provide cash-back to
transaction participants, most often the borrowers, who
receive a "rebate" which is not disclosed to the lender. As
a result the lender lends too much, and the buyer pockets
the overage or splits it with other participants, including
the seller or the real estate agent. This scheme requires
appraisal fraud to deceive the lender. "Get Rich Quick"
real-estate gurus' courses frequently rely heavily on this
mechanism for profitability. |
