How to Spot the 8 Most Common Types of Mortgage Fraud

While digital tools and technology have made buying or selling a home easier than ever, they have also increased the risk of fraud and financial or reputational loss for everyone involved. For nearly two decades, criminals have been exploiting these innovations and profiting from the home buying and selling process. One particularly insidious way they do this is through mortgage fraud. 

Since 2007, mortgage fraud incidence rates in the U.S. have steadily risen. In 2009, the Financial Fraud Enforcement Task Force was created to help address this worrisome trend. According to the FBI, mortgage fraud costs the U.S. between $1-10 billion per year. The most recent reports estimate that there was a 40% increase in mortgage fraud incidences from 2020-2021.

As you operate your real estate business, it’s important to be aware of the most common types of fraud occurring in the mortgage industry today. Armed with this knowledge, you’ll be able to protect yourself and your clients while also stopping criminals in their tracks.

In this article:

• What Is Mortgage Fraud?
• 8 Types of Mortgage Fraud
• How to Protect Your Business from Mortgage Fraud

What is mortgage fraud? 

While it can take many forms, mortgage fraud typically involves someone attempting to obtain a mortgage loan or ownership of a property by intentionally making false statements, providing false information, or presenting fraudulent documents.

Industry professionals have broken mortgage fraud down into two primary categories:

• Fraud for housing: Criminals commit material misrepresentation by pretending to be legitimate borrowers and presenting false information, such as misrepresented income or assets on a loan application. In other cases, criminals try to secure better terms by manipulating an appraiser to receivein the hopes of receiving a lower- or higher-than-accurate appraised value for a property.
• Fraud for profit: Criminals manipulate specific aspects of the mortgage lending process to steal cash or equity from lenders or homeowners. They will typically present illegal foreclosure relief, debt management terms, or predatory loans with excessive rates and penalties. 

While some fraud attempts seem easy to spot, criminals have become more sophisticated in how they operate.

Creating Fake Websites

Fraudsters will create fake websites that impersonate legitimate lending or mortgage companies to trick users into providing sensitive data. They will oftentimes pose as legitimate professionals by finding their names and other publicly available details. They will then use the fake website and identity to trick people. They will often use methods meant to seem either enticing or urgent, such as offering loan modifications, informing people they can stop making payments to their current loan, or telling someone that they need to make a payment immediately. These are all tactics to get your money or personal information.

Stealing Identities 

Fraud can also occur when criminals steal identities of buyers and sellers. Identities can be stolen through various means, including obituaries, mail theft, employment or credit card applications, or computer hacking. Once they have obtained their victim’s identity, they impersonate the home buyer or seller using verifiable identities and documents to obtain mortgage loans.

Performing Business Email Compromise

Business email compromise is a social engineering scam that occurs when a fraudster impersonates someone high up in a company, such as the CEO, and emails a lower-level employee, usually in the finance department. Using a spoofed email, they request that the employee send them a large sum of money. From the finance department’s perspective, these requests seem completely legitimate, but they are actually wiring money straight into the fraudster’s account.  

Manipulating Digital Faxes

Traditional fax machines are phasing out of use, but many businesses still have access to electronic fax accounts that, when breached, can be used by criminals to collect or send fraudulent mortgage payoff instructions to participants in real estate transactions. 

8 Types of Mortgage Fraud

Here are eight more common types of mortgage fraud you and your team may encounter. Protect your assets by understanding how each works: 

1. Property Flipping: A property is bought below market value and is immediately sold for profit without any renovations. The scammer will use an inflated appraisal provided by a corrupt appraiser.
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2. Asset Rental: A borrower manipulates the mortgage qualification process by borrowing money or renting assets to falsely appear more qualified for a mortgage. After the mortgage is funded, the assets or money are returned.
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3. Equity Skimming: A buyer purchases a home with the assistance of a “straw buyer,” or someone who buys the house on an investor’s behalf. They use fake documents to secure a mortgage. The investor then rents the property without making mortgage payments, making a profit from the rental income. This scam can continue for several months until the property is eventually foreclosed.
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4. Mortgage Payoff: A criminal impersonates a mortgage servicer and sends wiring instructions to a title company. They typically create a false sense of urgency that can make those involved in the transaction overlook otherwise suspicious details. As a result, title companies transfer money to the criminal’s bank account rathr than the bank that is actually owed the funds. 
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5. Foreclosure Scams: Predatory lenders mislead borrowers into believing they can save their homes from foreclosure by transferring the deed to a third-party investor. The lenders then sell the house and keep the money for themselves. The homeowners may believe they can rent and repurchase the house once their credit improves. What usually happens is that the fraudsters default on the mortgage payments and the home is repossessed. 
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6. False Identity Usage: A criminal commits identity theft and takes out a loan using the victim’s personal and financial information. Using Social Security numbers, pay stubs, and other legal documents, they obtain a mortgage through fraudulent activity and purchase a home.
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7. Inflated Appraisals: Corrupt appraisers will conduct a false appraisal. They may undervalue a property so that an investor can buy it at a lower price. The more common occurrence is when the appraiser overvalues a property so the seller can get a higher price. The appraiser receives a higher commission, sharing in the profits.

8. Occupancy Fraud: Borrowers will lie about the home's occupancy status, falsely claiming that it will be owner-occupied. This type of fraud can help the borrower secure better interest rates, since lenders typically give better rates to owner-occupied homes than investment properties.    

Mortgage fraud is serious and, if fraudsters are caught, the penalties can be steep. Penalties can include a prison sentence of up to 30 years, a fine of up to $1,000,000, and/or restitution to the harmed party.   

How to Protect Your Business from Mortgage Fraud

Real estate fraudsters seek easy marks that fail to follow security best practices. That’s why it's vital for your business to follow these practices and offer your customers access to a platform such as CertifID that delivers end-to-end encryption.

Want to learn more about real estate fraud and how you can better protect yourself and your customers? Download CertifID’s free whitepaper, Mortgage Payoff Fraud Is Rising: Here's How to Protect Your Business.

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