How to Watch Out for Mortgage Fraud

There are different types of mortgage fraud and ways to avoid it. Vitalii Vodolazskyi/Shutterstock

Mortgage fraud can devastate both individuals and financial institutions. And since a house is most people’s biggest asset, it’s essential to know and watch for red flags when approached by people who want to “help” you with loan modifications or foreclosures.

Mortgage fraud isn’t always committed by criminals. Sometimes, people commit it without realizing it. There are different types of mortgage fraud and ways to avoid it.

Mortgage Fraud Is a Growing Concern

According to HomeBuyer.com, there were 7,587,762 mortgage loan applications in 2023. With this abundance, the Federal Bureau of Investigation (FBI) has recognized mortgage fraud as a significant criminal problem.

According to the FBI, mortgage fraud schemes are initiated by different groups. They could be individuals acting alone or in collusion with borrowers, loan originators, or real estate professionals.

There are two victims in mortgage fraud. One is an individual homeowner, and the other is a financial institution. An individual may even commit mortgage fraud without realizing it.

Mortgage Fraud Targeting Homeowners

Some individuals looking for financial assistance or home loans are targeted by mortgage fraud. Fraudsters have several methods when targeting homeowners. They could offer misleading or deceptive loan terms or demand upfront fees for other services.

One service, loan modification help, can also be a scam.

When Loan Modification Help Is a Scam

You may have noticed commercials for loan modification help. Sometimes, these can be scams. Fraudsters promise to modify loans or reduce mortgage payments for a fee.

However, according to the U.S. Housing and Urban Development, Office (HUD) of Inspector General, the Federal Trade Commission prohibits loan-modification services from collecting a fee until you have a signed agreement for the modification with the mortgage lender or servicer. That means if they ask for money upfront, it’s a scam.

There are other signs that the loan modification solicitor is trying to scam you. For example, the person pressures you to sign a document before you have a chance to read or understand it. They may also tell you to start making payments to a third party other than your mortgage lender or servicer or they may tell you to stop making loan payments to your current mortgage lender.

Sometimes, they refer to themselves as a “forensic loan auditor” or “foreclosure prevention auditor” and tell you that you can sue the lender based on errors in the documents. They'll tell you that when you win, the lender must modify the loan. But there is no requirement for the lender to do this.

Beware if someone asks for your personal financial information. Only give this information to a legitimate lender or a HUD-approved counseling agency.

Another ploy is to promise help for a foreclosure in exchange for money. Unfortunately, they never deliver on this promise.

Avoid Foreclosure Rescue Scams

According to the U.S. Department of the Treasury, foreclosure rescue plans are a growing problem. They could cost you thousands of dollars or even your home.

Scammers promise to save your home or lower the mortgage. They often pretend to have direct contact with your lender, and of course, they charge you a fee.

Beware of companies or individuals that offer money-back guarantees. As soon as you pay them, they‘ll disappear, and you’ll have lost your money. Don’t listen to those who advise you to stop making your mortgage payments or discontinue contact with your mortgage lender. And unless you are working directly with your lender, don’t sign over the deed to your property.

If you’re behind on your mortgage and are at risk of foreclosure, it’s important that you contact your mortgage lender or servicer.

Mortgage Fraud to Lenders

Just like individuals may experience mortgage fraud, lenders also experience it. Sometimes, fraud is committed by individuals who don’t realize they are doing something illegal.

There are several types of this type of mortgage fraud.

Straw Buyer Misrepresents Nature of Transaction

A straw buyer acts on behalf of the true purchaser. The real buyer may have bad credit or other problems prohibiting them from obtaining credit. Once the transaction is complete, the straw buyer transfers the property title to the real purchaser.

Two Types of Income Fraud

Income fraud is when a borrower misrepresents the availability or continuity of a source of income required for the loan amount. There are two types of income fraud.

One is false stated income on the loan application. Another is misrepresentation of employment. The borrower may present fictitious proof of employment. They may provide fake pay stubs and employer documentation.

Non-Arm’s-Length Transaction

A non-arm’s-length transaction is a common type of fraud. It happens when the two parties involved in the mortgage loan have a personal relationship. This makes the lender and borrower susceptible to manipulation by the other.

Any transaction between two parties that know each other is considered non-arm’s-length. Often, there isn’t a real estate agent that would notice the familiarity between the two parties.

Penalties for Mortgage Fraud

Mortgage fraud is a serious offense and has legal consequences. There are local, state, and federal laws that hold mortgage professionals and borrowers accountable.

The consequences of mortgage fraud vary. However, according to U.S. Sentencing Commission Fraud Team data, depending on the number of victims, the average prison sentence for mortgage fraud in 2021 was 29 months. That’s down from 42 months in 2017.

Always Report Scammers

If you have been contacted by an individual or organization who makes promises and you suspect fraud, you might want to report them. You also should report it if you’ve been the victim of a scam.

The HUD Office of Inspector General can be reached at [phone] or on the HUD Inspector General website. You can also contact the Federal Trade Commission at [phone] or report the fraud on its website.

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