Watch Out For These Types of Mortgage Fraud
Mortgage fraud is a crime involving efforts to deceive lenders with false or misleading information. Depending on who’s doing the deceiving, consumers can be either perpetrators or victims of mortgage fraud. People engaged in mortgage fraud use illegal tactics and false information to steal money or home equity, or to gain access to housing.
Mortgage fraud investigations have declined continuously since 2010, but the FBI still investigated over 600 cases in 2017. Here’s what you need to know to protect yourself and your finances.
What are the most common types of mortgage fraud?
Broadly speaking, mortgage fraud falls into two categories: fraud for profit and fraud for housing. It’s important to understand both types of fraud.
Mortgage fraud for profit
Mortgage fraud for profit occurs when a mortgage industry insider steals money or home equity from either a lender or a consumer. Here are some common mortgage-fraud-for-profit schemes:
Sale-leaseback schemes. In a leaseback scheme, fraudsters convince homeowners facing foreclosure to transfer a deed to an “investor.” Perpetrators may lie and tell homeowners they can buy the property back after making timely rent payments. In most cases, the investor isn’t real and the property ends up in foreclosure.
A huge red flag is when a so-called lender or investor asks you to sign over the title to your home. When you give up the title to your home, you’re giving up the legal right to your home, and the investor may not sell it back to you. “These investors don’t have your best interest at heart, and you’re giving up your house,” warned Kim Cole, community engagement manager for Navicore Solutions, a nonprofit credit counseling agency.
Loan modification fraud. Another scheme that preys on struggling homeowners is loan modification fraud. Scammers promise to renegotiate the terms of a loan and save the house, but they charge huge fees to make it happen. “We’ve seen people pay $10,000 to a third party when they were only $12,000 behind on their mortgage,” Cole said.
If you want to modify your loan, it’s always possible to work with a (U.S. Housing and Urban Development) HUD-approved counselor who specializes in preventing foreclosure. These counselors do not charge for their services and can help you decide whether a mortgage product makes sense for you.
Home equity conversion mortgage (HECM) scams. A HECM allows borrowers over the age of 62 to tap into their home equity without losing their home. HECMs are legitimate loan products, but scammers can use them against borrowers. In a HECM scam, a fraudster convinces a senior to take out a reverse mortgage — which is a legitimate product — but the fraudster keeps some or all of the loan proceeds.
If you’re having trouble paying your mortgage, you’re more likely to become a victim of these types of fraud.
“When people are desperate, that’s where these fraudsters come out,” said Ira Rheingold, executive director of the National Association of Consumer Advocates (NACA) in Washington, D.C. “Everyone and their brother comes out to take advantage of you. You may have had an economic or health crisis that makes you vulnerable or desperate, and that’s when you really need to look out.”
Mortgage fraud for housing
Mortgage fraud for housing happens when a homeowner or an aspiring homeowner takes illegal actions to buy or keep a house. Some illegal actions include:
Overstating income. It’s illegal to lie about your income or create fake earnings records. You may be able to submit alternative income documentation such as bank statements rather than pay stubs and tax returns, but the documentation must be real.
Influencing appraisers. Any attempt to influence an appraiser’s valuation of a home is illegal.
Silent seconds. Lenders may allow borrowers to take out second mortgages to cover a down payment. However, these second mortgages must meet strict criteria. Additionally, all loans have to be recorded in the lender’s documentation. Taking out a down-payment loan and not telling the lender is illegal.
Is this mortgage offer legit? How to spot mortgage fraud
Mortgage fraud can be tough to spot, but “HUD-certified counseling agencies are always a free resource to check it out,” Cole advised. “A HUD counselor will offer a free opinion on the legitimacy and value of any program.”
These are a few indicators that someone could be scamming you:
- Not asking for documentation. Mortgage lenders need to know your income, your credit history and the value of the home to underwrite a mortgage for you. If a lender doesn’t ask about those things, they are probably a fraudster.
- Advance fees. Advance fees often indicate that a so-called broker or real estate investor is trying to rip you off. Real mortgage professionals will not accept payments for loan modifications until the new loan goes through. “Run away if someone wants an upfront fee or offers to make payments for you,” Rheingold advised.
- Guarantees of success. A fraudster might promise to modify a loan, before they have real information. A real lender may be able to help you, but they will not guarantee a successful outcome. Lenders have to look at your income, assets and credit before making a loan.
- Advice to stop paying. “If you’re current on your mortgage, and someone advises you to stop making payments, this is a red flag,” Cole said. “Stay in communication with your lender and continue making payments as long as you can.” If you’ve missed a mortgage payment or may fall behind on your mortgage, Rheingold advised speaking directly with your loan servicer about a loan modification. And HUD-approved housing counselors can help you modify your loan for free.
What to do if you suspect mortgage fraud
If you suspect mortgage fraud, consider taking the following actions:
- Enlist the help of a housing counselor. Every mortgage borrower needs someone on his or her side to be sure they aren’t getting ripped off. A HUD-approved housing counselor can help you understand your loan contract for free.
- Continue communicating with your lender. Fraudsters prey on vulnerable people who are struggling with their mortgage payments. They may try to drive a wedge between you and your loan servicer. “If you’re struggling with your mortgage, contact your loan servicer immediately,” Rheingold advised. “The further you are behind, the more difficult it becomes to modify your loan.”
- Walk away. “There is such a thing as ‘too good to be true,’” according to Cole. “If your intuition says it’s fraud, don’t work with that person. Instead, work with someone you trust.”
- Find legal representation. If you’ve already been the victim of mortgage fraud, you may be able to get some sort of financial compensation, especially if you can prove there was misrepresentation of facts. Low-income people may be able to find help through local legal aid services. Those who can pay a lawyer can reach out to attorneys through NACA.
The bottom line
If you’re desperate for a mortgage or a loan modification, you could become a victim of mortgage fraud. Don’t be afraid to ask a housing counselor for help if you don’t understand a loan or a loan modification program. Even more important, trust your instincts. If something seems too good to be true, it probably is.