Those who commit mortgage fraud may be subject to prosecution, either for “fraud for housing” or “fraud for profit.” Here’s how to spot them.
December 11, 2023
SVP of Growth at Aura
Jason Fragoso is SVP of Growth at Aura. As a father of two he cares deeply about creating a safer internet for all families.
Reviewed by
Aura Cybersecurity Editor
Alina Benny is an Aura authority on internet security, identity theft, and fraud. She holds a bachelor's degree in Electronics Engineering from the Cochin University of Science and Technology and has nearly a decade in content research. Twitter: @heyabenny
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See pricing Share this:Mortgage fraud is the deliberate misrepresentation of information by either borrowers or lenders to obtain financing. As such, those who commit mortgage fraud may be subject to prosecution, either for “fraud for housing” or “fraud for profit.”
In fraud for housing schemes, scammers unlawfully acquire housing. Three Houston men were indicted last year for allegedly defrauding mortgage lending businesses [*]. Reports suggest that they illegally cleaned credit scores to secure mortgages and property.
However, fraud for profit schemes misuse the lending process for personal profits. An Atlanta real estate agent, for example, falsified mortgage applications to net about $850,000 in claims [*].
According to CoreLogic, one in 134 mortgage applications is fraudulent [*]. The offenders can be borrowers, loan officers, mortgage brokers, mortgage industry insiders, real estate agents, appraisers, or a collusion of these people.
Mortgage fraud and real estate scams can have seismic implications for victims, but those committing mortgage fraud also face significant repercussions.
According to the United States Sentencing Commission (USSC), over 74% of mortgage fraud offenders received prison sentences, and the average sentencing time was 14 months [*].
The punishments vary by state, but they can reach up to 30 years in prison and millions of dollars in fines [*, *]. Below, we look at the major types of mortgage fraud and what red flags they present.
Mortgage application fraud involves borrowers providing false information on their loan applications.
This includes using stolen driver's licenses and Social Security numbers (SSNs), lying on credit applications, or hiding the true intentions for the property — such as turning it into a rental property.
Red flags:
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Deed fraud or home title theft involves fraudsters stealing a property by forging deed documents or faking sales and title transfers.
In both versions, scammers can take out a mortgage on the property and pocket the funds, while the actual homeowner defaults.
This happened in Atlanta when a man received a foreclosure letter because of a defaulted second mortgage for which he never applied [*].
Red flags:
Straw buyers refer to the accomplices who fraudsters use to make purchases on their behalf. This allows them to conceal their identities or hide their credit histories and liabilities.
Once the loan documents go through, the straw buyer transfers the title to the scammer. In New Jersey, scammers bought 12 properties in this way — taking the money, defaulting on the loans, and leaving the banks and straw buyers in dire straits [*].
Red flags:
In this mortgage fraud scheme, scammers apply for two mortgages: the primary mortgage and the silent second.
Fraudsters then use the silent second for a down payment to receive better interest rates on the first mortgage.
Red flags:
Air loan fraud refers to the act of awarding real loans to non-existent borrowers. Mortgage-lending scammers award air loans in order to steal funds or fake property sales for their organization.
Red flags:
Appraisal fraud occurs when people inflate appraisals and property values to trick mortgage lenders and homebuyers into paying more than the property is worth. This can take place when scammers purchase or refinance their properties.
Red flags:
Shotgunning fraud describes the act of securing multiple, simultaneous mortgage loans. Fraudsters apply to several financial institutions at once, steal the money, and leave the banks to untangle ownership.
Two New York men shotgunned home equity lines of credit (HELOC) on 17 different properties — saddling the banks with $9 million in losses [*].
Red flags:
REO fraud encompasses any scheme that takes advantage of the foreclosure process. This may include fraudsters illegitimately selling or renting foreclosed properties. It can also happen when owners rig the resale process for individual gain.
That's what happened in Michigan, where a former mayor manipulated the bid process for tax-foreclosed properties in return for over $50,000 in kickbacks [*].
Red flags:
Double sales refer to the act of selling the same property to two different parties. By overlapping the closing dates of these sales, fraudsters can steal down payments and other fees before their victims are made aware of the scam.
Red flags:
Illegal property flipping comprises any fraudulent acts that occur while buying, renovating, and reselling property. Examples include lying about property improvements, manipulating valuations, or equity skimming.
A New Jersey father and son used the latter by siphoning money from investors that was meant to fund the renovation and resale of homes, for a profit [*].
Red flags:
Ponzi schemes congregate so-called industry professionals who promise high returns on real estate investments. Ponzi fraudsters swindle investors by giving them returns entirely funded by new investors.
A New Jersey Ponzi scheme guaranteed investors up to 30% returns on property flips, but members received only a fraction or nothing at all [*].
Red flags:
Builder bailout fraud occurs when builders manipulate sales to satisfy mortgage lending conditions. The builder may offer secret incentives or use straw buyers to inflate property sale numbers and stay in the lender's good graces.
Red flags:
Buy and bail schemes take place when the value of a person's property falls below what they owe. The fraudster then takes out a new mortgage to buy another house, letting the primary residence fall into default and foreclosure.
The order of operations here allows the scammer to secure a new mortgage before they ruin their credit.
Red flags:
In a foreclosure rescue scam, fraudsters promise troubled homeowners that they can prevent foreclosure.
They offer other contrived financial services as well, such as eliminating credit card debt and modifying loan conditions.
One Ohio thief conned more than 780 homeowners across the country into paying him to help them evade foreclosure [*].
Red flags:
In this scheme, fraudsters posing as mortgage specialists or brokers convince homeowners or homebuyers to pay a fee in return for favorable mortgage rates or conditions. Despite offering an unregulated service, the scammers pretend that they can influence the underwriters.
Red flags:
A short sale refers to the sale of a property at a price less than the balance on the mortgage. In short sale fraud, scammers abuse the short sale process.
They may deceive lenders into approving a short sale and forgiving the mortgage balance only to then flip the property for profit.
Or, a third party might persuade the homeowner to pursue a short sale and subsequently purchase the property at a reduced price.
Red flags:
In this version of short sale fraud, the homeowner receives approval for a short sale and then sells the property to a fake buyer or someone they know.
In one instance of a non-arm’s length short sale, a Maryland woman filed for bankruptcy, discharged her debts, and completed a short sale to a straw buyer — all the while retaining ownership of the property [*].
Red flags:
Reverse mortgage scams take advantage of seniors looking to use their home equity without selling, such as through the Home Equity Conversion Mortgage (HECM) program.
Fraudsters impersonating reverse mortgage professionals deceive victims and steal their money. In Chicago, a scammer duped over 130 seniors into applying for reverse mortgages for rehabilitation projects, and absconded with any funds that came in [*].
Red flags:
Affinity fraud comes about when members of a specific group or community mislead other members. The scammers use their shared connection to establish trust and exert influence over the victim's choices.
Red flags:
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Occupancy fraud happens when a buyer misrepresents their intentions for the property. Occupancy fraudsters claim that they will live in the purchased house — when in reality, it lies vacant. Reverse occupancy fraudsters buy the house as an investment property but live in it.
Red flags:
While mortgage fraud cases have dampened since 2017, home title theft is still a reality for many Americans [*].
If you suspect that someone has stolen your house deed or committed some other type of mortgage fraud, file a fraud report right away. To protect yourself and your property, follow the reporting steps below.
Note: Reporting agencies and steps may vary depending on fraud type.
With Aura’s home title protection services, you get title and address monitoring, credit monitoring, and identity theft protection, plus 24/7 access to a U.S.based team of fraud resolution specialists.
Editorial note: Our articles provide educational information for you to increase awareness about digital safety. Aura’s services may not provide the exact features we write about, nor may cover or protect against every type of crime, fraud, or threat discussed in our articles. Please review our Terms during enrollment or setup for more information. Remember that no one can prevent all identity theft or cybercrime.
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