What Is Mortgage Fraud?

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Mortgage fraud is defined as a broad variety of illegal actions committed with the intention of obtaining a mortgage, or a loan, larger than would otherwise have been issued.  Mortgage fraud is considered a federal crime and carries punishment of up to 30 years imprisonment, in addition to severe financial penalties. Mortgage fraud is typically perpetrated by consumers seeking to buy property. It should not be confused with what is commonly known as predatory lending practices, which are a system of deceptive techniques used by banks and lenders to trick consumers into taking out a mortgage when it is beyond their means to do so. There are many different types of mortgage fraud, including the following:

Income Fraud

Income is the single most important piece of information lenders rely upon when determining whether to issue a mortgage. As a result, many consumers will falsify this information to make it appear as though they earn far more than they really do.  This is often accomplished by forging financial documents such as W-2 forms, tax returns and bank account records. 

Occupancy Fraud

This type of fraud is committed by borrowers who state on their applications that they will occupy a property as its primary resident, or use it as a second home. Instead, the property is primarily used primarily used as investment property and the owner makes money through rent or subleasing. Banks typically charge higher interest rates on investments properties, so this is one method that is used to get a lower rate.

Appraisal Fraud

This is fraud committed by an appraiser who works with the potential borrower to inflate the value of the home listed on the official appraisal. If the bank believes the figure given to it and issues a check, a portion of the check will go to the appraiser who inflated the value of the property. Often times in this situation, no payments are ever made and the home goes into foreclosure almost immediately. 

Identity Theft

A growing problem in the modern lending business is someone assuming another person's identity in order to obtain a mortgage without the other individual's knowledge. Once the account is established, there are no payments made on the account until the bank or lender contacts the individual whose name and identity was stolen to obtain the mortgage. 

The Harmful Effects of Mortgage Fraud

Apart from the fact that mortgage fraud is a crime, the harmful effects of this type of illegal activity are both widespread and permanent. Banks and lenders have had to resort to charging higher interest rates to recoup losses from mortgage fraud. This ends up costing many innocent borrowers thousands of dollars over the lifetime of their mortgage loans. 

Mortgage fraud also makes it harder for certain types of applicants to obtain mortgages, especially if they have been the victims of identity fraud. Other forms of fraud, such as appraisal fraud, can lead to an inflation of home prices. Eventually, the prices will fall and leave millions of home owners with mortgages worth more than the value of the property itself.