Loan and Mortgage
Fraud
Ms. Hannah Tula
Mr. Johnny P. Valete. Jr
What is Loan?
• A thing that is borrowed, especially a sum of money that is expected to be
paid back with interest.
What is Mortgage?
• A legal agreement by which a bank or other creditor lends money at interest
in exchange for taking title of the debtor's property, with the condition that
the conveyance of title becomes void upon the payment of the debt.
• A mortgage, also referred to as a mortgage loan, is an agreement between
you (the borrower) and a mortgage lender to buy or refinance a home
without having all the cash upfront. This agreement gives lenders the legal
rights to repossess a property if you fail to meet the terms of your mortgage,
most commonly by not repaying the money you’ve borrowed plus interest.
What is the difference between a Loan and a
Mortgage?
• The term “loan” can be used to describe any financial transaction where one party
receives a lump sum and agrees to pay the money back.
• A mortgage is a type of loan that’s used to finance property. A mortgage is a type
of loan, but not all loans are mortgages.
• Mortgages are “secured” loans. With a secured loan, the borrower promises
collateral to the lender in the event that they stop making payments. In the case of
a mortgage, the collateral is the home. If you stop making payments on your
mortgage, your lender can take possession of your home, in a process known as
foreclosure.
What is Mortgage Fraud?
• According to the Federal Bureau of Investigation (FBI), it is any sort of
"material misstatement, misrepresentation, or omission relating to the
property or potential mortgage relied on by an underwriter or lender to
fund, purchase, or insure a loan.“ With this working definition, we see that
mortgage fraud can be committed by both individual borrowers and
industry professionals. And the sums involved are high.
Two distinct areas of Mortgage
Fraud for Profit
• Fraud for profit: Those who commit this type of mortgage fraud are
often industry insiders using their specialized knowledge or authority to
commit or facilitate the fraud. Current investigations and widespread
reporting indicate a high percentage of mortgage fraud involves collusion
by industry insiders, such as bank officers, appraisers, mortgage brokers,
attorneys, loan originators, and other professionals engaged in the
industry. Fraud for profit aims not to secure housing, but rather to misuse
the mortgage lending process to steal cash and equity from lenders or
homeowners.
Fraud for Housing
• Fraud for housing: This type of fraud is typically represented by illegal
actions taken by a borrower motivated to acquire or maintain ownership
of a house. The borrower may, for example, misrepresent income and
asset information on a loan application or entice an appraiser to
manipulate a property’s appraised value.
What are the Types of Mortgage Fraud
• Property Flipping
• Asset Rental
• Equity Skimming
• Foreclosure Scams
• False Identity Usage
• Inflated Appraisals
Property Flipping
• Purchasing, renovating and reselling property is not inherently illegal. If it
was, the rise of property flipping shows would surely have been more
controversial. However, there are situations where flipping houses
becomes fraudulent. This type of mortgage fraud occurs when a property
is purchased below the market price and immediately sold for profit,
typically with the help of a corrupt appraiser who inflates the value of the
property.
Asset Rental
• Asset rental fraud occurs when loan applicants borrow, or rent,
the assets of others to make themselves appear more qualified for
mortgage financing. After the mortgage closes, the money is typically paid
back to whomever it was borrowed from.
Equity Skimming
• With equity skimming, investors may use straw buyers – or someone who
purchases property on behalf of another person. Using false income
documents and credit reports, the investors obtain a mortgage loan in the
straw buyer’s name. After closing, the straw buyer passes the property to
the investor in a quit claim deed, which gives up all rights to the property
and gives no guarantee to title.
• Once in their name, the investor does not make any mortgage payments
and instead rents the property until the event of a foreclosure, typically
several months later, therefore profiting from the rental income.
Foreclosure Scams
• Unfortunately, scammers can also try to take advantage of homeowners on the
verge of foreclosure. In this type of mortgage fraud, homeowners who are at risk
of defaulting on their loans or whose homes are in foreclosure are misled into
believing they can save their homes by putting the property in the name of a
third-party investor. The perpetrators make a profit by then selling the property
using a fraudulent appraisal, therefore stealing the seller proceeds.
• In this scheme, homeowners may be led to believe they can rent the property for
a minimum of a year and repurchase the home once their credit has improved.
However, the perpetrators do not make the mortgage payments and the property
usually ends up in foreclosure.
False Identity Usage
• Scammers often use false or stolen identities, to commit mortgage fraud.
This takes place when the scammer obtains financing by using an
unknowing victim’s financial information, including Social Security
numbers, stolen pay stubs and falsified employment verification forms,
therefore obtaining a fraudulent mortgage on a property they do not own
or occupy.
Inflated Appraisals
• False appraisals are another common way scammers commit mortgage
fraud. Appraisal fraud may be committed by the appraiser alone, or with
the help of other professionals, including the builder and mortgage banker.
• In some cases, a corrupt appraiser may undervalue a property to ensure an
investor will be able to purchase it, but more often we see appraisers
inflating the value of a property to increase the purchase price and, in a
chain reaction, also maximize their commission.
