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What is mortgage fraud and how can you avoid it?

When most people think of mortgage fraud, they probably imagine a would-be homeowner who lies on the application for a mortgage. Perhaps someone claims a home is worth more than it is, or maybe a potential borrower set up a fake phone number to claim income higher than what he or she was actually making. While that does happen, mortgage fraud can also get committed by commercial bankers, loan officers and other professionals in the mortgage and banking industry. These cases can prove to be more serious, as they can have a profound negative impact on a local real estate market or economy.

Ever since the mortgage crisis of 2008, the federal government has taken its role as industry overseer much more seriously. Lenders were having a financial heyday until the moment the bubble burst. Homes were selling for record amounts. It was easier than ever for someone who had questionable credit and mediocre income to obtain financing on a home. Banks and borrowers both lost out in a major way when these subprime loans began failing. It has taken almost a decade for the domestic mortgage and housing industries to recover from the impact of questionable lending practices.

There are many forms of professional mortgage fraud

Prior to the 2008 housing collapse, it was a poorly-kept industry secret that certain lenders preferred to work with certain assessors or appraisers. The reason why was simple. Bankers and mortgage brokers sought out valuation professionals who were willing to inflate or overstate the value of a property to ensure a higher loan amount would get underwritten. Financial incentives based on the number of mortgages, as well as commission structures that offered higher pay for bigger mortgages, were sufficient reason for a number of professionals to engage in this highly questionable practice.

In addition to essentially offering kickbacks by routinely hiring the same valuation professionals, there are many other forms of mortgage fraud. A broker could encourage potential borrowers to exaggerate their income or not disclose potential liabilities, like a lawsuit that hasn't gotten reported to the credit bureaus yet. Sometimes, a borrower gets encouraged to state the home will be a primary residence and not an investment property. This allows for a purchase with a lower down payment. This is called occupancy fraud.

Straw buyer fraud, as well as identity theft, are also common on an individual sale basis. With straw buyer scenarios, one person claims to be buying the property but is actually doing so on behalf of someone else who may not be legally or financially able to buy the property. Identity theft typically includes using the private financial information of an uninvolved person to secure financing. The home may then be sold, allowing the identity thief to profit without incurring any risk. Lenders or brokers may choose to turn a blind eye to red flags in order to earn the desired commission.

Those in the industry should be on the lookout for potential fraud. Failing to report or actively participating in mortgage fraud could result in criminal charges, including federal charges depending on the extend of the fraud and its overall impact.

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