What is Mortgage Fraud?
Mortgage fraud is a term used to describe a broad variety of criminal actions where the intent is to materially misrepresent or omit information on a mortgage loan application to obtain a loan or to obtain a larger loan than would have been obtained had the lender known the truth. In federal courts, mortgage fraud is prosecuted as wire fraud, bank fraud, mail fraud and money laundering, with penalties of up to thirty years imprisonment. Mortgage fraud is “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.
Why Commit Mortgage Fraud?
Borrowers and professionals are motivated to commit mortgage fraud for many reasons. We can describe most of those reasons by defining two primary factors – fraud for housing and fraud for profit.
Fraud for housing is committed by borrowers who, often with the assistance of loan officers or other lender personnel, misrepresent or omit relevant details about employment and income, debt and credit, or property value and condition with the goal of obtaining or maintaining real estate ownership. It is important to note that fraud for housing can be committed by individuals who intend to occupy a property as primary residence, or by investors who intend to rent the property as a source of income or to re-sell for gain.
Fraud for profit is committed by industry professionals who misstate, misrepresent or omit relevant details about their personal or their clients’ employment and income, debt and credit, or property value and condition with the goal of maximizing profits on a loan transaction. It is important to note here that fraud for profit can be committed by any professional in the loan transaction chain including the builder, real estate sales agent, loan officer, mortgage broker, credit/debt counselor, real estate appraiser, property inspector, insurance agent, title company, attorney, and escrow agent.
How does Mortgage Fraud Affect the Markets?
To understand the implications for the housing and real estate industries, and for financial institutions, simply refer to the headlines and literature on the 2008 subprime mortgage crisis. A quick study of derivatives and mortgage-backed securities tells the stories of financial institution failures that followed speculative lending that was sometimes based on mortgage fraud.
Conclusion
The good news is we can improve the markets by reducing mortgage fraud. Individuals must set realistic expectations for borrowing and homeownership experience. Investors should set realistic goals for profit. Industry professionals must pursue higher personal standards and submit to peer organization accountability. Governments need to make legislation more uniform and reconcile law enforcement with active investigations. (The fraudsters in The Pioneers Of Financial Fraud were the first to commit fraud, participate in insider trading and manipulate stock.)
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