What is Mortgage Fraud?

Mortgage fraud is defined by the Federal Bureau of Investigation (FBI) as “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.” Individual borrowers and industry professionals can commit mortgage fraud if they deceive another party by misrepresenting information, facts, and figures. So, don’t think that only predatory lending practices qualify under this definition as mortgage fraud. In fact, you can easily fall into mortgage fraud if you bend the rules just a little.

How easy is it to Fall into Mortgage Fraud?

Believe it or not, it’s easy for anyone to fall into mortgage fraud. In fact, during the real estate crash from 08-11, more people got caught in mortgage fraud than you can imagine. It usually happens in one of three ways and sometimes all three.

Three Most Common Types of Mortgage Fraud

  1. Declaring the loan is used as a primary residence. The most common mortgage fraud that banks and prosecutors caught people doing was claiming that the house they were purchasing was a primary residence. When in fact they were purchasing an investment property. They lied on their mortgage applications and ensuring disclosures in order to get a better loan. Traditionally primary residence home loans require less money down and have a lower interest rate. Again, people were telling the bank they were buying the home as a primary residence when in fact they were renting it out.
  2. Seller – Buyer Money Exchange without disclosing it to the Lender. The second most common type of mortgage fraud that is currently taking place is money that is being exchanged between the buyer and seller in a transaction is NOT disclosed to the lender. For example, the buyer sends in an inspection objection to the seller asking for a number of repairs to be done to the property before closing. The seller wants to give the buyer a credit in the form of a price reduction. The buyer doesn’t want the credit in the form of a price reduction because then they don’t have the cash in their pocket to make the repairs. So, they ask the seller if he or she can just bring a check to the closing table made out to the buyer and don’t tell anyone. This is mortgage fraud. During the course of a transaction when a buyer is getting a loan, money transferred between the buyer and seller must be disclosed to the lender and documented in the settlement statements. If parties are not following this rule, it’s fraud. Believe it or not many people are ok with this and have asked us (the Colorado Dream House Team) to go along with it and look the other way. We have never gone along with it and we never will!
  3. Asking a rebate from the agent in the absence of lender’s approval. The third most common type of mortgage fraud is when the buyer of a property asks his agent for a rebate on the agents’ earned commission. For example, the commission earned by the agent is $10,000 and upon closing the buyer wants the agent to rebate him back $5,000. This is legal if agreed to in writing ahead of time between the buyer and the agent. It’s also legal if this is a cash transaction. However, if the buyer is getting a loan, the lender must approve the rebate from the agent to the buyer. If the lender does not allow rebates under the term of the loan, then NO money can be exchanged between buyer and agent. This happens a lot because most lenders will not allow a buyer to get a rebate from their agent. Do many agents give money to their clients and never tell the lender…you bet! Again, this is mortgage fraud.

Penalties Related to Mortgage Fraud

You probably don’t know this, but the penalties for mortgage fraud are the same as the penalties for theft. The criminal charges depend on the value of the fraud. Penalties for mortgage fraud may include jail time, a fine and of course the full restitution to the victim of the mortgage fraud. The time in jail and the fine depends on the value of fraud and can go up to 8 to 24 years prison time and a fine of up to $1,000,000 if the fraud is valued at 1 million or more. Don’t get sucked into or talked into one of these traps. If you think it’s just one time and you won’t get caught, I can have you talk to a few people that had jail time.

Dan Polimino is a Broker/Owner with the Colorado Dream House Team, Keller Williams Realty DTC. Contact the Colorado Dream House Team at 720-446-6325, team@coloradodreamhouse.com, codreamhouse.com or coloradodreamhouse.com