Banking Law

Mortgage Fraud

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Mortgage fraud is the intentional enticement of a financial entity to make, buy or insure a mortgage loan when it would not have done so if it had correct information. Mortgage fraud encompasses many types of activities. Mortgage fraud schemes usually involve fraudulent appraisals, fraudulent loan documents and inflation of the buyer's income. The victim is often the lender or the governmental agency or private insurer who is insuring the loan.

FBI's Role


Fraud for Profit and Fraud for Housing

Mortgage fraud generally takes two forms: fraud for profit and fraud for housing.

Fraud for profit, also referred to as industry insider fraud, is fraud where the motive is to revolve equity, falsely inflate the value of the property or issue loans based on fictitious properties. Fraud for profit involves industry professionals and typically each case involves multiple loan transactions with several financial institutions involved. Since the perpetrators work in the mortgage industry, they understand how to exploit the system. The schemes can be complex and the losses very large.

Fraud for housing, also referred to as fraud for property, is fraud where a borrower perpetrates a fraud in order to acquire or maintain ownership of a house. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan. The borrower wants the property, intends to repay the loan, but makes misrepresentations in order to obtain the loan to buy the property. Sometimes industry professionals encourage the misrepresentation so that the professionals can earn compensation on the loan. Since fraud for property involves a homebuyer making misrepresentations in order to purchase a home in which to live and since typically the homebuyer fully intends to repay the loan and it is a one-time occurrence, the exposure to loss is not as great as cases involving fraud for profit.

Mortgage Fraud Different from Predatory Lending

Mortgage fraud is different from predatory lending. Mortgage fraud harms mortgage lenders or other members of the mortgage industry. Predatory lending generally focuses on practices that primarily harm borrowers. Predatory lending typically effects senior citizens, lower income and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, sub-prime or higher interest rates and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on mortgage payments and undergoing foreclosure or forced refinancing.

Mortgage Fraud Schemes

Typical mortgage fraud schemes include the following:

  • Illegal Property Flips. The most common scheme involves flipping where the property is purchased, falsely appraised at a higher value and then quickly resold. What makes property flipping illegal is that the appraisal information is fraudulent. The schemes typically involve fraudulent appraisals, doctored loan documents and inflation of the buyer's income. Kickbacks to buyers, investors, property/loan brokers, appraisers and title company employees are common in this scheme.
  • Backward Applications. After identifying a property to purchase, a borrower customizes his or her income to meet the loan criteria.
  • Air Loans. These are mortgage loans where the underlying security is non-existent. Lenders victimized by air loans have no collateral.
  • Silent Seconds. The property buyer borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his or her own money in the down payment. The second mortgage is often unrecorded in order to conceal it from the primary lender.
  • Fictitious credits. Fictitious credits for repairs that are not performed artificially inflate the property's value to allow for 100% financing and, on occasion, to provide a borrower with surplus funds. Fictitious credits endanger the lender's collateral.
  • Nominee Loans. The borrower's identity is concealed through the use of a nominee who allows the borrower to use the nominee's name and credit history to apply for a loan.
  • Foreclosure schemes. The perpetrator identifies homeowners at risk of defaulting on loans or homeowners whose houses are in foreclosure. The perpetrator misleads the homeowners into believing that the perpetrator can save the homeowner's property in exchange for a transfer of the deed and up-front fees. The subject profits from these schemes by re-mortgaging the property or pocketing the fees paid by the homeowner.
  • False gift letters. Lenders are concerned about the source of a borrower's down payment. Ideally, the down payment should come from the borrower's resources. Sometimes a borrower falsely represents that the down payment is a gift from a third party. False gift letters are known for the role they play in committing bank fraud.


The following are some of the many precautions you can take to make sure that you avoid deals involving mortgage fraud:

  • Get referrals from mortgage professionals and check the licenses of industry professionals with state regulators.
  • Look out for unusual promises. Be wary of unsolicited contacts and high-pressure sales tactics. A promise of extraordinary profit in a short period signals a problem.
  • Verify the value. Check out recent comparable sales of property in the area where you are buying, and other documents, such as tax assessments, to make sure the value of the property is not inflated.
  • Seek out title history. Review the title history to determine if the property has been sold multiple times within a short period, which could indicate that values were falsely inflated.
  • Know the loan terms. Understand terms of your mortgage and check that information against information in other loan documents.
  • Protect your signature. Never sign loan documents that contain blanks.

File a Complaint

If you're aware of a mortgage fraud scheme, you can contact your local FBI office. Contact them early because an investigation is labor intensive and takes time. By the time most complaints are filed, the guilty parties are long gone. The earlier they find out about a possible mortgage fraud, the better chance they have of catching the guilty parties.

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