Fraudulent Mortgage Schemes and Scams

There is a fine line between unscrupulous practices and outright fraud. In many cases, an unscrupulous mortgage company can hide costs from consumers while still staying within the letter of the law. According to the FBI, there are three times the number of reports this year compared to 2001. Mortgage companies are not the only perpetrators of fraud, as in the case of predatory lending practices; but often, legitimate mortgage companies fall victim to scam artists.

During the first nine months of 2004, mortgage companies reported 12,100 cases of suspicious activity, and the FBI currently has over 500 pending mortgage fraud investigations. A common type of fraud is called “property flipping,” in which an individual purchases a property that is priced at higher than market value, and then sells it, leaving the mortgage holder with a property that is worth less than the value of the loan. Other types of scams include forged credit histories, or using false buyers to conceal a true buyer’s identity. Recently, the US Attorney General’s office handed down indictments on an elaborate $20 million mortgage fraud scheme that involved “straw buyers,” identity theft and “flipping.”

These types of mortgage fraud schemes may often include mortgage insiders, such as brokers or originators. Unscrupulous mortgage professionals may engage in questionable and illegal practices designed to take away peoples’ homes by charging unreasonably high interest rates and fees. One example of mortgage fraud is the home improvement scam, where a contractor arranges to work on a home, which the homeowner finances through an equity loan. The contractor then charges inflated prices for substandard work, and leaves the homeowner holding the bag.

However, doing your due diligence in selecting a reputable lender may not be enough to avoid being victim to fraud. Lenders often sell the servicing of their loans to outside companies. An unscrupulous servicing company may manufacture a late payment by manipulating dates, or may charge an unrelated fee against a principal and interest payment, creating an artificial partial late payment. The next payment can then be rejected as insufficient, creating a two-month deficiency. A “forbearance agreement” may then be offered that involves several thousands of dollars worth of additional fees. This can quickly accelerate as the servicer initiates collection proceedings, and ultimately strip away all of the borrower’s equity and ultimately takes their home.