It’s been more than a decade since the housing meltdown when “liar loans” were frighteningly common, and unfortunately the number of borrowers who lie on their mortgage applications is on the rise yet again.Leading up to the housing crisis, unethical housing professionals took advantage of loan programs that didn’t require income or asset documents, and encouraged borrowers to lie on their applications to meet the approval guidelines. That often meant pushing homeowners and homebuyers to borrow more than they could afford.
The Dodd-Frank Act of 2010 all but eliminated liar loans in the aftermath of the housing bust, but that hasn’t stopped lying on applications from making a comeback. The crime committed when lying on a home loan application is called mortgage fraud, and with new laws making it punishable with jail time and million dollar fines, it just isn’t worth the risk.
Why people lie on mortgage applications
There are a number of reasons someone might lie on a mortgage application. The two most common are fraud for housing and fraud for profit. We’ll discuss what each is and provide some examples of how they might work.
Fraud for housing
This type of fraud is related to consumers that make up or inflate information on some part of their loan application to get a home, or keep the home they have. Examples might include convincing an employer to write a “new job letter” with a salary made up to qualify, or trying to persuade an appraiser to come in at a particular value to support a cash-out refinance.
The primary motivation for this type of fraud is to either buy a home, or access some of the equity that has been built up on a home. Home equity is the difference between what your home is worth, and the balance of any mortgage financing.
Fraud for profit
Industry insiders such as real estate agents, loan officers, attorneys, appraisers and even title companies are usually the perpetrators of fraud for profit. They use the entire loan process to steal cash and equity from both lenders and homeowners. Because of the sheer magnitude of economic damage fraud for profit schemes do to local housing markets, the FBI focuses most of its resources on them.
In some cases, home buyers may be part of a real estate fraud scheme involving real estate agents, mortgage loan officers or appraisers to acquire multiple properties in a short period of time, with the intent to immediately flip them for sale at a profit. In more sophisticated fraud rings, sellers may buy and sell houses within a certain area to artificially drive up values.
Unethical loan officers or real estate agents may try to convince inexperienced real estate investors to participate in these schemes, and in many cases they may indicate that there is no harm in a little white lie. But mortgage fraud is mortgage fraud, and you don’t want to be on the other side of the law if the FBI begins scrutinizing an application.
We’ll explore the most common types of mortgage fraud, based on recent reports and studies by Fannie Mae and Corelogic.
Seven common lies on mortgage applications
Lies on a mortgage application don’t just include things like stating you make more money than you actually do, or that you received a gift from someone who isn’t really related to you. You can also commit fraud by leaving off information like properties you own with no loans on them.
Corelogic issued a Mortgage Fraud Report in 2018 listing the most common types of fraud being found on loan applications. Although they are ranked based on how frequently they occur, any type of mortgage fraud is considered a federal crime, and will put the applicant at risk of prosecution.
Lies about your income
If you’re misrepresenting how much income you make or embellishing your employment history to try to get approved for a mortgage, you’re committing income fraud. Your income carries a lot of weight when a lender is determining whether you’ll be able to repay a mortgage loan. In fact, your debt-to-income (DTI) ratio, a measure of how much debt you have compared to your pre-tax income, is just as important as your credit history.
Your employment history is also important, and lenders prefer that you have at least a two-year history of earnings at your current job, with steady pay and no gaps in employment. However, you can get a mortgage if you’ve just started a job, or have recently received a large raise.
Dishonest borrowers and their employers may generate job letters with inflated starting salaries, or showing a large raise with manufactured paystubs. The income allows them to meet the DTI requirements on houses they otherwise wouldn’t be able to afford.
The number of applications with evidence of income fraud rose more than another type of mortgage fraud according to Corelogic’s mortgage fraud report in 2018.
Lies about living or not living the home you’re buying
Occupancy fraud is when the applicant lies about how they plan to occupy the property to take advantage of lower interest rates or down payment requirements. When you fill out an application you indicate how you will occupy the property you are buying or refinancing. You may choose to live in the property as a primary residence; on occasion as a second home (commonly called a vacation home); or as an investment property that you intend to rent out to tenants to earn income.
Interests rates and down payment requirements are the lowest on primary residences, which may motivate an applicant to lie about living in a property, even if they are really going to rent it out.
Another example of occupancy fraud involves buying an investment property, but indicating it is a second home to get better rates and make a lower down payment. This is most common with out-of-state buyers who may eventually plan to retire in the location they are buying, but rent the property out until they reach retirement age.
Lying about an investment property you actually plan to live in is called reverse occupancy fraud. Current lending guidelines allow you to qualify for a mortgage using the market rent on a property you are buying as an investment property.
Buyers with a lot of liquid assets, but very little income, may commit reverse occupancy fraud so they can get the benefit of the rental income on the property they are buying to qualify.
Lies about who is benefiting from the transaction
Transaction fraud arises when one or more parties to a purchase or refinance transaction lie about why they are getting a mortgage, or try to influence people with cash or profit incentives to buy a property on their behalf.
When you buy a home, you typically sign a purchase contract agreeing to a sales price, and costs associated with the sale of the property. Everyone involved in the transaction has to agree to how much they will be paid, and disclose whether they are related to anyone who is buying, selling or representing a buyer or seller. If the parties agree to terms they believe are fair, and there is no relation either by business or family, that would be considered an “arms-length” transaction.
Lenders do allow financing on non-arm’s length transactions, but scrutinize them to make sure all the parties are working in each other’s best interests.
Reverse mortgages fraud is a type of transaction fraud that has been on the rise as reverse mortgages have risen in popularity. A reverse mortgage allows a senior citizen to access equity in their home in a lump sum, or to create monthly income and does not require a monthly payment.
A child or unscrupulous loan officer might convince an aging parent to take out a reverse mortgage with promises of investing the money, or offer them a large commission or bonus for buying a house with a reverse mortgage. The predators in these schemes are usually trying to earn large commissions, or take the cash from the reverse mortgage proceeds, and the seniors may not even be of sound mind to understand they are being taken advantage of.
Lenders perform thorough checks of contracts and parties involved, and may require higher down payments, or flat out deny a loan if they believe a non-arm’s length party is trying to coerce the borrower to take out a mortgage.
Trying to convince an appraiser to lie about a home’s value
When a home is placed for sale, the seller provides certain disclosures about the condition of the property and real estate agents agree on a fair market value. An appraiser is hired to inspect the property and determine if the agreed upon price is fair based on the recent sales of similar homes nearby.
Before the housing meltdown, lenders, borrowers or real estate agents could pick any appraiser they wanted. Unfortunately, as the housing market heated up during the boom years, appraisers were chosen based on their ability to “hit a value,” which lead to sales at inflated prices.
When the housing market collapsed in 2008, many of these homes dropped in value rapidly, resulting in loan balances being higher than their market value. This phenomenon was called “being underwater,” and resulted in a high rate of foreclosures, as homeowners found themselves with homes that were worth thousands, if not hundreds of thousands, less than their loan balances.
To prevent this problem in the future, the government passed appraisal independence requirement laws that require lenders use a random rotation of appraisers. Many lenders now employ appraisal management companies with a roster of dozens of appraisers in different housing markets, and lenders, borrowers and real estate agents risk regulatory and legal action for attempting to influence an appraiser’s opinion of value.
Not disclosing other real estate you own
Many borrowers mistakenly assume if they own real estate with no mortgage they don’t have to disclose it on the application. In other cases, they may intentionally leave the property off of their application so they are eligible for first time homebuyer programs.
Whatever the reason, this is a form of fraud, and could result in a loan denial, even if the loan is initially approved. Lenders perform a series of quality control measures, which include checking national public records databases to be sure your name or social security number are not tied to ownership of a real estate anywhere else.
Even if you don’t have a mortgage on a property, you are responsible for paying property taxes, and in most cases maintaining homeowner’s insurance. Lenders will take the annual amounts and divide them by twelve, and count the monthly payment against you when you are qualifying for a new loan.
Many of these quality control tests are done right before closing, so it’s just not worth lying on your application by omitting real estate you own, because you could end up with an 11th hour closing crisis, or worse a declined loan.
Stealing someone else’s identity to get a mortgage
According to a study by Javelin Strategy in 2017, a research based advisory firm, 16.7 million people in the U.S. were affected by some form of identity theft in 2017. Examples of identity fraud include manufacturing a social security number, or using someone’s — such as an elderly parent’s — identity to obtain a home loan.
Given how long the average loan process takes and how intensive the identity checks are, it’s the rarest form of mortgage fraud. However, if you have an elderly parent, and they indicate that they are receiving notices about past due credit that they never opened, you may want to take action immediately to determine if someone is testing the waters with their identity information.
Lying about the source of down payment funds
One of the first red flags a lender will look for on your bank statements is large deposits. Lenders want to know where the funds for your down payment came from for a few reasons.
The first is, they want to make sure a third party is not providing funds as part of a straw-buyer scheme. A straw-buyer is usually someone with good credit and stable income, and is paid a fee to take out a mortgage on a home they don’t intend to live in, or make payments on.
The buyer may be given the down payment in cash, or as a gift by fraudulently filling out a gift letter indicating a family relationship with the buyer. Because lenders don’t generally request proof of relationship with gift funds, this type of asset fraud is hard to track, and may not be discovered unless there is a fraud investigation later.
To avoid having to document a large cash deposits, more sophisticated straw buyers schemes may involve mortgage lenders producing forged bank statements. The straw buyer may also be given small amounts of cash by a real estate agent or investor to deposit over time, making it look like they are saving up for the down payment themselves.
The other red flag with large deposits has to do with money laundering. According to a report from Accuity, a global risk insurance company, real estate money laundering schemes reached $1.6 trillion a year across the globe.
Crime syndicates and drug cartels try to make their businesses look legitimate by using the funds derived from illegal activities to make “normal” purchases, such as buying real estate. Anti-money laundering measures are designed to scrutinize any funds used to buy and sell real estate, and watch for patterns of deposits that would indicate an individual is trying to stay just under the threshold for cash deposits that might trigger a money laundering investigation.