What Is Mortgage Fraud: Types, Red Flags, and Detection Tips

Under Vision 2030, Saudi Arabia wants to help more people own homes, aiming to raise homeownership to 70% by 2030, up from 47% before, so the Saudi government has updated mortgage laws and introduced new programs to make buying a home easier for Saudis.

These changes have made it much simpler to get a mortgage, which is exciting for many families but with more mortgage approvals happening, there’s also a chance that mortgage fraud could become an issue.

Key Takeaways:

This guide breaks down:

• What is mortgage fraud?

• Types of mortgage fraud

• Mortgage fraud examples

• Mortgage fraud schemes

• Mortgage fraud red flags

• How is mortgage fraud detected?

What is Mortgage Fraud?

There was mortgage application fraud in the US alone, about 1 in 123 applications! So, what is considered mortgage fraud? Mortgage fraud is any deliberate and intentional misrepresentation, whether by the omitting of or falsifying information during the mortgage application or lending process.

In many cases, people commit mortgage application fraud to obtain the loan they’re applying for, which they wouldn’t get approved otherwise or under normal circumstances without fabrications.

Some common mortgage fraud schemes are income fraud and identity theft.

Mortgage Fraud Categories

Mortgage fraud can be grouped into two main categories, or let’s say, mortgage fraud areas:

1. Fraud for Property or Housing: When someone is not being honest and truthful about their finances and they do so intentionally to get a mortgage they wouldn’t otherwise qualify for, this is considered fraud for housing! So, for example they lie about their income by overstating, lie about a job, or even use fake documents like tax returns to secure the mortgage.
   Some borrowers might also claim a property is their primary residence when it is actually a second home. The main aim is to gain a loan for a property that they would not have been approved for based on their true financial situation. Fraud for property can lead to loan defaults and financial losses for lenders, let alone the long-term issues in the housing market.
   

2. Fraud for Profit: An example of this would be an appraiser intentionally overestimating a property's value to help a borrower get a higher loan. In return, the insider may receive a financial kickback. So this means that fraud for profit must involve people from within the mortgage industry, like loan officers or brokers, who are in a position that allows them to take advantage and benefit financially!

Read more: Real Estate Fraud Prevention: A Guide for Financial Institutions

11 Types of Mortgage Fraud

Like other types of fraud, there are different types of mortgage fraud; some mortgage fraud examples are simple like lying about income while others are more complex and require more conspiracies.

1. Fraud for Housing or Property

This is the most common type of mortgage fraud, where borrowers misrepresent their financial status to secure a home loan, they may inflate their income, or falsify employment details, or even provide fake documents to qualify for a loan they otherwise wouldn't be able to afford.

2. Fraud for Profit

As mentioned previously, fraud for profit is a collaboration between the fraudster and someone from the inside like brokers.

3. Straw Buyer Schemes

A straw buyer is someone who applies for a mortgage on behalf of another person, the real buyer who most probably cannot afford the mortgage himself or has poor credit. In reality, the straw buyer does not intend to live in the property and may later transfer the property to the actual buyer to help them hide their true identity and avoid mortgage restrictions.

4. Appraisal Fraud

Appraisal fraud happens when an appraiser intentionally inflates the value of a property. This enables the borrower to obtain a larger loan than the property is actually worth. In some cases, the appraiser may undervalue the property to help investors purchase it at a lower price. This type of fraud is a common tactic used to artificially inflate loan amounts.

5. Asset Rental Fraud

In asset rental fraud, loan applicants borrow or rent assets (like cars, homes, or even financial documents such as pay stubs) to make themselves appear financially stable or more qualified for a mortgage. Once the loan is approved, the rented items are returned to their real owners.

6. Equity Skimming

Equity skimming is when a straw buyer is used to getting a mortgage using false information. After the loan is approved, the investor (who is usually the real buyer) rents the property, collects rent and doesn’t make the mortgage payments. The property goes into foreclosure and the investor makes money off the rent until the lender takes possession.

7. Foreclosure Scams

These scams target homeowners in foreclosure. Fraudsters promise to save the home by transferring the property to a third-party investor, usually to sell it for a profit using a fake appraisal. The homeowner thinks they can rent the property and buy it back later, but the scammers don’t make the mortgage payments.

8. False Identity Usage

This type of fraud occurs when scammers use stolen or fabricated identities to apply for mortgages. The scammer might use another person’s let’s say Social Security number or pay stubs to secure a loan for a property they do not own.

9. Property Flipping

Property flipping involves buying a property at a low price and reselling it for a much higher price, typically with the help of a corrupt appraiser who inflates the property’s value. This creates the appearance of a profitable transaction.

Read more: Fraud Detection Rules: Types, Benefits, and Selection Tips

10. Ponzi Schemes and Investment Fraud

They sell properties at inflated prices to investors and promise high returns, but the returns are paid out of new investor funds not actual profits. The scam relies on a constant flow of new investors to keep the fraud going.

11. Buy-and-Bail Schemes

A buy-and-bail mortgage fraud scheme is when a homeowner applies for a new mortgage to buy a new property after the value of their current property has dropped below what they owe. They then let the old property go into foreclosure. They get to start fresh while defrauding the lender who gave the original loan.

5 Common Mortgage Fraud Red Flags

The warning signs of fraud are great indicators that financial institutions can make use of to catch fraudsters before falling victim to them!

1. Mismatched information in loan applications.

2. Borrowers are hesitant to provide required documents.

3. Frequent refinancing on the same property.

4. Loan packages with incomplete or inconsistent data.

5. Sudden, unexplained property value changes.

Read more: The 10 Best Fraud Detection Software and Companies Reviewed

How is Mortgage Fraud Detected?

Mortgage fraud detection relies on a combination of technology, processes, and expertise:

1. Advanced Analytics and AI: Financial institutions that use artificial intelligence to scan mortgage applications can detect anomalies in applications that might indicate fraud. AI also learns from past fraud cases, so it gets smarter over time.

2. Well-trained staff: Staff need technology but also need to be trained to spot fraudulent documents and inconsistent information. Give them the tools and the knowledge!

3. Regular Audits: Routine check-ups of loan processes to ensure compliance, integrity and functionality.

Conclusion

Mortgage lender fraud is a serious criminal offense but the good thing is if you’ve got a solid system that can spot fraud early, and you train your staff well, you can still have a great chance to catch mortgage fraudsters early and before bad things happen and it can't be undone. So a combination of a good AI-powered fraud prevention solution and knowledgeable employees enables mortgage fraud detection and prevention!

FAQs About Mortgage Fraud

Q1. What is considered mortgage fraud?

If the applicant is not being truthful at any point of the mortgage application process, then this can be considered a form of mortgage fraud, whether it is providing false information or intentionally hiding/leaving out details that they know would affect the acceptance of their application, in other words, if the applicant did intend to mislead the process, then this is called mortgage fraud.

Q2. What are examples of mortgage fraud?

Income misrepresentation, falsified appraisals, straw buyer schemes.

Q3. How severe are the penalties for mortgage fraud?

Varies but includes fines and prison terms depending on the jurisdiction and fraud type.

Q4. How can I protect myself from mortgage fraud?

If you look for ways to protect your organization from mortgage fraud then you will need to always do the obvious and never fail behind verifying all the information submitted by the customer/prospect, especially if the provided information sounds too good to be true.

Your verification process does not need to be manual though, you can make use of AI-powered solutions like FOCAL platform to verify documents and analyze mortgage applications for patterns that indicate fraud.