How Is Mortgage Fraud Detected? 20 Types of Fraud To Know

What Is Mortgage Fraud?

Mortgage fraud is the deliberate misrepresentation of information by either borrowers or lenders to obtain financing. As such, those who commit mortgage fraud may be subject to prosecution, either for “fraud for housing” or “fraud for profit.”

In fraud for housing schemes, scammers unlawfully acquire housing. Three Houston men were indicted last year for allegedly defrauding mortgage lending businesses [*]. Reports suggest that they illegally cleaned credit scores to secure mortgages and property.

However, fraud for profit schemes misuse the lending process for personal profits. An Atlanta real estate agent, for example, falsified mortgage applications to net about $850,000 in claims [*].

According to CoreLogic, one in 134 mortgage applications is fraudulent [*]. The offenders can be borrowers, loan officers, mortgage brokers, mortgage industry insiders, real estate agents, appraisers, or a collusion of these people.

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Common Types of Mortgage Fraud & Warning Signs

Mortgage fraud and real estate scams can have seismic implications for victims, but those committing mortgage fraud also face significant repercussions.

According to the United States Sentencing Commission (USSC), over 74% of mortgage fraud offenders received prison sentences, and the average sentencing time was 14 months [*].

The punishments vary by state, but they can reach up to 30 years in prison and millions of dollars in fines [*, *]. Below, we look at the major types of mortgage fraud and what red flags they present.

1. Application fraud
2. Home title fraud
3. Straw buyers
4. Silent second
5. Air loans
6. Appraisal fraud
7. Shotgunning
8. Real Estate Owned (REO) fraud 
9. Double sales
10. Illegal property flipping
11. Real estate Ponzi schemes
12. Builder bailouts
13. Buy and bail fraud
14. Foreclosure rescues
15. Advance fee schemes
16. Short sale fraud
17. Non-arm's length short sale
18. Reverse mortgage fraud
19. Affinity fraud
20. Occupancy and reverse occupancy fraud

1. Application fraud

Mortgage application fraud involves borrowers providing false information on their loan applications.

This includes using stolen driver's licenses and Social Security numbers (SSNs), lying on credit applications, or hiding the true intentions for the property — such as turning it into a rental property.

Red flags:

• Borrowers with inconsistent personal information, employment histories, pay stubs, and credit reports. 
• Borrowers with a history of rental properties or a larger loan request than the property's market value warrants.

2. Home title fraud

Deed fraud or home title theft involves fraudsters stealing a property by forging deed documents or faking sales and title transfers.

In both versions, scammers can take out a mortgage on the property and pocket the funds, while the actual homeowner defaults.

This happened in Atlanta when a man received a foreclosure letter because of a defaulted second mortgage for which he never applied [*]. 

Red flags:

• Communications about delinquent mortgage payments or missing notices about mortgages and property taxes.
• Unauthorized changes or tampering of property information and ownership records.

3. Straw buyers

Straw buyers refer to the accomplices who fraudsters use to make purchases on their behalf. This allows them to conceal their identities or hide their credit histories and liabilities. 

Once the loan documents go through, the straw buyer transfers the title to the scammer. In New Jersey, scammers bought 12 properties in this way — taking the money, defaulting on the loans, and leaving the banks and straw buyers in dire straits [*].

Red flags:

• The buyer meets the mortgage requirements with an unexplained large deposit or down payment.
• The buyer's financial means and living situation don't reconcile with buying a new property.

4. Silent second

In this mortgage fraud scheme, scammers apply for two mortgages: the primary mortgage and the silent second.

Fraudsters then use the silent second for a down payment to receive better interest rates on the first mortgage.

Red flags:

• Borrowers with sizable, unexplained cash deposits or financing arrangements. 
• Inconsistencies between the credit report and loan application may point to undisclosed debt.

5. Air loans

Air loan fraud refers to the act of awarding real loans to non-existent borrowers. Mortgage-lending scammers award air loans in order to steal funds or fake property sales for their organization. 

Red flags:

• The entity overseeing the sale may be showing signs of financial troubles — sudden layoffs, hasty asset sales, or abrupt closures of branches.
• Borrowers provide scant or inconsistent information about themselves and the property.

6. Appraisal fraud

Appraisal fraud occurs when people inflate appraisals and property values to trick mortgage lenders and homebuyers into paying more than the property is worth. This can take place when scammers purchase or refinance their properties.

Red flags:

• Limited, incomplete, or unverified comparables are used in the appraisal process.
• Drastic property value increases occur without a proper explanation or description of upgrades.

7. Shotgunning

Shotgunning fraud describes the act of securing multiple, simultaneous mortgage loans. Fraudsters apply to several financial institutions at once, steal the money, and leave the banks to untangle ownership.

Two New York men shotgunned home equity lines of credit (HELOC) on 17 different properties — saddling the banks with $9 million in losses [*].

Red flags:

• The borrower has a slew of hard credit inquiries — all at around the same time.
• Borrowers have porous employment records or finances and no clear intent to occupy said property.

8. Real Estate Owned (REO) fraud

REO fraud encompasses any scheme that takes advantage of the foreclosure process. This may include fraudsters illegitimately selling or renting foreclosed properties. It can also happen when owners rig the resale process for individual gain.  

That's what happened in Michigan, where a former mayor manipulated the bid process for tax-foreclosed properties in return for over $50,000 in kickbacks [*].

Red flags:

• Unusual buying process, such as lower-than-expected purchase prices or suspicious terms and conditions.
• The property changes hands quickly during and after the foreclosure process.

9. Double sales

Double sales refer to the act of selling the same property to two different parties. By overlapping the closing dates of these sales, fraudsters can steal down payments and other fees before their victims are made aware of the scam.

Red flags:

• Strange seller behavior or conditions, such as insisting on a specific closing date.
• Needless transaction and payment requests, such as cash transfers or upfront fees.

10. Illegal property flipping

Illegal property flipping comprises any fraudulent acts that occur while buying, renovating, and reselling property. Examples include lying about property improvements, manipulating valuations, or equity skimming. 

A New Jersey father and son used the latter by siphoning money from investors that was meant to fund the renovation and resale of homes, for a profit [*].

Red flags:

• Property improvements are undocumented, unverified, or inconsistent with known timelines and valuations.
• Flippers extend unrealistic promises or guarantees, or they use unconventional sales tactics. In a lawsuit against Build Reality, the company planted more than 5,000 road signs advertising their now-fraudulent house flipping business [*].

11. Real estate Ponzi schemes

Ponzi schemes congregate so-called industry professionals who promise high returns on real estate investments. Ponzi fraudsters swindle investors by giving them returns entirely funded by new investors.

A New Jersey Ponzi scheme guaranteed investors up to 30% returns on property flips, but members received only a fraction or nothing at all [*]. 

Red flags:

• Operators run seminars or members-only gatherings to propose get-rich-quick investment opportunities.
• The organization lacks regulatory oversight and structure, and only contracts other members to do work.

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12. Builder bailouts

Builder bailout fraud occurs when builders manipulate sales to satisfy mortgage lending conditions. The builder may offer secret incentives or use straw buyers to inflate property sale numbers and stay in the lender's good graces.

Red flags:

• Builders have a large inventory that they need to unload to meet lender agreements. 
• Builders use high-pressure sales tactics, quick closing dates, or hefty incentives.

13. Buy and bail fraud

Buy and bail schemes take place when the value of a person's property falls below what they owe. The fraudster then takes out a new mortgage to buy another house, letting the primary residence fall into default and foreclosure.

The order of operations here allows the scammer to secure a new mortgage before they ruin their credit.

Red flags:

• A person who has very little or negative equity in one house applies for a second mortgage.
• A buyer defaults or mismanages their credit shortly after securing a second mortgage.

14. Foreclosure rescues

In a foreclosure rescue scam, fraudsters promise troubled homeowners that they can prevent foreclosure.

They offer other contrived financial services as well, such as eliminating credit card debt and modifying loan conditions.

One Ohio thief conned more than 780 homeowners across the country into paying him to help them evade foreclosure [*].

Red flags:

• Specialists tout apparent legal loopholes or sovereign status as means to stop foreclosures.
• Someone offers to buy your house and sell it or rent it back to you at a reduced rate.

15. Advance fee schemes

In this scheme, fraudsters posing as mortgage specialists or brokers convince homeowners or homebuyers to pay a fee in return for favorable mortgage rates or conditions. Despite offering an unregulated service, the scammers pretend that they can influence the underwriters.

Red flags:

• Promises or guarantees of rate reductions or term improvements in exchange for an upfront fee.
• Unsolicited and urgent offers come from supposed specialists lacking proper documentation or identification.

16. Short sale fraud

A short sale refers to the sale of a property at a price less than the balance on the mortgage. In short sale fraud, scammers abuse the short sale process.

They may deceive lenders into approving a short sale and forgiving the mortgage balance only to then flip the property for profit.

Or, a third party might persuade the homeowner to pursue a short sale and subsequently purchase the property at a reduced price.

Red flags:

• The homeowner experiences sudden and unexplained financial hardship that doesn't tally with their spending or credit history. 
• Disparities exist between the appraisal or purchase bids and the historical or regional comparables.

17. Non-arm's length short sale

In this version of short sale fraud, the homeowner receives approval for a short sale and then sells the property to a fake buyer or someone they know.

In one instance of a non-arm’s length short sale, a Maryland woman filed for bankruptcy, discharged her debts, and completed a short sale to a straw buyer — all the while retaining ownership of the property [*]. 

Red flags:

• The sale happens quickly and without a real estate agent.
• The purchaser's information is inconsistent or similar to the short seller.

18. Reverse mortgages fraud

Reverse mortgage scams take advantage of seniors looking to use their home equity without selling, such as through the Home Equity Conversion Mortgage (HECM) program.

Fraudsters impersonating reverse mortgage professionals deceive victims and steal their money. In Chicago, a scammer duped over 130 seniors into applying for reverse mortgages for rehabilitation projects, and absconded with any funds that came in [*]. 

Red flags:

• An individual provides unsolicited assistance in applying for a reverse mortgage.
• Someone who is not a family member appears to be guiding the senior applicant through the reverse mortgage application process.

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19. Affinity fraud

Affinity fraud comes about when members of a specific group or community mislead other members. The scammers use their shared connection to establish trust and exert influence over the victim's choices. 

Red flags:

• All the parties involved in a transaction have a shared connection — a religious group, social club, or cultural association.
• The victim has unusual or unexplained motivations for completing the transaction.

20. Occupancy and reverse occupancy fraud

Occupancy fraud happens when a buyer misrepresents their intentions for the property. Occupancy fraudsters claim that they will live in the purchased house — when in reality, it lies vacant. Reverse occupancy fraudsters buy the house as an investment property but live in it.

Red flags:

• Large down payments that hint at contributions from other investors or renters.
• Purchasers falsely assert that they will live rent-free to mislead lenders into believing that they won't be occupying the home — or jeopardize their mortgage eligibility.

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Reporting Mortgage Fraud

While mortgage fraud cases have dampened since 2017, home title theft is still a reality for many Americans [*].

If you suspect that someone has stolen your house deed or committed some other type of mortgage fraud, file a fraud report right away. To protect yourself and your property, follow the reporting steps below.

• Collect all the necessary information.
• Contact the Federal Housing Finance Agency's (FHFA) and the Housing and Urban Development's (HUD) Office of Inspector General. 
• Submit a complaint with the Consumer Financial Protection Bureau (CFPB).
• Report fraud and/or identity theft to the Federal Trade Commission (FTC).
• Contact your local law enforcement office, the Federal Bureau of Investigation (FBI) field office, and your Attorney General.

Note: Reporting agencies and steps may vary depending on fraud type.

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