Mortgage fraud is a term used to describe a broad variety of actions where the intent is to materially misrepresent information on a mortgage loan application, in order to obtain the loan.

Examples of mortgage fraud
Occupancy fraud: Usually this is seen where the borrower wishes to obtain a mortgage to acquire an investment property, but instead the borrower claims on the loan application that they will occupy the property as their primary residence or second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Lenders typically charge more in interest rate for investment property mortgages, under the assumption that investment properties are more likely to default.

Employment/income fraud: Borrowers may overstate income in order to qualify for a larger loan amount. This is most often seen with so-called "stated income" mortgage loans, where the borrower declares their income without verification. It is sometimes seen in traditional full-documentation loans where the borrower alters IRS income documentation.

Failure to disclose liabilities: Borrowers conceal obligations, such as mortgage loans on other properties or newly acquired credit card debt, in order to reduce the amount of monthly debt declared on the loan application. This is pertinent because the debt-to-income ratio is a key underwriting criterion to determine eligibility for most mortgage loans, and the omission of liabilities artificially lowers the debt ratio, allowing the borrower to qualify for more money.

Mortgage fraud ring: A more complex scheme involving multiple parties in a financially motivated attempt to defraud the lender of large sums of money. One possible scheme includes a straw borrower whose credit report is used, a dishonest appraiser who intentionally and significantly overstates the value of the subject property, a dishonest attorney who prepares two sets of HUD closing documents, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan. If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth far less. The parties involved share the ill-gotten gains and disappear without making payments on the mortgage.

Appraisal fraud: The larger the value of a home is inflated, the more money can be cashed out of a property or sold for in a purchase. This can be inflated by a fraudster appraiser or someone with knowledge of graphic editing tools such as Adobe Photoshop. In most cases of mortgage fraud, the appraisal is typically involved.

Mortgage Servicing Fraud: After closing your loan you may be told you owe certain fees, or end up with different terms than those you agreed upon. Mortgage servicing fraudusually involve the lender who will discourage homeowners to refinance with a different lender, or simply tell them they aren’t able to do so. The borrower will feel trapped with a certain bank or lender thanks to these conniving plans.

Another unethical practice involves inserting hidden clauses in contracts in which a borrower will unknowingly promise to pay the broker or lender to find him or her a mortgage whether or not the mortgage is closed. Often there will be a time limitation before the mortgage closes. If the time period is exceeded the lender will be liable to pay the closing costs. This practice is considered unethical by the National Association of Mortgage Brokers. Often a dishonest lender will convince the consumer that he or she is signing an application and nothing else. Often the consumer will not hear again from the lender until after the time expires and then the consumer is forced to pay all costs. Potential borrowers may even be sued without having legal defense.

Other background
Mortgage fraud may be perpetrated by any and all participants in a loan transaction; including the borrower, a mortgage loan officer who originates the loan, a real estate agent, an appraiser or by multiple parties as in the example of the fraud ring above. Dishonest and unreputable mortgage originators may actually encourage and assist borrowers in committing fraud, because many loan officers are typically compensated based on loans originated.

According to a December 2005 press release from the FBI, "mortgage fraud is one of the fastest growing white collar crimes in the United States".

All text is available under the terms of the GNU Free Documentation License (see Copyrights for details).