How can today’s homeowners and buyers dodge the mortgage fraud bullet, and ensure their continued freedom? How rampant is mortgage fraud in the US today? What are some of the common traps both home buyers and sellers need to avoid, and how can they ensure they are on the right side of the law and avoid the devastating lifelong ramifications of even being suspected of mortgage fraud?
The Mortgage Fraud Crisis
Mortgage fraud is frequently blamed as the core issue that caused the implosion of the US housing market, and so many financial institutions in the early 2000s. This crisis literally evaporated trillions in home equity, net worth, and investment portfolios. Even in late 2014 analysts estimate there are over $1 trillion in ‘bad’ loans out there, with over $250 billion in seriously delinquent and repossessed properties on the books of US banks and servicers.
There is no question that the real estate and finance industry was substantially cleaned up in the wake of the foreclosure crisis. Many individuals and companies left because it was no longer profitable. Many more were indicted for various types of real estate and mortgage fraud and are now serving lengthy sentences behind bars.
Now the landscape is definitely cleaner, with better checks and balances in place to sniff out, prevent, and prosecute fraudulent activities, but it isn’t perfect. In fact, data compiler CoreLogic’s Mortgage Application Fraud Risk Index rose 3.2% from the second quarter of 2013 to the end of the second quarter 2014. The FBI, federal and local task forces, and industry quality control regulators continue to work to pursue and prosecute mortgage fraud cases, yet some of the most serious problem sources still haven’t been brought to justice. Thousands have been jailed, including mortgage brokers, title company workers, and individual borrowers, even including some judges and attorneys. However, many of these parties point the finger of blame squarely at big banks as being the orchestrators.
While multi-billion dollar settlements have been reached with the nation’s largest banks, regulators and watch dogs say they are worried these institutions have continuously managed to subvert the penalties levied upon them. Chief among the issues is mortgage lenders skillfully avoiding having to provide meaningful loan modifications by transferring loans to subsidiaries and non-bank entities, until property values have risen enough for them to repossess them and cash in on them for a profit.
The Severe, Life-Long Penalties of Mortgage Fraud
For the individuals both willingly and unwittingly caught up in mortgage fraud the consequences can be severe and last a lifetime, and beyond. Just a few ‘errors’ on a mortgage loan application can effectively leave individual borrowers open to a barrage of criminal charges that could effectively total a life sentence in federal prison. Even short terms behind bars or simply being investigated for suspected mortgage fraud can be incredibly destructive. Income and assets become frozen. Credit and reputation is destroyed, and a lifetime of work thrown out the window. Even for those that recover after a decade or two, it often means all hopes for providing for children and future grandchildren are derailed. The impact of the stress on extended family members can also yield serious health consequences.
While many mortgage fraud cases include large mortgage companies with false advertising and fake documents, the New York Times reports that many of the individuals going to jail for mortgage fraud are borrowers who took out stated income or ‘liar’s loans’ which were legal when taken out. In these cases family members of those incarcerated say it is virtually impossible to escape when the FBI is out to nab you and is determined to get a conviction. It is on you to fund your case and prove your innocence.
Common Types of Mortgage Fraud:
- Mortgage application fraud
- Appraisal fraud
- Foreclosure rescue and elimination fraud
- Title fraud
- Home insurance fraud
- Robo-signing
- Failure to comply with settlement provisions
- Discrimination
How to Avoid and Deal with Mortgage Fraud
The big question is what can current homeowners do to avoid fraud when attempting to refinance their properties, or to quickly exit loans which may be questionable or may be in danger or becoming delinquent? It’s crucial to both avoid becoming a victim of mortgage fraud or being unwittingly caught up in it.
This starts with being alert to the above common types of fraud. Then requires borrowers to be diligent in reviewing all loan application and real estate closing paperwork. If it isn’t accurate demand it is fixed before signing. If what you are being told to do just doesn’t seem or smell right walk away. Unfortunately, there will be characters at even the largest and most well-known institutions that will try to subvert the rules. Issues can be reported through StopFraud.gov, the Fraud Enforcement Task Force website which is headed up by embattled AG, Eric Holder of ‘Fast and Furious’ fame.
It can be better to give the benefit of doubt in these scenarios considering the consequences of a simple investigation. If the breach is blatant, do report it and run. If already in a bad loan, it can be wisest to find a cash buyer and get out fast.