Mortgage fraud on the increase

Mortgage fraud is an increasingly expensive problem in the lending industry. As home prices skyrocket and lenders make it easier than ever to borrow money, the criminal element has continually come up with new and clever ways to defraud lending institutions out of their money. This is a problem for everyone, as the public pays for the costs of fraud through higher property taxes and interest rates.

Here’s a list of the most common types of mortgage fraud, according to a recent survey:

• Occupancy Fraud - The most common type of mortgage fraud involves the question of occupancy. Lenders offer better rates and taxes tend to be lower for primary residences that will actually be occupied by the borrower. Properties which are not occupied by the borrower tend to have significantly higher default rates, so the interest rates and fees charged for loans on homes that will not be occupied by the borrower tend to be higher to offset the additional risk to the lender. Occupancy fraud is far and away the most common type of misrepresentation on mortgage applications, and occurs on slightly more than half of all applications that involve fraud.

• Hidden debt - Lenders request a full disclosure from the prospective borrower of total outstanding debts. Most of the time this can be accomplished by checking a credit report, but sometimes borrowers have other debts that aren’t disclosed on the credit report. They are required to disclose all debts, but nearly a third of all fraudulent loan applications involve other debt that is not reported. Loans are granted only when a borrower can demonstrate a suitable debt-to-income ratio which indicates an ability to repay. Hiding debt affects this ratio and may cause lenders to issue loans to unqualified buyers.
• Employment fraud - This can come either in the form of an applicant lying about income, perhaps by producing false documents regarding pay, or lying about whether he or she is employed at all. Since a large portion of the decision to grant a loan is based upon the borrower’s income, it stands to reason that lying about income or employment status is pretty significant.
• Appraisal Fraud - This one only amounts to about ten percent of all fraud, but it is increasing. Loans are predicated upon the value of the property in question being at least equal in value to the loan amount. If the property is valued at less than the loan, the loan cannot be granted. The easiest solution to this is an under the table arrangement between the lender and the appraiser, where, for a hidden fee, the appraiser “guarantees” that the property will appraise properly. Appraisal fraud hurts everyone in a community, as the falsely increased property values lead to increased property taxes for everyone who lives there.

Mortgage fraud is an ongoing problem that gets worse every year. Lenders are employing new tactics to try to stop it, but so far, the criminal element seems to be winning.