Is Mortgage Fraud a Felony?

Mortgage fraud is a type of white-collar crime that occurs when a person tries to defraud a party concerning important information in relation to mortgage loans. It is illegal for anyone to provide a financial institution with false information concerning:

• A person’s income
• A person’s assets and debts
• A person’s identity
• The value of a property

While no specific federal statute defines mortgage fraud, other statutes can be applied that criminalize defrauding or attempting to defraud mortgage lenders, such as mail and wire fraud laws (i.e. 18 U.S.C. § 1341, 1343). Also, the Fraud Enforcement and Recovery Act was amended to include mortgage lenders and other people and entities that make federally related mortgage loans as financial institutions.

Mortgage fraud is typically considered a felony offense unless the amount of money involved in the scheme is less than $1,000. If convicted of committing mortgage fraud, a person can face imprisonment, a hefty fine, and restitution payments (i.e. the compensation of victims for their losses).

How Mortgage Fraud Is Committed

Mortgage fraud can be committed by either borrowers or real estate professionals. Based on who commits mortgage fraud, the act can fall into two categories: fraud for profit and fraud for housing.

While fraud for profit is committed by real estate professionals, fraud for housing is committed by borrowers. Fraud for profit involved taking money from a transaction by falsifying or omitting information. Appraisers, agents, brokers, or other industry insiders may collude with one another to misuse the mortgage loan lending process to defraud lenders, homeowners, and/or buyers. Common types of mortgage fraud for profit schemes include:

• Appraisal schemes. This type of fraud for-profit scheme occurs when a loan officer or another real estate/mortgage industry professional misrepresents the appraisal value of a home.
• Equity skimming. Using a fake buyer (known as a straw buyer), a person obtains property and mortgage with the fake person’s identity and fraudulent information (about their credit, income, etc.). The fraud then occurs when the straw buyer defaults on their mortgage or tax payments and uses a loan to avoid foreclosure.

Fraud for housing is committed by mortgage loan applicants and borrowers and typically involves submitting false or incomplete information to qualify for a loan or better rates. Common types of mortgage fraud for housing schemes include:

• Fake support documents. When a person applies for a loan, including a mortgage loan, they will be asked to submit paycheck stubs, W-2s, and other financial documents that prove they can handle the financial responsibility of the loan. It is considered mortgage fraud if an applicant submits forged, altered, or fraudulent documents.
• Property flipping. Flipping houses has become a popular source of income for many people. Instead of actually renovating and “flipping” homes, some people purchase homes and conspire with a property appraiser to falsely inflate the value of a home before resale. Thus, they didn’t actually increase the value of the property or make important updates but can still profit when they put the home back on the market.
• Silent second. To cover the down payment for a loan, a person may consider taking out a second loan. However, it is fraud if the person uses the second loan to cover the first if the initial lender is unaware of the second loan that is taken out.
• Stolen identity. Using a fake or stolen identity to apply for a loan is also a form of mortgage fraud.
• Straw buyers. A straw buyer is a real or fake person that is used by a buyer to obtain a mortgage. A straw buyer typically has a better income and credit history which can increase a person’s chances of obtaining a loan and receiving better rates.

To learn more about mortgage fraud, read our follow-up piece, “Real-Life Examples of Mortgage Fraud Cases.”

Get Legal Help

If you or a loved one are under investigation for or have been charged with mortgage fraud, Hubbs Law Firm is here and equipped to help. Known for treating our clients like family, you can trust our team with your case. Once you retain our services, we can work to build a solid, personalized defense strategy and achieve the best possible case results.