Mortgage Loan Fraud and Its Impact on the Worldwide Economic Crisis

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Mortgage loan fraud is a common and often overlooked crime; it is taking place with increased prevalence today, due to the predominance of third-party loan originators (both brokers and conduit lenders). This type of fraud takes many different forms and is committed by buyers, sellers, attorneys, title companies, and others; in most cases it is overlooked by individuals, corporations, and law enforcement because it is seen as a “victimless crime”. In recent years, the booming real-estate market has fueled this criminal activity; mortgage loan fraud has become a crime with both victims and harsh consequences. In present day, banks and financial institutions have become inundated with “bad loans”, many of which are “bad” because they were fraudulently obtained. This plethora of defaulted loans has been a huge factor in the downfall of the lending industry.

Mortgage loan fraud is a term used to describe a broad variety of criminal actions in which the intent is to materially misrepresent or omit information on a mortgage loan application in order to obtain a loan or larger loan than would have ordinarily been obtained. Mortgage fraud is a low risk, high yield criminal activity that accounts for an estimated four to six billion dollars in annual losses. The FBI alone has 42 task forces dedicated to loan and real estate fraud. In the 2008 fiscal year, there were 62, 494 suspicious activity reports related to mortgage loan fraud, with billions of dollars in losses; that same year, the FBI had 523 indictments and 282 convictions related to these crimes.

There are several common deceptions often employed in different types of mortgage loan fraud. Deceptive purchase contracts may inflate the contract purchase price; this is done because many appraisers and lenders think of the purchase price as being evident of the true market value. These deceptive contracts are becoming increasingly common in the commercial arena as well. Property appraisers are under intense pressure to hit the sale prices of a home or property; they often “rubber stamp” it without truly appraising the property. This pressure often comes from mortgage companies themselves, who want the appraisers to provide the correct numbers so the deal goes through. There may be hidden seller concessions, such as seller financing and repair allowances. Bogus offers to purchase are one of the oldest and most transparent scams; these are attempts to provide indicators of high market value. Other common deceptions include illegal improvements, extraordinary appraisal assumptions, misrepresented or undisclosed property conditions, false operating statements, straw tenants, phantom renovations, and misleading or erroneous statistics.

Mortgage loan fraud is often confused with predatory lending. Predatory lending typically affects senior citizens, lower incoming borrowers, and those with bad credit. Predatory lenders force borrowers to pay exorbitant loan origination and settlement fees, subprime or more interest rates and unreasonable service fees. These borrowers often end up defaulting on the mortgage payments and are forced to refinance or be foreclosed upon.

Mortgage loan fraud can be divided into two general categories: fraud for financial profit (obvious fraud), and fraud for property/ housing; there are also several subcategories within these large designations. Fraud for profit often involves multiple loans and schemes to gain illegal proceeds from property refinance and sales. This type of fraud receives the majority of law enforcement attention, and the participants are frequently paid for their participation in the scheme. Fraud for profit is associated with early payment defaults; the perpetrators disappear quickly and leave behind a property worth only a fraction of its appraised value. This type of fraud occurs most commonly in a property-flipping situation, where a buyer will purchase a dilapidated property and resell it at an inflated price to a “straw...
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