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The Usual Suspects

Keyser Soze may not be real, but these common mortgage fraud schemes definitely are.

By Tory Barringer

Straw buyer

Fraud type: For profit/for housing

Straw buyers are borrowers whose identities are being used to disguise the person or entity who would actually benefit from the loan. These beneficiaries may include would-be homeowners who would not otherwise qualify for a specific loan (a family member, for instance) or an investor who wants the property as an income-generating asset.

Perpetrators (perps) may be willing accomplices to the crime, or they may simply be going along, unaware that they are being used for a fraud scheme. Some might not even have knowledge that their identities are being used at all.

Common red flags include mortgage payments being made by someone other than the borrower, a buyer purchasing a home that seems incompatible with their life circumstances (far from work, a large increase in expense, etc.), or gift funds making up the majority or entirety of the down payment and closing costs.

Air loan

Fraud type: For profit

The so-called “air loan” is a loan made to a nonexistent borrower on a property that also does not exist. Perpetrators of this fraud will concoct fake identities for straw buyers (see below), setting up elaborate schemes involving fake employers, addresses, and telephone numbers that lead to their own “offices,” all to fool creditors and earn some easy cash.

Be on the lookout for signs of a straw buyer and make sure you can validate the chain of title.

Appraisal fraud

Fraud type: For profit/for housing

Appraisal fraud involves an appraiser (often in league with other parties involved in the transaction) deliberately providing an inaccurate report on a property, either inflating or deflating the value or otherwise listing misleading information. Fraud may also occur in the form of a person inaccurately representing themselves as a state-licensed appraiser.

An artificially overvalued property may be used to increase an agent/loan officer’s commission or to create “phantom equity” for the borrower; it may also indicate a builder buyout (see below) or a potential Ponzi scheme in the works. An undervalued property could be a sign that the appraiser is assisting with a short sale or loan modification fraud scheme (again, see below).

Review appraisal reports and make sure employees know what to watch out for. Red flags include incomplete/vague reporting, photos not matching the property details, or a lack of accurate or recent comparables.

Foreclosure rescue

Fraud type: For profit

Perhaps one of the more egregious examples on this list, foreclosure rescue fraud schemes target desperate borrowers at risk of losing their homes. Under the guise of working on these homeowners’ behalf, perpetrators will often take payment or even property deeds in exchange for their “services,” which are nonexistent. Fraudsters will then use the property for their own profit (sometimes in combination with other fraud schemes) while accepting payments from the homeowner, who believes their money is going to pay their mortgage.

Similarly, perps may offer to “renegotiate” the terms of the borrower’s loan, charging upfront fees and offering a worse deal (if they offer anything at all).

Foreclosure is often the end result, hurting both homeowner and lender/servicer.

Make sure you are communicating with distressed borrowers. Many are hopefully aware of these scams, but a desperate homeowner may be prepared to believe anything. If they indicate that they are sending payments to another party or that they have been advised not to pay at all (or if they have been told to stop communicating completely), that is a major warning sign that something is wrong.

Illegal property flipping

Fraud type: For profit

House flipping by itself is a perfectly legal and common practice, but when individuals try to hide behind the practice to artificially inflate home values and profit, this behavior makes the list.

In this scheme, a property is purchased and resold in a short window and with an inflated price (most often with the help of an appraiser accomplice; see Appraisal fraud). Perpetrators may buy and sell these properties among each other, bringing up the value each time and pocketing the money.

As mentioned, illegal property flips often involve mechanics from other schemes, so keep a watchful eye out for signs of straw buyers or fraudulent appraisals. If a property’s value is increasing in contrast to a declining trend in the area or if it’s suddenly in high demand after being stagnant on the market for a while, that may be a sign.

Builder bailout

Fraud type: For profit

The common name used for schemes in which builders will employ fraudulent practices to sell off inventory, often due to declining demand and a need to recoup funds spent on construction. Common methods include offering unreasonably large incentives to buyers, including hidden down payment assistance, while using a fraudulently inflated appraisal to boost the price. Some may also employ straw buyers to purchase the properties and let them fall into foreclosure. A “better” case scenario would be that the financial institution preyed on in this scheme ends up holding a loan that’s underwater from the start.

Again, pay close attention to indications of appraisal fraud. If a property’s comparables are all taken from within that same development, it’s a red flag and should be followed up on. Obtain a complete copy of the purchase contract and verify all information, including deposits. Pay close attention to the builder’s advertising and watch for excessive incentive offers.

Silent second

Fraud type: For housing

In this scheme, the property buyer—either unable or unwilling to make the down payment—borrows funds from an undisclosed second loan. As this second mortgage is unrecorded, the lender on the first loan may not know anything is amiss.

Note that there is a difference between a silent second and down payment assistance. The latter is a legitimate practice, with the primary lender being made aware of the secondary loan; the former is a form of fraud.

Pay attention to the borrower’s assets and income. Account for everything you can. Numbers don’t lie, but applicants sometimes do.

HECM/reverse mortgage fraud

Fraud type: For profit

These scams take advantage of one of our most vulnerable populations: the elderly. Perps—oftentimes strangers, but sometimes the senior’s own family—will steer the victim into a reverse mortgage loan and pocket the proceeds for themselves. Scammers will often opt for a lump sum cash option to take the easy payout, but that is by no means true for all cases. As is the case in many other fraud schemes, inflated appraisal values are often employed for maximum results.

This can be a difficult scheme to spot, as red flags are minimal. A senior who appears to be coached by a family member or another third party may be an indication, especially if that party holds power of attorney. Outdated comparables in the appraisal and distressed property conditions are also warning signs.

Buyer bailout

Fraud type: For profit/for housing

The scammers in this instance are homeowners who are underwater on their loan but are otherwise unremarkable (up to date on payments, etc.) This may also include borrowers who have solid credit but anticipate a downturn in the near future. In either case, the homeowner will continue to make payments on their property while quietly applying for a mortgage on another, cheaper, home. Once the second property is theirs, they “bail” on the first one, defaulting on it while enjoying their new house.

Borrowers may try to rent out their first home after vacating it. If a borrower has no prior history as a landlord, they may not be able to generate the revenue to keep making payments.

If a borrower has little to no equity in their home and no intent to sell and is still seeking a second house, they may be preparing for a buy and bail.


Information on this list compiled from Fannie Mae, the FBI, and the FFIEC. Please refer to those resources for a more exhaustive list of mortgage fraud schemes and how they work.


Tory Barringer is the Managing Editor of Mortgage Compliance Magazine. He can be reached at TBarringer@MortgageComplianceMagazine.com.

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