Considering how heavily regulated the mortgage industry is, itâs hard to believe that mortgage fraud is actually on the rise. Yet one out of every 109 loan applications made from the second quarter of 2017 to the second quarter of 2018 contained elements of fraud, according to a report from mortgage data firm CoreLogic.
Mortgage scams are often very complicated and involve many different people that may convince you that youâre getting a great deal. The emotion tied to getting a home can often lead to impulsive decisions â which is exactly what financial predators count on.
In other cases, you may be an accomplice to a mortgage fraud scam and not even know it.
This guide will help you avoid mortgage scams â with tips to prevent you from becoming a victim or participant in mortgage fraud.
As interest rates and home prices rise in the 2019 mortgage market, there is less mortgage business to go around. At the same time, it is harder to people to qualify for mortgages under new rules approved since the financial crisis.
With those pressures on both sides of the equation, some mortgage professionals and consumers unfortunately start looking for ways to get mortgage approvals by concocting schemes that circumvent the rules, or straight out violate them, as youâll see from the examples that follow.
At the same time, technology and all-digital mortgages open the door for phishing scams that try to trick people to send their down payments to the wrong place.
These relatively new mortgage scams are creating billions of dollars in losses for consumers, bilking them out of down payment money and savings without any way to recoup their losses through the normal protections of the U.S. banking system.
Weâll start with the biggest and baddest of all the new mortgage scams: wire fraud.
Wire fraud is the fastest growing cybercrime in the country, and cost aspiring American homeowners over $1.4 billion in 2017, according to the FBI. In June 2018, the FBI launched a major law enforcement effort, making 42 arrests in the United States, thwarting the theft of nearly $14 million in fraudulent wire transfers.
This scam is very sophisticated, and itâs important you understand exactly what to look for and how to avoid falling victim to this ongoing problem in the real estate and rental sectors of the housing industry.
Once your loan is approved and youâre getting near the contract closing date, youâll be begin to receive correspondence about where and how to send your down payment and closing costs. Many borrowers will opt to prepare a cashierâs check with their local bank â the safest way to eliminate any possibility youâll be the victim of wire fraud.
But if you prefer to avoid the extra trip to the bank, or if you only bank online, wiring your money will be your only other option. Your funds will need to go to the title company handling your purchase escrow.
For a purchase financed with a mortgage, the lender will request wiring instructions directly from the title company. The wiring instructions contain information about your escrow, including an escrow number specifically tied to your transaction, with routing instructions for the funds to be deposited into the title companyâs account.
Hackers always bypass your lender with wire fraud scams, choosing to hijack the title company email or the realtor email, since they often are in touch with you about the amount needed for closing. A title company will rarely, if ever, give you wiring instructions that arenât encrypted.
In fact, many title companies will have you set up a user ID and password as part of their communications involving any transaction documents youâll need to review. If you start receiving correspondence with attachments that you can open without your user ID and password, chances are the email is fraudulent.
Nonetheless, the stress and sometimes hurried nature of last minute scheduling changes is what wire fraudsters count on â that one moment you open an email and click through without making sure the source is legitimate. Once the money is gone, thereâs no getting it back.
Below are five steps you can follow that will prevent you from falling victim to wire fraud.
You may get an email that looks just like a legitimate email from your realtor or escrow officer, with wiring instructions youâll need for your upcoming closing. In most cases, the realtor or the title companyâs email is either hacked, or the fraudster assumes the identity of the real estate agent or title agent handling your loan.
Donât rely on the contact information in the email. In most cases, the correct contact phone number for the title officer should be in your purchase contract. Use that as a first line of defense, and then use an online directory as a back-up to make sure your actually calling your title officer and not a scammer.
Realtors donât usually provide wiring information in a financed purchase transaction. Even if you are paying cash, the wiring information should reference the property you are buying, with an escrow number related to your transaction. Again, you shouldnât be initiating your funding wire until you have signed your closing papers and verified the wiring instructions face-to-face with the attorney or escrow officer handling the transaction. If the email is pressuring you do to that, chances are itâs a bogus request.
Mortgage lender closing departments work directly with title companies to verify where the loan proceeds of a mortgage should be deposited. Check the wiring instructructions you received in the email against what your lender provides â if they donât match, the email is probably a scam.
There is rarely a reason to wire funds for a purchase transaction before you have reviewed and signed the closing papers. Itâs also a good idea to withhold the money until youâve confirmed that all of the closing figures are correct and reflect the terms you agreed to in your purchase contract. If youâre taking out a new mortgage, you also want to make sure the final closing disclosure reasonably matches the initial loan estimate.
Of all of the mortgage scams, this one has the potential to cause the most financial damage with the least amount of legal recourse. In many cases, the money is wired overseas, and U.S. law enforcement has less jurisdiction to recover money overseas than within the U.S.
The FDIC insurance protections that safeguard money you have on deposit in your bank account donât apply to money that you wire. You have several options before hitting the send wire button to verify and re-verify the accuracy of the information, so once you hit the submit button, youâve effectively certified that you did your due diligence to check the authenticity of the wire source.
In the wake of damage related to Hurricane Michael, which hit Florida in October 2018, distressed homeowners had to deal with a new peril: hurricane relief scams. These range in scope from repair-related scams to impostors posing as FEMA inspectors to âhelpâ homeowners with flood claims on their properties.
The problem is only likely to get worse, as a recent storm surge prediction report puts nearly 6.9 million U.S. homes at risk of damage from future flooding. If the predictions are accurate, total reconstruction costs is estimated to be more than $1.6 trillion.
Just like scammers preyed on homeowners trying to save their homes from foreclosure during the housing crisis, they are now plotting complex schemes to take advantage of homeowners affected by natural disasters.
If you have experienced a hurricane-related loss, or know someone in one of these areas, knowing the signs of a disaster mortgage fraud scheme can help save them the heartache of spending money on an illegitimate repair company, or giving all your financial information to someone posing as a FEMA home inspector.
Communities hardest hit by natural disasters may have seen large disruptions in employment, resulting in financial hardship. Financial records may also have been destroyed in the disaster â leaving homeowners without contact information for their lenders and making them vulnerable to impostors. These fraudsters may pose as lender representatives promising mortgage assistance programs that are little more than fronts for illegal schemes.
Others create official looking identification and pose as FEMA inspectors, requesting social security numbers, dates of birth and other information that is then used by the identity thief to open new credit and make the hurricane victims life even worse. They may even demand payment for inspections up front, which is something FEMA.
Contractors may show up or call indicating they are there to help with repairs, or offer discounted repair services promising to waive deductibles. Never, ever sign any paperwork from these contractors unless you initiated the claim with your company, especially if they indicate they will work with your insurance company to pay for your repairs.
Anyone who has lost financial records related to a home loan should have a credit report run to obtain the contact information directly from the credit bureaus. Equifax, Experian and Transunion will list the contact numbers of all creditors on a credit report, allowing you to make contact with them to let them know about your hardship.
Creditors will never send someone to your area to negotiate debt during a crisis, and you should never speak to someone about anything related to your credit unless you can verify the source of the call. In every case possible, make sure youâre the one who initiates the call, using contact information you already have on file or obtained from your credit report.
This includes anyone offering mortgage modifications, foreclosure rescues, home repairs or reverse mortgages to fix your property after a disaster. If you donât do the research and seek the company out based on a website or local business office you can visit, donât give any personal information until you can verify who you are talking to.
These scams are not really new and not necessarily illegal, but they are considered unethical. They are likely to be more frequent in a market where more loan officers are vying for fewer mortgages in a market with very little refinance business.
In most cases, bait and switch scams are accompanied by high pressure sales tactics to get you to stop shopping around for a mortgage. You are likely to get multiple calls at all hours of the night and day as the loan officers try to get you to use their services over someone else.
You may also get an initial loan estimate that has much higher fees and rates than other lenders youâve received, only to be told theyâll match any rate or cost quote you receive in writing from a competitor. If youâve experienced any of these tactics from a loan officer youâre speaking to, it might be best to cross them off your list of potential lenders to work with.
A lender may advertise a rate that assumes their future customer has a very high credit score, a very high down payment, and a large loan amount (usually $250,000 or more). It may also be a âbuy-downâ rate, costing thousands of dollars in points and origination fees, an adjustable rate, or even a short term rate like a 10-year or 15-year mortgage.
Rates vary by state, so national lenders may quote an interest rate that is only available in particular area of the country. Most quotes also assumes you are buying a single family residence that you will live in as your primary residence, so if youâre buying a condo or a manufactured home, the price quote will not be accurate.
Here are a few warning signs and steps you can take to avoid falling victim to this scam.
If you arenât being asked very many questions about your income, credit or the type of property youâre looking at when youâre shopping around for a mortgage, chances are pretty good the final rate quote will differ significantly down the road. All lenders have âloan level price adjustments,â which means FICO scores, down payments, debt-to-income ratios and the type of property can all increase the costs and final interest rate that is applicable to your rate.
Just like everything else in real estate, nothing is legally binding until itâs in writing. If a lender is quoting what looks like an outstanding rate that obliterates the competition, the best way to verify if itâs the real deal is to ask for the rate to be locked and get written confirmation.
The classic sign of a bait and switch will be a somber phone call from an apologetic loan officer informing you of a sudden change in the market, or that an underwriter needs to review your package before it can be locked. If they canât deliver the price they first quoted, chances are youâre in store for more changes and excuses as to why the final rate and fees end up higher.
Lenders are not allowed to charge you a fee to provide a price quote, but once you give them the OK to proceed with the loan, they can charge you an application or processing fee. Although itâs not uncommon to pay upfront for a credit report and appraisal, an application fee or non-refundable processing fee may be a red flag of a pending bait-and-switch.
The basic idea is you wonât want to switch companies if youâve already got some upfront money into the transaction, and will reluctantly stick with the lender, not wanting to start over and risk not closing on time, or missing a lock expiration.
An investor may have unexpectedly exited the market, or suddenly changed their guidelines and the best pricing requires a higher minimum loan amount. Those are just a few more reasons a lender may notify you of a switch to a higher priced loan, after baiting you with a cheaper one.
Despite the number of warnings and articles written about the following mortgage scams, many people still fall victim to different spins on them.
A common one involves scammers presenting themselves as âalternative lenders.â They often advertise to people with poor credit, with the false hope that their specialized loan programs will allow them to get pre-approved for loans the âbig banksâ canât provide. In many cases, they are simply fishing for big upfront fees, or in the worst cases, they are identity theft rings looking to open new credit and deplete what remaining resources their victims already have.
The table below lists some more of the most common mortgage scams, who the fraudsters focus on, the basics of how they work, and quick tips to avoid them.
|Mortgage scam type||Who it targets||How it works||How to avoid it|
|Reverse mortgage repair scam||Current or future homeowners 62 and older||Contractor creates urgency to do work, and recommends or teams with a loan officer who recommends a reverse mortgage||Get second opinions about any proposed work, and shop for your own mortgage company|
|Reverse mortgage property flip scam||Current or future homeowners 62 and older||Realtor and/or lender convince senior to buy a fix-up property using reverse mortgage||Just say no. This is not something reverse mortgages were designed for|
|Reverse mortgage market investment scam||Current or future homeowners 62 and older||Financial planner recommends taking out equity in lump sum to invest in market||Just say no. Cash should be used for home repairs, living expenses or to cover unexpected medical expenses|
|Home improvement scams||Distressed homeowners with homes that have deferred maintenance (infrastructure repairs that been postponed due to budget concerns)||Contractor comes to your home with a free quote for repairs, and then recommends major renovations||You should initiate any requests for repair estimates from a reputable licensed contractor|
|Foreclosure rescue||Anyone having trouble making payments||Attorneyâs office or company solicits home rescue options for an upfront fee||Never, ever pay an upfront fee for any foreclosure rescue service. Your current mortgage company and local non-profit agencies will do this for free|
|Transfer of mortgage servicing scams||Anyone with a current mortgage||A company calls or send something in the mail indicating your mortgage payments are to be made to a new company||Always call your current mortgage company, using your current mortgage statement to verify contact information for any transfer of servicing notices.|
|Government endorsed loan program scams||Anyone looking for a mortgage or who currently has one||Pop-up ads, phone calls, or website ads talking about government, current President of U.S., or other federally endorsed loan programs||Ignore the ads. Government loan programs are provided by licensed mortgage lenders. Verify the license of the company and their contact information through the Consumer NMLS link.|
|VA interest rate reduction churning||Any veteran with a current VA loan||Companies encourage repeated interest rate reductions of VA loans||Veterans should demand a cost break-even, and get a second opinion for any refinance they are pursuing.|
Now that weâve talked about fraud targeting consumers, now itâs time to address the flip side. According to a recent report from Corelogic, the biggest increases in mortgage fraud on loan applications relate to buyer misrepresentations of occupancy and income. That means more consumers, perhaps with the influence or coaching of a housing professional, are lying about whether or not they plan to live in a house as a primary residence, or are making up the income being used to qualify for mortgages.
The most common reason for committing occupancy fraud is so a borrower only has to make a minimum down payment. FHA loans and VA loans allow down payments of 3.5% and 0%, respectively, but they also require the property be a primary residence.
Investment properties and second home purchases require higher down payments at higher interest rates with more closing costs. Perpetrators of occupancy fraud on government loans may not realize that lenders reserve the right to conduct occupancy inspections for up to 12 months after a government loan is made.
If the inspector shows up and someone other than the original borrower is residing there, the next knock on the door could come from an FBI fraud investigator.
This is a relatively new phenomenon characterized by buyers with large down payments who say theyâre buying an investment property, but turn around and live in them as primary residences. This scheme takes advantage of the fact that current lending guidelines allow market rent on an investment property to be used as qualifying income, even if there is no current tenant or lease on the property being purchased.
This is most frequently found in high rent cities like New York City, where houses have appreciated quickly and market rents are very high, creating much higher qualifying income than would be found in suburban areas of the country.
Income fraud schemes can be as simple as getting an employer to provide a bonus at an opportune time, or manufacturing tax documents and paystubs.The latter comes with enormous risk, considering tax records at most lenders will be matched against what is filed in the IRS database.
Lenders employ entire staffs of quality assurance personnel and use third-party fraud detection companies to track irregularities in income. According to Corelogic, income fraud risk rose 22% in the second quarter of 2018, most likely due to borrowers feeling squeezed by increasing prices and higher interest rates.
Credit reports make this relatively unlikely, but some examples of this are not disclosing a property owned because it has no mortgages on it, or child support or alimony that is not court ordered. Not disclosing something on a loan application is considered âfraud by omission,â and is considered just as serious as intentional fraud.
In the aftermath of the housing meltdown, federal and state laws were passed to more severely punish anyone committing mortgage fraud. The ripple effects of mortgage fraud are felt by entire families, neighborhoods and communities for years, and sometimes the damage is permanent.
The current penalty for mortgage fraud is up to 30 years in prison and up to $1 million in fines â itâs just not worth it.
If you believe youâve been a victim of a mortgage scam, or feel like you are being pressured into participating in any type of mortgage fraud by a housing professional, family member or friend, you can contact the following regulators for guidance:U.S. Department of the Treasury Financial Crimes Enforcement Network: Provides a list of regulatory agencies to contact regarding all types of fraud and complaints, including mortgage fraud.
FDIC: Has valuable information tips and a guide to what to look for with foreclosure rescue, modification and mortgage delinquency scams.
USA.gov: Provides for avoiding moving scams, including how not to get taken advantage of by moving companies, which may come in handy for first time home-buyers.
The Department of Housing and Urban Development (HUD): This link provides contact information for a network of non-profit housing counselors all of the country who can provide objective, non-sales driven opinions about any mortgage scam or fraud concern you might have.
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