Don't accidentally commit mortgage fraud. Here's how to avoid becoming an inadvertent criminal.

Did you ever expect to become a con artist? Many have, by accident — falsified loan applications are the most commons type of mortgage con, legal publisher NexisLexis said in its NexisLexis Risk Solutions annual mortgage fraud report. Director Tim Coyle stated that 80 percent of mortgage fraud involves an industry insider, like a broker, loan officer, appraiser or real estate agent. However, it’s the borrower who signs on the bottom line.

What Misrepresentation?

Nearly three-fourths of mortgage fraud included the misrepresentation of borrower income, employment or intent to occupy the property. In addition, another 17 percent of scams were credit frauds, which means mortgage applications in which debt that didn’t appear on credit reports was not disclosed, or there was actual misinformation planted in the credit report.

The reason for this increase in fraud, says Mr. Doyle, is that lender guidelines have become so restrictive that those who stand to gain from a transaction, like appraisers, property investors, real estate agents and mortgage brokers, have increasingly resorted to fraud to shore up their profits. However, it’s borrowers whose signatures are on these loan documents who can end up in trouble most easily. Here’s what can happen.

Just One Little Lie

The Joneses (not their real names) wanted to purchase a house. Their credit scores were good, and they had no problem paying their bills with their income — probably because they have a boarder renting a room and a little side business, buying things at garage sales and selling them on eBay. However, the lender wouldn’t count the boarder income or the business earnings because neither of those things were listed on the Joneses’ tax returns.

The mortgage broker was stumped — in the past, he’d have just found them a stated income mortgage, but today those loans don’t exist. To get around this income problem, which he didn’t consider a “real” problem because they actually have the income, he “bumped up” the earnings on the Joneses mortgage application and added “new and improved” W-2s to the file. The couple was none the wiser, and they got their house. However, the loan was eventually audited, and the W-2s from the IRS didn’t match those in the loan file. The Joneses now have to defend themselves against a criminal charge.

Read Your Documents, or Go to Jail

All this could have been prevented by carefully reading before signing their application and their final loan documents.

  • Never sign a blank mortgage application
  • Never sign loan documents (the final paperwork contains a final mortgage application with the information used to grant the loan approval) without reading them and resolving discrepencies.
  • Never let a real estate agent or lender talk you into misrepresenting anything — in no instance is that ever legal.

While the example above doesn’t seem so terrible (the underwriter wouldn’t count income that they truly earn, so are they really lying?), it’s still criminal. And underwriters have good reasons for disallowing that sort of income — because statistically, people relying on unstable sources of income default at a higher rate.

If the only way you can get loan approval is to lie, it’s flat-out fraud. Don’t go there.

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Gina Pogol

Gina Pogol

  • Bradley L Chase III

    While your example of the “Joneses” mortgage broker or loan officer making up fake W-2’s to reflect higher income is most certainly, without any ‘shadow’ of doubt FRAUD, I am left with a little confusion. Allow me to explain my confusion.

    You had briefly mentioned a “Stated Income” type of loan, in which you are spot on correct when you notified readers that “Stated Income” mortgages are no longer available…and in my own opinion, this is an unfortunate option that has been taken away from borrowers. Just as your example of the “Joneses” is where a Stated Income mortgage loan fits the common sense factor…or I should say that the “Joneses” situation such as good credit, always has paid their bills and assuming their actual credit score is above average (690-750)….the Stated Income mortgage loan makes sense. Let me be very clear, falsified W-2’s is most certainly FRAUD.

    Now, when Stated Income, 2055 Programs (drive by appraisals), No Appraisal mortgage loans and even “No Doc” mortgages (No Documents meaning: borrowers did not need to show income..their employment was verified by a phone call made directly by Underwriters, No Appraisal was needed…the Underwriters went by data that indicated Median Home Values in a specified zip code to determine an Appraised Value for the home to be purchased or refinanced…No Bank Statements to verify “Seasoning” of Down Payment funds). The only item needed to close the mortgage loan was clear Title work and Title Insurance, which meant that these types of mortgage loans could close literally within 24 hours of signing the Loan Application. These mortgage loans were for VERY qualified borrowers and not to mention, VERY rare however these types of mortgages served a good purpose….for WHO some of you may be asking yourselves?? Well, most people are not aware of the following fact: ALL of these types of Mortgage Loans mentioned above and also roughly 90% of the regular mortgage loans…including today’s approval for mortgages, purchase or refinance, were and are still sent through a single loan approval software known as LP (short for Loan Prospector).

    LP or Loan Prospector software is owned directly by…are you ready….Fannie Mae and Freddie Mac. These 2 Government Mortgage Giants have set ALL of the Conventional Loan stipulations and guidelines. Yes, the Stated Income, 2055 (drive by appraisals) and even the No Doc aka No Documentation types of mortgage loans. I urge everyone to just do a little bit of research…I am sure that Google will provide you with links directly to Fannie Mae and Freddie Mac.

    There were independent “Super Brokers” and Mortgage Loan origination lenders who served the “Sub Prime” markets…and still do today however there are very few left after the “Housing Bubble”. Let me set the record straight…even if you had or have your mortgage loan originated through let’s say, Fifth 3rd, Old National Bank, Bank of America, Chase Bank, or any other large banking firm…other than your local Credit Unions…your approval or denial comes straight from Fannie Mae and/or Freddie Mac…yes the Government Mortgage Lending Agencies.

    Anyone care to talk a little more about fraud?……

  • Dahna M. Chandler

    The moment your mortgage broker or real estate agent starts talking about falsifying or even ‘fudging’ the numbers or other documents, you should walk away, particularly if you’re a first-time home buyer and have never read closing documents before. Like allowing your tax preparer to fudge or outright falsify your tax returns, once you sign those documents, you are (criminally) responsible if you are caught. So, understand as much as you can, resist the temptation to “cheat” to get your mortgage, read everything you’re expected to attest to as being true with your signature and sign nothing that’s suspect…or you may end up being a suspect in a criminal case.