Buying a house is an exciting prospect for anyone, but that excitement can quickly turn sour if you find you’ve become the latest victim of mortgage fraud.
The fact is that the robust housing market was not only a great investment for many people, but it also introduced opportunistic scams centered on mortgage applications. Commonly known as mortgage fraud, the FBI has called it one of the fastest-growing white-collar crimes, with a 44% increase in suspicious activity from 2005 to 2006 and losses of more than $4 billion in 2006.
Even more relevant to Texans looking to buy a home in the New Year, our state is one of the top 10 mortgage fraud states in the country, with California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, and Utah rounding out the list.
Defining mortgage fraud
In its simplest terms, mortgage fraud is the “intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan.”
Investigators give several reasons for its rise, including high mortgage loan origination volumes that compromised quality control; the rush of lenders to speed up the loan process; rising home prices; new, non-traditional loans (like zero-down packages) that required little to no documentation; and relaxed lending practices.
Consumers can be victims of mortgage fraud in one of two ways: fraud for property or fraud for profit. Property fraud is usually applicant-driven, with an applicant embellishing or omitting details on loan applications to buy a home, usually with every intention of paying off the loan.
But it’s the fraud-for-profit schemes that are most damaging – and the ones consumers need to be most aware of – because they often involve multiple loans and elaborate manipulations.
Perhaps even more alarming is that they must rely on several people for them to work – including lenders, appraisers, and loan officers – all of whom must lie and who are essentially getting paid to falsify documents like appraisals and loan applications.
While there are a lot of variations on mortgage fraud, most cases involve claiming that a property is more valuable that it really is – essentially duping the consumer – with the scammers pocketing the difference and the consumer in the dark about the whole thing.
Because the appraisal is high, loans are bigger, payments are higher and the buyer pays a falsely inflated price. Not surprisingly, there’s a strong link between mortgage fraud and loans that go into default or foreclosure because of this false information.
Tips for avoiding mortgage fraud
While experts say that those most vulnerable to these scams are older adults, anyone can unknowingly be a victim, especially first-time homebuyers navigating the home loan process.
No matter what the scenario, get your own lender. If you’ve got a pushy mortgage broker who insists you use a certain lender, watch out. No one cares about the source of your loan, only that you plan to pay it back in good faith and not default on the loan. In the end, your lender is a highly personal choice.
Also, don’t borrow more than you can afford, which can open the door to a potential scam. Talk to your bank first to get pre-approved for a loan. This process often returns a higher number than many people think they can get. Realize that just because you’re pre-approved for a $300,000 loan does not mean you should buy a $300,000 house.
Enlist your Texas REALTOR® to help you set realistic goals – like, for example, that you don’t want to consider homes that cost more than $225,000. Be realistic and buy only as much house as you can afford. And, no matter how tempting the situation may seem, avoid purchasing property sight unseen. You also might consider hiring your own appraiser, to ensure third-party independence.
Make sure you get copies of all loan documents – that’s standard practice in the homebuying process – and read them! You should have more documents and papers than you know what to do with. This is a good thing, so you know exactly what you’re signing and what the terms are.
Finally, take your time when buying and financing a home. You should not be rushed when it comes to “signing your life away” on something as big as a mortgage. It’s a big decision and should not be taken lightly or done quickly. If your lender is rushing you to sign important papers, take that as a sign to get up and leave.
Taking action here in Texas
As one of the top 10 states for mortgage fraud scams, we have reason to be careful. That’s why Texas REALTORS® played a major role in urging comprehensive legislation to curb mortgage fraud.
As of September 2007, a new law championed by the Texas Association of REALTORS® requires state agencies to assist in the investigation and prosecution of mortgage fraud cases; requires that each applicant gets a notice verifying name, income, and employment (the penalty for providing false or misleading information is two years to life in prison); extends the statute of limitations to seven years for money laundering or false statement to obtain property, credit, or a mortgage loan; and creates a Residential Mortgage Fraud Task Force that partners with state, federal, and local law enforcement agencies to track and prosecute mortgage fraud.
Together, we can make a difference simply by being aware and insisting on open communication and honesty when it comes to buying a home. The American Dream of homeownership should not be compromised in any way. Consumers and consumer advocates here in Texas, along with cooperating government agencies, will help ensure that it isn’t.