What is Mortgage Fraud?
Mortgage fraud is a deceptive practice that occurs within the context of real estate transactions, specifically related to mortgage loans. It involves intentional misrepresentation or manipulation of information to obtain a mortgage loan under false pretenses or to deceive lenders and other parties involved in the process.
There are several forms of mortgage fraud, each with its own characteristics and consequences. One common type is occupancy fraud, where a borrower misrepresents their intention to live in the property as their primary residence. This is done to secure more favorable loan terms, such as lower interest rates or down payment requirements, typically associated with owner-occupied properties.
Another form is income fraud, where borrowers fabricate or inflate their income and assets to qualify for a larger loan or better terms. This may involve falsifying employment records, bank statements, or tax returns.
Appraisal fraud occurs when an appraiser intentionally overstates the value of a property to secure a larger loan amount. This can deceive lenders into granting loans that are not in line with the property’s true worth.
Straw buyer fraud involves using a third party, known as a “straw buyer,” to apply for a loan on behalf of someone who does not qualify. This scheme allows ineligible individuals to obtain mortgages and can lead to default and financial losses for lenders.
Mortgage fraud not only harms lenders, but it also has broader implications for the housing market and economy as a whole. When fraudulent loans default, it can contribute to financial instability and housing market downturns.
To combat mortgage fraud, lenders, regulators, and law enforcement agencies employ various preventive measures and investigative techniques. These include enhanced verification processes, increased scrutiny of documentation, data analytics, and collaboration among industry stakeholders.
Overall, mortgage fraud is a serious crime that undermines the integrity of the mortgage lending process and has far-reaching consequences for individuals, institutions, and the economy. Efforts to detect and prevent such fraudulent activities are crucial to maintaining a healthy and transparent real estate market.
Mortgage Fraud Statutes
There are several federal statutes that govern mortgage fraud in the United States. The primary federal law addressing mortgage fraud is the United States Code, specifically Title 18, Section 1014, which prohibits making false statements or providing false information to obtain a mortgage loan insured or guaranteed by a federal agency, such as the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the Federal National Mortgage Association (Fannie Mae).
Other federal laws that may apply to mortgage fraud cases include:
Title 18, Section 1341: Mail Fraud – Prohibits the use of the mail system in furtherance of a fraudulent scheme related to mortgage transactions.
Title 18, Section 1343: Wire Fraud – Prohibits the use of wire communications, such as phone calls or electronic transfers, in furtherance of a fraudulent scheme related to mortgage transactions.
Title 18, Section 1001: False Statements – Prohibits making false statements to federal agencies or institutions involved in mortgage lending, such as falsifying loan applications or supporting documents.
The investigation of mortgage fraud cases is typically conducted by several federal agencies, including:
Federal Bureau of Investigation (FBI) – The FBI investigates a wide range of financial crimes, including mortgage fraud cases involving significant financial losses or complex schemes.
U.S. Department of Housing and Urban Development (HUD) Office of Inspector General – HUD’s Office of Inspector General investigates cases involving mortgage fraud related to federally insured loans, such as FHA loans.
Internal Revenue Service (IRS) – The IRS investigates cases involving tax-related aspects of mortgage fraud, such as false income or asset information provided on loan applications.
U.S. Postal Inspection Service – The Postal Inspection Service investigates cases involving mail fraud, which may be applicable to mortgage fraud schemes that use the mail system.
Additionally, state and local law enforcement agencies, as well as regulatory bodies such as state banking departments, may also be involved in investigating and prosecuting mortgage fraud cases, depending on the jurisdiction and circumstances of the fraud.
Mortgage Fraud Penalties
The U.S. Sentencing Guidelines (USSG) establish a baseline for sentences related to mortgage fraud, and this baseline can be adjusted based on specific offense characteristics. These offense characteristics or enhancements can increase the severity of the sentence depending on the details of the crime. Here are some common enhancements:
- Role in the Offense: If the defendant had a leadership or managerial role in the fraud, the offense level could be increased by 2 to 4 levels.
- Use of Sophisticated Means: If the scheme was especially complex or required special skills or efforts to conceal, this can increase the offense level by 2.
- Number of Victims: The offense level can be increased by 2 if the crime involved 10 to 50 victims, by 4 if it involved 50 to 250 victims, and by 6 if it involved more than 250 victims.
Now, let’s project a potential sentence for a first-time offender involved in a mortgage fraud case resulting in a $2,000,000 loss. Assuming no criminal history, the offender would fall into Criminal History Category I in the USSG.
- The base offense level for mortgage fraud is 7.
- The loss of $2,000,000 would increase the offense level by 16 (for losses between $1,500,000 and $3,500,000), resulting in a total offense level of 23.
- If the offender had a managerial role in the offense, this could increase the offense level by 2 to 4, let’s say 3 for this example, bringing the total offense level to 26.
- If the fraud involved sophisticated means, this could increase the offense level by another 2, bringing the total to 28.
- And finally, if the fraud involved 10 to 50 victims, this could add another 2 to the offense level, resulting in a total offense level of 30.
An offense level of 30 for a first-time offender in Criminal History Category I corresponds to a sentence of 97 to 121 months, or about 8 to 10 years, according to the USSG’s sentencing table. This is in addition to any fines, restitution, or terms of supervised release that may be imposed. Please note that these calculations are approximations, and actual sentences can vary based on various factors and the judge’s discretion.