How to Report Real Estate Fraud

Real estate fraud comes in many forms, from Financial Institution Fraud (FIF) to Mortgage Fraud (a subset of FIF) and real estate scams themselves, pertaining to properties that aren’t actually for sale, among other things. In this guide, we’ll go through some of the most common types of fraud in real estate and how to report them.

Mortgage Fraud

A subset of Financial Institution Fraud (FIF), mortgage fraud is a crime that involves omission, misrepresentation, or misstatement in regards to a lender’s decision for a mortgage loan. If a lender relies upon this misinformation as part of their decision (i.e., to approve a loan or to negotiate payment terms), it’s known as mortgage fraud.

Following the housing market collapse, mortgage fraud was also broadened to include fraud targeting distressed homeowners. The FBI and other entities are responsible for investigating potential mortgage fraud.

In general, there are two types of mortgage fraud:

  • Fraud for profit: Industry insiders are the most common culprits when it comes to for-profit mortgage fraud. They may utilize special knowledge or authority to facilitate the fraud, and these cases often involve collusion by other insiders, including loan originators and bank officers. This fraud doesn’t aim to secure housing, but to use the mortgage lending process to ultimately take money from homeowners and/or lenders. These cases are the highest priority for the FBI.
  • Fraud for housing: When a mortgage borrower takes illegal actions, like misrepresenting their ability to pay in order to acquire or maintain homeownership, it’s known as fraud for housing. Other examples include misrepresenting available assets on a loan application or getting an appraiser to manipulate property value.

 

In order to address mortgage fraud, the FBI has the Financial Crimes Task Forces, comprised of local, state, and federal agencies across the country who work to address large-scale schemes. You can help by reporting potential mortgage fraud when you suspect it.

Other Types of Real Estate Fraud

Mortgage fraud is far from the only type of real estate fraud out there. Other instances of real estate fraud include the following.

Brokerage Fraud

  • Air Loans: Air loans are a type of nonexistent property loan where there’s typically no collateral. Brokers invent air loans, along with borrowers and properties. The brokers establish accounts for payments, maintain escrow accounts, and even establish an office where a fake employer, credit agency, etc. can be reached.

Investor and Builder Fraud

  • Straw Buyers: Investors may create straw buyers, falsify income documents and credit reports, and then obtain mortgages in these straw buyers’ names. Before closing, however, the straw buyer puts the property in the investor’s name with a quit claim deed, relinquishing property rights without providing a guaranty to title. The investor then refuses to pay the mortgage and rents the property until it’s foreclosed on many months later.
  • Builder Bailouts: When builders face declining demand, they may employ bailout schemes to offset their financial losses. In one example, they may find buyers who obtain loans on their properties, but then allow them to be foreclosed upon. In another example, builders convert apartments into condos during a housing boom, but then recruit straw buyers when a decline in demand leaves them with excess inventory. Builders may offer cash incentives to borrowers and inflate the property values to help them qualify for the property.
  • Illegal Property Flipping: Investors purchase property, get it appraised at a high value, and then sell it quickly. What makes this illegal is the fraudulent appraisal. They may also provide false info during the transactions, with the schemes typically involving a fraudulent appraisal, falsified loan documents, inflated income or kickbacks for buyers, and so on. Title company employers, brokers, and/or appraisers may be in on the scheme.

Borrower Fraud

  • Commercial Real Estate Loans: People who own distressed commercial property, or someone helping them, can obtain financing by manipulating the appraised value of the property. They may create fake leases to exaggerate its profit and further inflate its value. With the help of a fraudulent appraiser, lenders end up giving loans to the owner and the borrower struggles to maintain the property due to their actual lack of cash flow. The commercial loans end up in default and the lender is typically left with a dilapidated property.
  • Silent Second Mortgage: In this example of fraud, a property buyer gets a non-disclosed second mortgage from their seller to cover the down payment they use to finance the property through their lender. The primary lender doesn’t know about this second mortgage and believes the buyer has put their own money down. The second mortgage typically goes unrecorded to hide it from the primary lender. This greatly increases the buyer’s chance to default on their loan and misrepresents their actual ability to pay, making for a case of mortgage fraud.

Third-Party Fraud

  • Home Equity Conversion Mortgage (HECM): HECM is a type of reverse mortgage loan product available to homeowners aged 62 and older who occupy their home as their primary residence. This program provides homeowners access to equity, often in a lump sum payment. Perpetrators target these eligible homeowner through recruitment seminars and advertisements. Scammers ultimately get a HECM in the name of the homeowners, paying a small amount to the senior and taking the rest for themselves, without the senior’s knowledge. Since HECMs don’t need to be repaid until the borrower no longer occupies the home as their primary residence, the lender usually won’t find out until the homeowner passes away. Property values also tend to be inflated in these schemes.
  • Loan Modification Scams: Perpetrators act like they’re assisting homeowners who are delinquent on mortgage payments by saying they’ll renegotiate the loan terms with the homeowner’s lender. The scammers charge large fees up-front, make great promises, and often negotiate less favorable terms for the clients or do no negotiation at all. The homeowners typically lose their homes as a result.

Where Do I Report Real Estate Fraud?

To report real estate fraud, call the FBI hotline at 202-324-3000 or use the website at https://tips.fbi.gov. You may also report it to other agencies, though the FBI generally oversees mortgage fraud cases.

If you suspect a fraud for housing case, like where a borrower is misrepresenting themselves or their assets as part of a mortgage application, you may also be able to contact the lending institution directly and they can contact the FBI to begin an investigation.

If you feel that you may be a victim of real estate fraud, collect and maintain any potential evidence and call the FBI right away to report the case. If you’re the victim, you may also be able to go to your local police department to start the process.

While it can be difficult, if you suspect any type of fraud, it’s important that you report it to the FBI or another regulatory agency right away. Share all of the information available to you to aid the case.

How to Avoid Wire Fraud

Wire fraud is an intimidating threat, especially when you’re in the middle an already exciting, yet stressful, and major financial decision. Fortunately, there are easy ways to avoid wire fraud.

  • Double-check account numbers, addresses, and other information before ever signing a document or wiring money.
  • If you’re ever in doubt, call your trusted advisors (like the lending institution directly) to confirm how they will contact you and what the next steps are.
  • Use an advanced, secure platform that allows you one point of contact for everyone involved in the transaction, minimizing the risk that a third-party tries to intercept.

If you’re looking for a secure, trusted platform to handle your real estate transactions, look no further than paymints.io. The fast, digital interface makes for seamless and transparent communication throughout every phase of a real estate transaction. Digital earnest money and closing costs, along with direct bank transfers and real-time tracking, keeps you in control of your money until you have keys in hand.

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