How Real Estate Professionals Can Guard Against Mortgage Fraud

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Points of Interest

Mortgage fraud has been a concern in the real estate industry for decades, but the risk landscape of mortgage fraud is changing with disruptions from the pandemic and other global events. Real estate professionals who are able to detect the signs of common mortgage fraud schemes, can protect both themselves and their clients from potential harm.

Our economy is currently entering a recession, and mortgage rates are lower than ever. This has prompted many homeowners to refinance. According to the National Mortgage Application Fraud Risk Index, refinances accounted for 61.4% of all loan applications in the second quarter of 2020, up from 59.9% in the previous quarter. And although the risk of mortgage fraud decreased overall by 8.7% in Q2, the risk of investment mortgage fraud, also known as “for-profit” mortgage fraud, has increased.

The pandemic has made the real estate market volatile. Real estate prices have increased as the economy has shrunk amid the pandemic, and this market volatility is an opportune playground for ill-intentioned real estate investors looking to test their luck. As such, real estate professionals and lenders need to be on the lookout for potential investment mortgage scams.

Although lending restrictions have tightened in recent years, the threat of mortgage fraud is still present. According to CoreLogic, about 1 in 123 mortgage applications in the second quarter of 2019 contained fraud. Real estate agents, mortgage brokers and the homeowners they represent need to spot the red flags of mortgage fraud, so they can stop it before it happens.

What constitutes mortgage fraud?

Mortgage fraud occurs when one party presents false or inaccurate information in connection with a mortgage application. As a result, the lender or approving party approves the loan, and it is issued on terms and conditions different than if the true information of the applicant was known.

There are many different types of mortgage fraud, and almost any party involved in a mortgage transaction can be defrauded as a result. This includes unsuspecting homebuyers, as well as financial institutions, titleholders, lawyers and other parties.

In general, there are two types of mortgage fraud: fraud for housing and fraud for profit.

Fraud for housing

Fraud for housing occurs when a borrower knowingly provides false or inaccurate information to secure a loan and obtain housing. This often happens when borrowers misrepresent their income or employment status to get better terms on their loans.

Fraud for profit

Fraud for profit is sometimes referred to as “insider” fraud, and it involves mortgage professionals defrauding a lender for financial gain. It usually requires the participation of at least one authority in a real estate transaction, such as the appraiser, real estate broker, mortgage broker or another real estate professional. For example, a real estate appraiser might devalue a house to get a buyer a better price in exchange for a kickback from the buyer.

That said, a real estate professional can be implicated in fraud even if they aren’t aware. If the professional fails to disclose certain information or accidentally misrepresents someone involved in the transaction resulting in financial gain, they could be committing fraud.

For this reason, real estate professionals must be able to distinguish between legal and illegal mortgage and real estate investment practices.

Investment mortgage fraud is a type of white-collar crime. It can result in prison time, probation, fines and loss of license. Real estate professionals found guilty of committing fraud may also need to pay financial restitution to their victims, which can devastate their careers and bank accounts.

10 common mortgage schemes to be aware of during the pandemic

Real estate professionals can inadvertently become involved in schemes targeting their clients if they don’t stay vigilant. Here are some of the most common mortgage fraud schemes to be aware of, especially during the COVID-19 pandemic.

1. Illegal property flipping

This type of fraud occurs when a property is purchased and then resold at an inflated, unreasonable price. House flippers might buy the property and make cosmetic changes to make it appear renovated, then sell it to unsuspecting buyers to turn a profit. They’ll typically do so without the oversight of a real estate agent or with the help of an appraiser who provides a fraudulent value of the property.

  • Pandemic risk factors: During COVID-19, property flippers will be searching for cheap real estate to purchase so they can have it falsely appraised. As more and more homeowners miss their mortgage payments, the prospect of mass foreclosures is very real. Be on the lookout for cheap real estate that is appraised at a value higher than it’s worth.

2. Fictitious or stolen identities

This type of fraud occurs when a borrower maintains a fake or stolen identity to secure the funds for a home loan or obtain more favorable terms. According to David Reischer, Esq., a real estate attorney and CEO of, “The most pernicious and expensive fraud is based on the existence of fake borrowers. When a mortgage loan is given to a fake borrower, it allows for equity to be stolen out of the property and in many instances never to be recovered after the loan funds.”

  • Pandemic risk factors: When people get desperate, they are more susceptible to revealing compromising information that could lead to stolen identities. There has already been an uptick in identity theft since the pandemic started. Thoroughly research the identity of anyone trying to apply for a mortgage, as there is a higher than usual chance of identity fraud.

3. Loan modification scams

When homeowners are struggling to pay their mortgages, they become more susceptible to loan modification scams. In this scam, the fraudster presents themselves as a loan refinance company or expert and entices the homeowner to pay them instead of their loan servicer at a lower monthly rate. They may promise the homeowner better loan terms but abscond with the initial payment and never communicate with them again.

  • Pandemic risk factors: As the pandemic continues to take a toll on the economy, more homeowners struggle to pay their mortgages, as well as other bills and expenses. During this period, unsuspecting homeowners may seek relief from fake lenders

4. Foreclosure rescue scams

Foreclosure rescue scams are like loan modification scams, but in these cases, the scammers directly target homes that are being foreclosed upon. The scammer will tell the homeowner that they can prevent foreclosure by negotiating on their behalf for a fee. Once the fee is paid, they never contact the homeowner again.

  • Pandemic risk factors: As of August 2020, there is a foreclosure moratorium in place, but it may not be extended unless the government acts. If it isn’t extended, many homeowners may face foreclosures, so the prospect of a foreclosure “rescue” will be tempting. Ensure any homeowners you work with who are behind on their mortgage payments know their real options regarding foreclosure.

5. Occupancy fraud

Occupancy fraud occurs when the homebuyer lies about their property being owner-occupied. They’ll do so to get better loan terms on their mortgage, then rent out their property for profit. When this happens, the lender isn’t appropriately compensated for their risk because they don’t know that they are lending to a real estate investor and not a homebuyer.

  • Pandemic risk factors: As we continue to conduct business remotely, some real estate investors may try to take advantage of the current situation to lie about the occupancy of their properties. Believing no one will check their property’s occupancy status, they’ll claim they are living there but will rent it out instead. Follow up with every homebuyer you work with and research their true intentions for buying a house.

6. Straw buyer scams

This type of trick is like identity fraud, but it usually involves a fake buyer and another party who intends to use the property. When this type of fraud occurs, a prospective buyer with bad credit partners with someone who has good credit, presenting the party with good credit as the person taking out the loan. This gives the individual with bad credit more favorable loan terms.

  • Pandemic risk factors: Foreclosures and missed mortgage payments can severely impact someone’s credit score. If homeowners continue to struggle to pay their loans during the pandemic, there could soon be a significant number of homebuyers on the market with bad credit. This increases the chances of a straw buyer scam.

7. Air loan scams

An air loan scam occurs when a mortgage broker creates a fictitious property and a fictitious borrower to earn false profits on loan transactions. Because there is no borrower, the loan eventually goes into default. The lender loses their investment, and the broker of the fake loan walks away with profits.

  • Pandemic risk factors: Air loans could become more common as we continue to do business at a distance. If you’re suspicious about the existence of a property or borrower, do your homework and try to visit the building itself. It could be that you’re dealing with an air loan scam.

8. Buy and bail scams

The buy and bail scam involves a homeowner whose property value has fallen below the amount owed (also known as being “underwater”), but who is current on their mortgage. They’ll apply for a purchase-money mortgage on another home, then let their first home go into foreclosure once the new property has been secured.

  • Pandemic risk factors: Buy and bail scams are common during a housing crash when property prices plummet, and homeowners’ homes lose their value. Although real estate prices are currently stable, there’s still a possibility of a housing crash in the near future simply due to the economy retracting.

9. Short sale schemes

There are multiple types of short sale fraud. Typically, the fraudster will profit by concealing or falsifying information about the true value of a property. This makes it difficult for the loan servicer to make a short sale decision, leading to reduced indebtedness on the property.

  • Pandemic risk factors: In some instances, a buyer might conceal information from the homeowner and the lender, enabling them to buy a property for cheap and sell it at market value to turn a profit. Real estate investors may try to engage in this type of short sale scheme during the pandemic as real estate prices continue to climb.

10. Hacking and social engineering scams

Some of the most brazen mortgage fraud scams are known as “social engineering” attacks. This is when a victim is psychologically manipulated into performing an action or divulging sensitive information.

In one type of attack, a hacker will hack into the email address of a party involved in the sale of a home, such as a buyer, seller, lawyers, the title company, the real estate agent or a mortgage broker. The hacker will then monitor emails as they go back and forth. At the right moment, they’ll send a fraudulent email to the buyer posing as a legitimate party and asking for a wire transfer of funds to complete the sale.

  • Pandemic risk factors: These attacks become more common during a crisis, such as a pandemic, as people tend to be more afraid and desperate than usual.

Steven J.J. Weisman, Esq., a lawyer and college professor who teaches about white-collar crime at Bentley University, says, “Even if you are not involved in buying or selling a home, it is always a good idea to protect your email account from being hacked. This means having a strong password and security question.”

Weisman also suggests that everyone involved in a real estate transaction “maintain good anti-virus and anti-malware software on all your electronic devices, including your computer as well as your smartphone, and keep your security software up to date with the latest security patches as soon as they are made available.” 

“Don’t click on links in emails or text messages that may contain malware that can steal your personal information from your electronic devices,” Weisman added.

Detect and prevent mortgage fraud: How to spot the signs

Mortgage fraud can come from almost any direction, whether from the borrower, the appraiser, the mortgage broker or another party. The best way real estate professionals can prevent mortgage fraud is to recognize the red flags.

The 4 most common signs of mortgage fraud you should be aware of

1. Phony loan applications

Fake loan applications are filled out by applicants using false or fictitious information to get better loan terms. A fake loan application may contain some or all of the following:

  • The borrower and their employer have the same phone number
  • The address of the applicant’s employer is a P.O. Box
  • There is a different mailing address on the borrower’s W-2 forms and bank statements
  • The borrower’s income is far beyond what their job typically pays
  • The borrower has too many assets for their income level
  • The borrower’s homeowners insurance policy is for a rental property

“Fake borrowers will produce fake driver’s licenses, passports, W-2 forms, pay stubs, bank statements and tax returns to create the illusion of a real borrower,” said Reischer. “Lenders must always be on guard to make sure that the person is who they claim to be. New techniques at creating fake documents associated with real Social Security numbers can cause giant losses for a bank that provides a loan on phony credentials. Purchase loans, construction loans, bridge loans and cash-out refinance loans are all susceptible to crooks that are looking to exploit ultra-loose money in the mortgage industry.”

2. Credit documentation discrepancies

False credit documentation is often a telltale sign of mortgage fraud. If any credit documentation you receive contains these discrepancies, you may be dealing with a scammer:

  • The borrower’s length of credit history doesn’t match up with their age
  • Information on the borrower’s paperwork doesn’t match up with information on their latest credit report
  • Their Social Security number isn’t consistent with their documentation

3. Appraisal inconsistencies

If the appraisal of a home seems far above the fair market value of similar homes, it could be a sign of appraisal fraud. Similarly, a home that has been appraised at far below the fair market price of similar homes could be a sign of fraud.

Most lenders will work with an appraiser they trust to judge the value of a property. The buyer may also work with an appraiser. It’s best to compare both appraisals to spot any signs of inconsistency.

4. A quitclaim deed is involved

A quitclaim deed allows an owner to easily transfer real property to another person without much expense. If a quitclaim deed is involved in a real estate transaction, or if a property is transferred to an individual or alias immediately after it is purchased, it could be a sign of fraud.

How to report mortgage fraud

Mortgage fraud is relatively rare and has been decreasing steadily over the past several years. According to the United States Sentencing Commission, the number of mortgage fraud offenders has decreased by 73.3% since the fiscal year 2014.

Still, mortgage fraud is a serious criminal offense that can be charged as a felony, and there could be a spike in fraud rates as the economy continues to suffer due to the pandemic.

If someone is convicted of mortgage fraud, they could face up to 30 years in prison and a fine of up to $1 million. This is not including any restitution the perpetrator must pay to the victim or victims. Real estate professionals can be found guilty of mortgage fraud, whether they committed fraud knowingly or unknowingly.

The FBI handles most mortgage fraud investigations. If you suspect fraud in a real estate transaction, you should immediately report it to the authorities by doing one of the following:

If you are reporting a case in which an individual homebuyer or consumer is the victim, you can contact the Offices of the United States Attorneys in your state. Your state Attorney General may bring a lawsuit against professionals or companies that are hurting consumers.

Finally, you can contact your local police department.

To report scams involving specific types of government-backed loans, you can contact the department, agency or company associated with the loan program:

  • The U.S. Department of Housing and Urban Development (HUD/FHA)
    • Phone: (800) 347-3735
    • Fax: (202) 708-4829
    • Email:
    • Address: HUD OIG Hotline (GFI), 451 7th Street, SW, Washington, DC 20410
  • Fannie Mae/Freddie Mac
    • Phone: (800) 4-FRAUD-8
    • E-mail:
    • Fax: 571-382-4883
    • Mail: Attn: Financial Fraud Investigation Unit, 8200 Jones Branch Drive, McLean, VA 22102-3110

If you suspect a licensed professional involved in a real estate transaction of fraud or suspect an individual is not licensed to perform the part they play in the transaction, contact the appropriate licensing authority in your state.

The bottom line

It is in the best interest of every real estate professional to do their due diligence to identify and report cases of investment fraud. Although there are many different types of mortgage fraud, you can prevent it if you know what to look for. If you suspect someone of committing mortgage fraud, don’t hesitate to report them to the authorities.

Contact the Offices of the United States Attorneys in your state

Michael Rand

Personal Finance Contributor

Michael Rand is a business and personal finance writer based in Beverly, Massachusetts. He holds a master’s degree in writing from Salem State University and spent years producing content for financial services clients as an agency writer. His work has been featured in publications like, The Simple Dollar, and