A Guide to Preventing Mortgage Fraud

Mortgage Fraud

A Guide to Preventing Mortgage Fraud

According to the consumer reporting agency LexisNexis, mortgage fraud costs have increased by 16.2% since 2020. Today, it costs financial institutions roughly $4.23 to address every $1 lost to mortgage fraud. Available data shows mortgage fraud, which refers to illegal activities that loan officers, brokers, appraisers, and real estate agents could potentially engage in to secure a loan. While these activities are rare, they are linked to loan defaults and foreclosures. Fraud can also lead to declines in property values, economic downturns, and large costs for small and midsize banks. Fortunately, there are steps that your lending institution can take to help prevent fraud and make sure you minimize costs. 

The Many Forms of Mortgage Fraud

Mortgage fraud comes in many forms, with the most common consisting of the following:

  • Foreclosure scams
  • Appraisal fraud
  • Income fraud
  • Straw buyer fraud

In addition to contributing to loan defaults, foreclosures, plummeting property values, and so on, mortgage fraud carries a 30-year prison sentence and up to $1 million in fines.

How Lenders Can Avoid Becoming a Victim of Mortgage Fraud

Banks and other mortgage lenders can protect themselves against mortgage fraud in several ways, some of which include

Verifying Borrower Information

One of the best things banks and other mortgage lenders can do to avoid mortgage fraud is to verify any information received from borrowers. That means running background checks to confirm identity, employment history, income, and, above all else, credit history. Reliable sources for conducting these in-depth background checks include tax returns, bank statements, credit checks with all three major credit bureaus, and pay stubs.

Careful Underwriting

Careful and thorough underwriting can help protect lenders against mortgage fraud.  That entails looking deep into a borrower’s financial situation to identify possible inconsistencies or red flags that could suggest fraud before finalizing a home loan.

Scrutinizing Appraisals

Appraisal fraud occurs when an appraiser intentionally over-inflates the value of a home.  This illegal practice can contribute to loan defaults and foreclosures because it leads to lenders writing loans for amounts some homebuyers can’t afford.  Ensuring appraisers are independent, licensed, and qualified to assess property values can minimize the chances of a lender becoming a participant in such fraudulent and illegal practices.

Staying Up to Date on Mortgage Fraud Trends

Mortgage fraud is constantly evolving.  And that means mortgage professionals will always be susceptible to becoming unwitting participants in mortgage fraud schemes. Attending training sessions, workshops, and conferences that discuss emerging fraud trends and how to avoid becoming a victim can lower the chances of this happening.

In summary, many lenders become victims of mortgage fraud every year in the U.S. Staying vigilant, carefully reviewing loan applications, and conducting thorough background investigations can go a long way toward driving down the number of occurrences.

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