Federal and state agencies investigate how mortgage companies commit fraud, but these offices must first suspect irregularities. Mortgage fraud takes place in making or denying loans and also in colluding with fraudulent mortgage loan applicants.
- Pressure. Mortgage companies commit fraud by verbally presenting terms that never appear in the printed contract, or by pressuring consumers to accept a loan contract. The pressure may include setting artificial deadlines or making offers for discounts applied only to contracts signed before leaving the business office.
- Fees and interest. Lenders may also commit fraud by charging excessive interest rates or by requiring high fees or points to make a loan. Loan instruments typically used to commit fraud include balloon payments, where small payments are made culminating in a large, final bill. Interest-only mortgage loans are another method used to commit fraud. These loans feature payments that never apply to the principal amount, and monthly payments that cover only the interest. When the loan period is over, the borrower is still on the hook for the total amount of the loan. Balloon loans are legal, but only if the borrower is aware of the total amount of interest to be paid.
- Bad loans. A larger type of fraud is made when mortgage companies purposely make bad loans knowing full well that the borrower will default. The loans are then insured by an outside agency against loss. When the loans fail, the mortgage company receives the insurance money, as well foreclosing on the real property involved in the lending scam. It's a win win for the mortgage company, and it's fraud on a massive scale. This type of fraud cuts deep into the stability of the economy.
- Red lining. Mortgage companies also commit fraud in failing to lend in some neighborhoods. This practice, known as red lining, excludes certain groups of people from ever obtaining a home loan. It promotes neighborhood decline since homes cannot be sold in some low-income neighborhoods. If potential applicants meet lending requirements and the property is fit, the laws preclude denying loans simply based on arbitrary red lines placed on city maps.
- Discrimination. Applicants also experience fraud when mortgage companies refuse to make loans based only on the race, age or religion of the applicant.
- "Rescue" mortgage companies. When consumers find themselves in mortgage trouble, another type of mortgage company fraud occurs. Foreclosure "rescue" mortgage companies make fraudulent claims to obtain new, low-interest loans, and sometimes take money without ever making a loan. Cases of mortgage fraud include transferring the property to the to the fraudulent company. Other scams feature refinancing using less common loans, including reverse mortgages where homeowners are off the hook for payments, but the owners lose any interest in the property. Reverse mortgages can be legal, viable loans, but fraud occurs by accelerating the interest charged and foreclosing quickly on the property. This process leaves the owner without any equity and without a place to live.
- Borrower Collusion. Residential mortgage payment limits, usually under 38 percent of the applicant's monthly income, provide a reasonable payment level for loan applicants. Unscrupulous lenders commit fraud by colluding with borrowers presenting false documents showing claims of excessive income. This loan fraud is usually combined with an loan insurance policy that covers the loan and returns the property to the bank.