I’ve mentioned before that in addition to the hazards of subprime credit, over-valuation, over-supply, resets, rising interest rates and so forth, the property market has been the scene of an immense amount of mortgage fraud. I think the extent of this fraud is not yet widely appreciated. Anyway, I have tried here to catalog the major types of mortgage fraud that I have seen reported. Since this is credit fraud, I have grouped the various forms under the three C’s of credit.

Collateral Fraud. The objective of collateral fraud is to deceive prospective lender(s) as to the market value of the property being used as collateral for a mortgage loan. Note that a particular transaction may include multiple forms of fraud, there is no implication that these are mutually exclusive.

Appraisal Fraud: Improperly or illegally influencing appraisals. The mildest and most widespread form of this fraud is to ask appraisers to submit a preliminary estimate of value before awarding them the job - and then giving the work to the appraiser who “hits the number”. More severe forms of course include explicit collusion and under-the-table payments. This fraud is easiest in a down market, because the appraiser can use older, out-of-date comparisons from closer to the market peak to disguise the real value of a property.

Undisclosed Cash Back: In this widespread fraud, the property is sold at at an inflated price. Most or all of the premium over the market price is then covertly passed back to the buyer. The seller agrees to the scheme in order to get a prompt sale. (And it would not be illegal if the cash-back payment were disclosed to the mortgage lender). The buyer then generally walks away with the cash, making no mortgage payments. This gives rise to a so-called early payment default. A milder version, although still felonious, is the use of the premium or cash-back as the “down payment”.

Phantom Builder Loans: A variation on loaned down payments, usually done by builders in order to qualify buyers who would not otherwise be able to obtain mortgage financing. The builder inflates the purchase price of the house and then extends the buyer a loan for the difference between the actual and the inflated purchase price. The buyer is not expected to ever make any payments on the loan, which is then quietly written off by the builder. But the effect is to reduce the apparent loan-to-value (LTV) ratio on the first mortgage, for example making a 100% loan appear to be only 80%. This makes the loan appear safer than it really is, inducing the mortgage lender to extend credit under false pretenses.

Down Payment Passthroughs: This fraud is very common and may also be classified as a capacity fraud. Typically for this fraud, buyers who lack sufficient down payments or assets to qualify for mortgage financing, especially government-guaranteed loans where down payments are still required, are directed by builders to an apparently unrelated non-profit organization. This organization presents itself as a community-supported program to boost home-ownership, amongst minorites, low-income folks, etc., etc., but in truth is simply a front for the builder. The builder contributes money to the non-profit, which then turns around and grants a portion of the money to prospective buyers for use as a down payment. This is a disguised discount intended to deceive the mortgage lender as to the actual loan-to-value (LTV) ratio.

Multiple Financing: Obtaining multiple mortgages on the same property at the same time, borrowing many times the property’s value. This can be tricky but apparently is more common than one might think. Delays in recording can mean that title companies don’t know about one another’s activity on the same property. Or creating a fake title company works, too. Generally this will be fairly quickly discovered, so fast feet and stolen identities are needed.

Character Fraud. The objective of character fraud is to deceive the mortgage lender as to the likelihood that the prospective borrower can be relied upon to honor the terms of the credit extension being contemplated. This deception is achieved by falsification of the borrower’s identity or credit score and payment history.

Straw Buyers and Identity Theft: In some sense, the easiest way to get a loan if you have some impediment to your own access to credit (such as being a known criminal) is to hire someone with the necessary credentials to act as the buyer. Or deceive them into acting as the buyer. Commonly known as a “straw buyer”. They usually believe that they’re going to receive a fee, a share of big profits, or both. Failing that, then use someone’s identity without their knowledge or permission, otherwise known as identity theft. Then you either sell them your property at an inflated price, or do a “cash-back” and then abscond with the cash. Either way leaving the straw buyer holding the bag.

Rented FICOs: This one has just been shut down by Fair, Isaac (the vendor of FICO scoring). The borrower would arrange, usually through an agency specializing in this fraud, to pay a fee to be added as an additional authorized user on credit cards issued to an individual with flawless credit. Due to a quirk in the FICO scoring system, now eliminated, the prospective borrower’s score would be increased based on the high-score individual’s payment record.

Flip Fraud: It takes several (typically 6 to 9) months after default for foreclosure to actually occur. This period offers, in effect, free use of the property for speculation. So flippers can, and do, obtain mortgage credit without any intention of ever making any payments. The property is immediately listed for sale at a profit; if it sells, then the profit is taken, if not, the flipper takes a hike leaving the mortgage company to dispose of the mess. Most prevalent in states (such as California) where foreclosure rules make it difficult or impossible for the lender to go after the borrower’s other assets.

Capacity Fraud. The objective of capacity fraud is to deceive the prospective lender as to the borrower’s ability to make the payments to be agreed on. This deception is achieved by falsification of the borrower’s identity (covered above), employment, income, assets and other obligations.

Rented Down Payments and Reserves: Don’t have any money for a down payment or for the assets to cover the three months or so of payments required by many lenders? Then there are folks out there who will rent you the appearance of money - an account in your name to show the lender. The account is real enough, just that the borrower has no access to it although it appears to be in the borrower’s name.

Over-stated incomes and assets: The willingness of lenders to accept the unverified claims of borrowers as to their incomes and/or assets is well-publicized, as is the widespread fraud that ensued. Liars’ loans, as they have become known.

Forged Documentation: Mostly done by mortgage brokers rather than the borrowers themselves, documents such as W-2s, income tax returns, 1099’s, bank statements and so forth are altered to misrepresent the borrower’s income and/or assets. Classic and straightforward. Often amateur work, but at least one large mortgage lender is claimed to have had an “Art Department” whose sole job was professional forgery of documentation.

Simultaneous Purchases: Frequently used by speculators and flippers, this fraud relies on the time delays in the credit information reporting system. This fraud strategy involves buying several properties at the same time and neglecting to inform the multiple prospective lenders about the true scale of the borrower’s commitments. The much-discussed Casey Serin shows an example of this fraud.

Residency Fraud: Perhaps the simplest fraud of all, lying to the lender about the intended use of the property - saying that it will be owner-occupied when, in fact, it is being purchased for investment or speculation. In all fairness, there are also many properties when the use change was forced rather than intentional, and therefore not fraudulent - the buyer bought a new property and intended to live in it, but couldn’t sell his previous residence and so was forced to hold one or the other for rental or speculation.