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Mortgage fraud is often a complicated crime that can involve both mortgage lenders and borrowers. It's estimated, for example, that about 10 percent of the nation's mortgage applications contain either mistaken or intentional omissions. What makes an intentional omission different from an inadvertent one is often difficult to prove, which is why mortgage fraud prosecutions were, until more recently, relatively rare.
Mortgage fraud occurs when someone lies, confuses, or intentionally omits important information during the mortgage application and approval process. Mortgage fraud is possible through a single act by either a lender or a borrower.
A wide range of activity can constitute mortgage fraud, and state laws that punish the crime differ significantly. Some states do not have specific mortgage fraud law, while others do. Regardless, all states have laws that punish the type of activity that occurs in mortgage fraud.
When people want to buy a home and apply for a mortgage, they have to submit an application to a lender. If the borrower knowingly makes misstatements, misrepresents important information, or omits important information, these actions constitute mortgage fraud. This type of fraud is sometimes known as fraud for housing because the borrower is not seeking to make a profit from the fraud, but commits it to obtain a home.
Lenders, as well as borrowers, can also commit a type of mortgage fraud in order to make a profit from the transaction, which is why this type of mortgage fraud is sometimes known as “fraud for profit” or professional mortgage fraud. Professional mortgage fraud often involves complicated schemes and collaborations by multiple parties, such as mortgage brokers, real estate appraisers, real estate agents, accountants, attorneys, investment bankers, builders, and even credit agencies. The main purpose of these schemes is to make money and not to obtain a home for a buyer.
Mortgage Fraud: Single and Multiple Actions
A single act of mortgage fraud can occur, for example, when borrowers knowingly misrepresent how much money they earn or when they accept a kickback or undisclosed payment from the seller.
Multiple acts of mortgage fraud are more common and typically occur when several people collaborate to obtain a mortgage. For example, house “flipping” can constitute mortgage fraud in some situations. (This type of home flipping is different than when a person buys a home, makes repairs, and then sells it for a profit.) Mortgage fraud flipping occurs when a buyer purchases a home at a low price, then recruits an appraiser who agrees to value the house at a much higher price. The new owner then sells the home at an artificially inflated profit, giving the appraiser part of the profits.
Mortgage Fraud Involves Intent, Not Mistakes
Mortgage fraud crimes occur only when a borrower or a professional knowingly makes misrepresentations or omissions. By contrast, a borrower who mistakenly reports income information does not commit mortgage fraud. Put another way, mortgage fraud exists as long as the intent to defraud is present. For example, an appraiser who intentionally misrepresents a home's value in hopes to later get the buyer to sell and give the appraiser a kickback commits mortgage fraud. It doesn't matter if the seller never agrees to the scheme or the appraiser never makes a profit, because the appraiser knowingly made a material misstatement of the facts in the mortgage application process.
In addition to state mortgage fraud crimes, federal prosecutors can also prosecute individuals or organizations for mortgage fraud. Federal criminal laws often apply when the activity involved crosses state lines, involves federal agencies such as the Federal Housing Administration, or involves mortgage lenders and other federally regulated financial institutions. Federal prosecutions for mortgage fraud usually target professional fraud, not fraud for housing.
Fraud and Organized Crime
In some situations, federal prosecutors have filed RICO charges against large-scale mortgage fraud operations. RICO stands for the Racketeer Influenced and Corrupt Organizations Act, a law that punishes a group of people in an organization if members of the organization commit crimes. Federal prosecutors typically use RICO charges against organized crime organizations such as mafia groups or gangs. However, after the housing bubble burst in 2007-2008 and more large-scale mortgage fraud became known, federal prosecutors have increasingly used RICO charges in professional mortgage fraud cases.
Mortgage fraud is a serious crime, and one punished by significant penalties. Because mortgage fraud can involve different crimes at either the state and federal level, the potential penalties associated with the crime differ widely. Mortgage fraud is typically charged as a felony offense, but misdemeanor crimes are possible in cases where only a small amount of money is involved, typically less than about $1,000.
- Prison. Prison penalties for mortgage fraud can be significant. A conviction for federal mortgage fraud charges can result in a federal prison sentence of 30 years, while state convictions can last a few years or more. Misdemeanor fraud convictions can bring jail sentences of up to a year.
- Fines. Fines for mortgage fraud are often extremely high, especially when professional fraud is involved. A conviction for a single count of a federal mortgage fraud can result in a fine of up to $1 million. State fines can range from a few thousand dollars for a misdemeanor convictions to $100,000 or more for felony convictions.
- Restitution. Mortgage fraud convictions often include restitution payments as well. Restitution is different than a fine, though they both involve money. Restitution is designed to compensate the injured party for your wrongdoing, while the government imposes a fine as a penalty. If, for example, you are convicted of mortgage fraud after you make false statements when applying for a mortgage, you may have to pay restitution to the lender in addition to your fines.
- Probation. Probation sentences can be imposed for a mortgage fraud conviction separately from, or in addition to, fines and prison sentences. Probation sentences for mortgage fraud typically last at least one year, but longer terms are common. Someone on probation must meet specified court requirements, such as making regular reports to a probation officer, submitting to random drug testing, and refraining from committing other criminal acts.
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Mortgage fraud charges are very serious, and convictions can mean you spend the rest of your life in prison. You need to contact a criminal defense attorney as soon as you learn you're being investigated for mortgage fraud, are contacted by law enforcement authorities, or even suspect you may be in trouble. Your ability to defend yourself depends on your ability to know your rights, and only an experienced criminal defense attorney in your area can provide the legal advice you need. An experienced criminal defense attorney will guide you through every stage of the criminal justice process at either the federal or state level and will give you advice based on experience, legal expertise, and knowledge of the court systems in your area.