What Is Mortgage Fraud?

Mortgage fraud is often a complicated crime that can involve mortgage lenders, borrowers, and industry players. A wide range of activities can constitute mortgage fraud at both the state and federal levels. Read on to learn about the different types of mortgage fraud and the various laws involved.

What Is Mortgage Fraud?

Mortgage fraud occurs when someone intentionally lies, confuses, or 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. It can also involve complicated schemes and multiple acts by several actors. Because the loan and mortgage process involves numerous documents, multiple transactions and players, and large sums of money, it creates ample opportunity for fraud.

Types of Mortgage Fraud Cases

Authorities typically categorize mortgage fraud into two broad categories based on motive—fraud for housing or fraud for profit.

Mortgage Fraud for Housing

When people want to buy a home and apply for a mortgage, they must submit an application to a lender. If the borrower knowingly makes misstatements, misrepresents important information, or omits important information, these actions constitute mortgage fraud.

A single act of mortgage fraud can occur, for example, when borrowers knowingly misrepresent how much money they earn or what their debt, assets, and credit ratings are. The applicant might submit forged or altered documentation, use a stolen identity, or take out a second mortgage off the books (a "silent second") to get the main mortgage approved. The point of these misrepresentations is to get the lender to rely on them and approve the loan.

Mortgage Fraud for Profit

Lenders, investors, and other industry insiders can also commit mortgage fraud. These professionals might engage in a single act or complicated schemes 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.

Some common mortgage fraud schemes include the use of:

• straw buyers to hide the true borrower's identity, equity, and credit
• inflated property appraisals to flip the property, make a quick profit, or close a deal
• deflated property appraisals to get short sale approvals
• reverse mortgage fraud to steal equity or create and pocket false equity (often at the expense of the bank and a senior citizen), and
• misrepresentations and fraudulent documents in underwriting and closing loans.

Professional mortgage fraud often involves collaborations by multiple parties, such as mortgage brokers, real estate appraisers or agents, accountants, attorneys, investment bankers, builders, and even credit agencies.

Is It Mortgage Fraud to Make a Mistake on a Loan Application?

Mortgage fraud crimes occur only when a borrower or professional knowingly makes material misrepresentations or omissions. ("Material" means the information will be used to make the loan decision.) Borrowers who mistakenly report incorrect information don't commit mortgage fraud. Put another way, mortgage fraud exists when the intent to defraud is present. Transposing a number, misunderstanding a question, or submitting the wrong document isn't fraud if it's an honest mistake. If the person discovers they made a mistake, they should immediately take action to correct it or notify the lender.

Is Mortgage Fraud a Federal or State Crime?

Mortgage fraud can be prosecuted as either a state or federal crime.

State Crimes for Mortgage Fraud

State laws criminalize unlawful activities that occur within their borders. Some states have criminal laws specific to mortgage fraud, such as Florida, Minnesota, and New York. Even if a state doesn't have such a law, general fraud crimes will apply. Larger schemes might fall under states' racketeering laws (targeting organized crime).

(Fla. Stat. §§ 817.54, 817.545, 895.02; Minn. Stat. § 609.822; N.Y. Penal Laws §§ 187.00 to 187.25, 460.10 (2024).)

Federal Crimes for Mortgage Fraud

Federal criminal laws generally apply when criminal activity crosses state lines or involves the internet, federal agencies (such as the Federal Housing Administration), or mortgage lenders, banks and other federally regulated financial institutions.

Prosecutors might file federal charges for bank fraud, loan and credit application fraud, wire fraud, or conspiracy to commit any of these crimes. They can also file federal racketeering charges under RICO (the Racketeer Influenced and Corrupt Organizations Act), especially in cases involving large-scale mortgage fraud schemes.

(18 U.S.C. §§ 1014, 1341, 1343, 1349 (2024).)

What Are the Penalties for Mortgage Fraud?

State law penalties for mortgage fraud vary. Some states impose felony penalties for any type of mortgage fraud. Others increase the penalties based on how much money was involved or lost (similar to theft penalties). Defrauding vulnerable populations (such as elderly adults) could also lead to harsher penalties.

Under federal law, mortgage fraud convictions that fall under bank or loan application fraud statutes carry up to 30 years of prison time and $1,000,000 in fines. These penalties apply whether the defendant is the principal actor, attempted the offense, or conspired to commit fraud.

In state and federal cases, judges typically impose restitution orders to pay back victims for their losses. Other consequences of a fraud conviction are loss of professional licenses, forfeiture of any property or proceeds of the crime, and civil lawsuits from victims.

(18 U.S.C. §§ 1014, 1343, 1344, 1349, 1961, 1963 (2024).)

Defenses to Mortgage Fraud

In fraud cases, prosecutors must prove that the defendant intentionally or knowingly made material misrepresentations to defraud another. Defendants might try to beat fraud charges by showing they didn't know the information was incorrect, their error was unintentional or immaterial, or they weren't aware of any scheme to defraud.

A defense lawyer could also try to suppress (get rid of) any government evidence allegedly obtained through an illegal search or Miranda violation.

Find a Lawyer

Being investigated or charged with mortgage fraud is serious. You'll want to find a criminal defense lawyer who defends complicated fraud cases. If you're facing federal charges, it's important to find a lawyer who practices in federal court.