Mortgage fraud is a large and growing problem and warrants significant attention. The mortgage lending industry has lost billions of dollars as a result of fraud, and the sum is believed to have risen steadily in recent years. Though the lender is the direct victim of mortgage fraud, fraud harms honest homeowners and homebuyers as well, through increased housing costs. Schemes that involve artificially inflated appraisals, for example, drive up property tax assessments and foreclosures resulting from fraud depress surrounding home prices. Clearly steps need to be taken to make the prosecution and prevention of mortgage fraud more effective. To date, however, there has been little agreement on which steps need to be taken.
It is critical to recognize the difference between mortgage fraud and predatory lending. “Mortgage fraud,” as understood by law enforcement and the real estate finance industry, is the “material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.”1 A lending institution is deliberately deceived by another actor in the real estate purchase process — such as a borrower, broker, appraiser or one of its own employees — into funding a mortgage it would not otherwise have funded, had all the facts been known. “Predatory lending,” on the other hand, is a term used to describe a range of lending practices harmful to borrowers, including equity stripping2 and lending based solely on the foreclosure value of the property. Some of these practices can be fraudulent, but defining an exact set of predatory lending practices has been difficult. This paper seeks to separate the issue of mortgage fraud from predatory lending and to provide policymakers with a roadmap to effectively combat mortgage fraud that is distinct from policy decisions made to address predatory lending.
While some anti-mortgage fraud proposals have focused on amending federal law, federal law currently empowers law enforcement officials with sufficient authority and tools to combat mortgage fraud. The federal mail and wire fraud statutes, which are broadly phrased and have been broadly interpreted, reach all possible cases of mortgage fraud. Additional federal statutes apply to certain instances of mortgage fraud committed against federally regulated or insured institutions, providing federal law enforcement officials with additional avenues to combat mortgage fraud. Unlike new legislation, which always carries with it the risk of unexpected interpretations, existing law is tested by years of judicial precedent and can be applied by federal law enforcement officers with confidence.
Federal Bureau of Investigations, Financial Crimes Report to the Public, at 20 (Mar. 2007), available at http: /www.fbi.gov/publications/financial/fcs_report2006/publicrpt06.pdf.
“Equity stripping,” as a predatory lending practice, generally refers to foreclosure “rescue” schemes where an owner sells the house and leases it back at a higher monthly payment to stave off foreclosure. Once the individual falls behind on those new payments, the house is taken away and any equity built up in the home is lost.
Mortgage Bankers Association
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