What Is Mortgage Fraud? And Why Is It All Over The News?

If you're in the market for a new home and looking to sign a mortgage, be sure you know what you're signing. Improper or inaccurate statements on your mortgage agreement can come back to bite you and even get you into legal trouble. Finding a starter home is hard enough: you don't need to add in worries about falling victim to mortgage fraud, and you certainly don't want to be accused of financial wrongdoing because you were dishonest or unintentionally inaccurate about the statements you signed your name to. That's what happened recently when the Trump administration accused two government officials — U.S. Federal Reserve board member Lisa Cook and New York State Attorney General Letitia James — of committing mortgage fraud.

Mortgage fraud is a form of deceit or misrepresentation when offering or obtaining a mortgage loan. It can work in both directions: A lender can misrepresent the terms of a loan to get people to sign one they can't afford. Potential home buyers can also misrepresent their income, assets, or the reasons for buying a property to get a better deal on their loan. Cook and James were accused of illegally stating the purpose of the home they were buying to obtain lower interest rates on their mortgage. A recent report by the investigative journalism group ProPublica also claimed that President Donald Trump did the same thing when he purchased two different Florida homes in 1993, designating one as his primary residence.

Having an experienced realtor on your side can help new homeowners watch for fraudulent lending terms. Lenders can exploit naïve or inattentive applicants by offering misleading terms that can lead to financial hardship or even to losing one's home. One fraudulent foreclosure scheme involves lenders demanding upfront fees that falsely guarantee help to the homeowner in the event of foreclosure. Lenders may also promise to reduce mortgage payments in the future under conditions that the homeowner can never meet, or bury hidden charges in otherwise innocuous language. If it sounds too good to be true, it probably is.

In their eagerness or naivety, however, new home buyers might be tempted to be dishonest on their mortgage application in order to obtain a loan. Fraudulent statements are among the many red flags that mortgage lenders look for. Potential home buyers may overstate their income, misstate their employment status, or fail to disclose other existing financial obligations, such as car loans or credit card debt. 

Misstating the intended purpose of the property can also be a form of fraud, since a mortgage on a primary residence or vacation home often receives more favorable mortgage terms than a mortgage on an investment property. In the case against Letitia James, federal prosecutors accused her of violating the terms of her mortgage application for a second home by renting out the property. In that case, however, a grand jury recently declined to approve charges against the New York Attorney General. While the grand jury's reasoning was not given, it has been reported that a "second home rider" clause in the mortgage agreement allowed James to use it for short-term rentals. Whether you're applying for a mortgage for a primary residence or a short- or long-term rental, knowing what you're signing can keep you out of trouble.