What is Mortgage Fraud? How to Detect & Combat Fraudulent Borrowers

In the past few years, mortgage applications have increased significantly. Unfortunately, so has mortgage fraud – and the problem’s getting worse.

CoreLogic estimates that 1 in 120 mortgage applications was fraudulent in 2021. In 2020, the rate was 1 in 164. That’s an increase of more than 35 percent in one year alone, which means that rate is likely to continue to increase in 2022 and beyond.

Lenders are battling multiple circumstances. For one, fraudsters are growing more sophisticated. A quick search on Google reveals how to forge documents realistically. Social media videos advise on how to avoid detection.

The lending process is also a catalyst for fraud, with multiple parties involved in the origination and servicing process. Variables such as price and interest rate increases can incentivize borrowers to falsify details on their loan applications.

The FBI has taken notice, recognizing that mortgage fraud “was very common during the past few years as home values dramatically increased and people bought homes they couldn’t afford.” 

While law enforcement agencies are working hard to stop mortgage fraud, lenders who want to protect their finances must take proactive steps. Using automated fraud detection tools to validate and verify applicant information and documents can help.

What is mortgage fraud?

Mortgage fraud happens when an applicant intentionally falsifies, misrepresents, or omits information required to fund, purchase, or insure a mortgage loan.

Fraud can occur at any step of the mortgage process. The perpetrator can be a borrower or an industry professional like a banker or appraiser. Because the motivations of these two groups are often distinct, the FBI designates their crimes into two separate categories: fraud for profit and fraud for housing.

Fraud for profit

Fraud for profit typically gets committed by mortgage professionals. The motive behind this type of fraud is often financial gain. Fraudsters might try to flood the market with bad mortgages to earn fees or use “straw buyers” to purchase multiple properties to collect kickbacks from lenders bailing out their investments.

Fraud for property

Fraud for property typically involves borrowers. Loan applicants may inflate their income and assets to qualify for a loan they wouldn’t otherwise be able to afford. Alternatively, some individuals use fraudulent documents like altered pay stubs and false bank statements to get approved.

In either case, the goal is clear: to unlawfully obtain property.

Types of mortgage fraud schemes

Mortgage fraud schemes fall into various types. Here are some of the most common:

Occupancy fraud

Occupancy fraud occurs when borrowers lie about the intent of using a property as their primary residence. They intend to qualify for a loan or receive preferred terms from a lender.

Appraisal fraud

Inflated appraisals get used to exaggerate a property’s value and increase the appraiser’s commission.

When the appraiser colludes with an investor, properties get undervalued, making them more accessible for the investor to purchase.

Property flipping

Property flipping is usually legitimate. However, the practice turns into mortgage lending fraud when the property gets sold immediately after being purchased for below the market price.

A pair of corrupt investors and appraisers often commit the scam. The appraiser “verifies” that the property is worth the inflated sales price.

Identity theft

Identity theft happens when borrowers use an unsuspecting person’s data to apply for a mortgage. The scammer might use real information like the victim’s Social Security number and paystubs.

Foreclosure scams

Desperate homeowners may fall victim to foreclosure rescue fraud. A scammer might offer a “guarantee” that they can help the homeowner keep their home in exchange for upfront fees, only never to deliver.

Straw buyers

Straw buyers are people who purchase a property on behalf of someone else, often to avoid disclosure requirements or get better approval odds. The straw buyer often receives a fee for acting as a go-between.

Mortgage fraud detection: Prevent fraud earlier with automation

Preventing fraud is usually a matter of catching it earlier in the loan process, and modern technology helps lenders do that.

Ocrolus Detect offers intelligent automation designed for mortgage fraud detection. Our platform uses AI algorithms trained on documents from the world’s leading financial institutions.

Detect’s algorithms identify suspicious patterns that traditional methods can miss, such as income misstatements and altered documentation, all while providing clear audit trails for compliance. This technology helps uncover fraud before it costs your business money.

At the same time, Ocrolus’ powerful mortgage fraud detection solutions still leverage human oversight to ensure accuracy and quality. By combining the power of technology with human expertise, Detect provides lenders with a comprehensive fraud detection solution.

Confidently approve more borrowers

You can rely on Detect to make quicker, better-informed lending decisions.

Detect speeds up your process and eliminates the need for intensive manual review by providing comprehensive file origin signals and accurately diagnosing file tampering. With Detect, lenders can confidently process more loans without worrying about what’s slipping through the cracks.

Mortgage fraud is a serious issue that can have costly consequences for lenders. Fortunately, technology makes it easier to catch fraudsters.

Ocrolus’ Detect platform harnesses the power of artificial intelligence to identify suspicious patterns and reduce risk accurately. Try Detect now and see how your business can transform your mortgage fraud detection process and prevent costly losses down the line.