Understanding Mortgage Fraud: What It Is and Why It Matters 

Many headlines recently have been focused on high profile politicians potentially committing mortgage fraud.  Given the heightened coverage, we thought it would be helpful to examine what mortgage fraud is?

Mortgage fraud is a serious financial crime that can have far-reaching consequences for individuals, financial institutions, and the broader economy.

What Is Mortgage Fraud?

Mortgage fraud involves intentional misrepresentation, omission, or falsification of information during the mortgage lending process. The goal is typically to obtain a loan or more favorable terms that the borrower would not otherwise qualify for. Common examples include:

1. Income fraud: Overstating income to qualify for a larger loan.
2. Occupancy fraud: Claiming a property will be a primary residence when it is intended as a rental or investment.
3. Appraisal fraud: Inflating or deflating property values to manipulate loan amounts.
4. Straw buyers: Using another person’s identity or credit to obtain a mortgage for someone who wouldn’t qualify.
5. Failure to disclose: Omitting information about existing debts or secondary financing.

These deceptive practices, whether committed knowingly or unknowingly, not only undermine the integrity of the lending system but also expose lenders and investors to increased risk.

Legal Classification and Penalties

Convictions can carry severe penalties, including:

• Up to 30 years in prison.
• Fines of up to $1 million per count.
• Restitution to compensate victims for financial losses.

State laws also classify mortgage fraud as a felony, with penalties varying based on the amount involved and the number of fraudulent transactions. In some cases, lower-value fraud may be charged as a misdemeanor, but even these can result in jail time and significant fines.

Statute of Limitations

The statute of limitations for mortgage fraud depends on the nature of the offense and jurisdiction. Federal statutes like mail and wire fraud typically have a five-year limit, but this can extend to ten years if the fraud affects a financial institution. Civil actions under FIRREA (Financial Institutions Reform, Recovery, and Enforcement Act) also have a ten-year window.

Importantly, the “discovery rule” may apply, meaning the clock starts when the fraud is discovered—not when it occurred. Courts may also “toll” the statute if the defendant concealed the fraud or fled the jurisdiction.

Conclusion

Regardless of who is engaging, either knowingly or unknowingly, in mortgage fraud, markets depend on transparency and accuracy when pricing different types of risk.  In this case, when a borrower distorts the market with inaccurate information, lenders are not able to price that risk appropriately which creates opportunities for participants to exploit these risks, mainly to the detriment of the lender and ultimately broad markets.  If market participants lose confidence in the proper functioning of markets, everyone loses. 

We hope everyone had a wonderful Labor Day Weekend!

Gordon Asset Management, LLC