Mortgage fraud: unlikely, but possible
According to the FBI, you are not the most likely victim of mortgage fraud — most cases are perpetrated by borrowers against mortgage lenders. Often those involve exaggerations, white lies or outright falsehoods on loan applications.
However, mortgage industry professionals who abuse their positions of trust pose a much more serious threat to individuals. Their aim is to line their own pockets at the expense of innocent consumers.
Here are some of their more common scams. Knowing about them could save you from becoming a victim.Verify your new rate (Dec 9th, 2018)
Mortgage fraud according to the FBI
The Federal Bureau of Investigation investigates many of these fraud cases, although local law enforcement often has its role. So the FBI has useful insights into this sort of crime.
Who are the fraudsters?
One FBI report provides a list of mortgage professionals who are frequently involved in frauds:
- Bank officers
- Mortgage brokers
- Loan originators
- Other professionals engaged in the industry
Of course, the vast majority of people involved in mortgage lending are decent and honest folk whose main goal is to help you get a good deal on your loan. Don’t assume that anyone — no matter how fancy her job title — is above suspicion.
Be especially wary if you’re being pressurized, or you’re being urged to do something you know is wrong (“Believe me, everyone does it”), or you’re being offered a deal that’s too good to be true.
What to look out for
That FBI report lists nine different forms of common mortgage fraud. Many of those make victims of lenders but some frauds are dangerous to consumers.
Your equity is the amount by which the current market value of your home exceeds the balance left on your mortgage. That sum usually grows as your home appreciates in value and your monthly payments whittle down the debt.
Most of the time, that’s just a paper gain. But it counts toward your net worth. When you need money, you can access some of your equity through a cash-out refinancing or a home equity loan or home equity line of credit (HELOC).
As importantly, it can provide all or most of the down payment you need when you buy your next property. Your equity is real money that you need to protect.
How scammers take your equity
Since your equity is real money, scammers would like to get their hands on it and they’ll make outrageous promises; using sleight of hand to do so.
Things are so bad, there’s a bipartisan proposal in the U.S. Senate to protect veterans and servicemembers from these predatory, abusive practices. At the time of this writing, no law has yet been enacted to deliver those protections. Even if one eventually is, it won’t help civilians. It comes down to you to guard your equity.
Equity stripping involves lenders who get you a lower your mortgage rate and payment by adding very high costs onto the loan — increasing your mortgage balance. But they don’t tell you this, and because the fees come out of your home equity instead of your pocket, you might not realize it.
You might get a payment that’s $100 a month lower — but you don’t see that they charged you 10 points (10 percent of the loan amount). Avoid this by making sure the costs shown on the final statement from the title company are reasonable and match what was disclosed upfront.
A common goal of refinancing is to get a lower monthly payment. There’s nothing wrong with that and many loan programs will deliver lower payment options without you accessing your equity.
Imagine you’ve had your 30-year mortgage seven years and you now owe $100,000. You have to pay that down over 23 years. But refinancing means you can get a new 30-year mortgage, so you spread your repayments over 30 years. You’re resetting the clock. And that means your monthly payments are almost bound to be lower. However, you’ll pay more in the end. Because you’ll be paying interest for 37 years instead of the original 30 years.
You can also lower your monthly payments by buying “points” (or “discount points”) when you refinance. With this, you pay cash (out of your equity) to reduce your mortgage rate.
Another way to cut payments is to refinance from a fixed-rate mortgage to an adjustable-rate mortgage (ARM). ARMs have much lower rates than FRMs, but only for a certain period of time. After that, they float with other interest rates, meaning there is a risk (a big one right now) that your payments could increase. ARMs make the most sense if you’re pretty sure you’re going to sell up and move home after a certain period and can fix your rate for that period.
Finally, beware of deals that promise the whole transaction will be free: “No out-of-pocket expenses.” And it’s true you may not have to come up with any money on closing. But that doesn’t mean you won’t pay.
Almost invariably, those closing costs will be added to your mortgage balance and you’ll be paying them (and interest on them) for maybe the next 30 years. Alternatively, you’ll be asked to accept a higher interest rate so the lender can cover your closing costs.
Scams and non-scams
The thing is, all those refinancing features may make perfect sense for some borrowers in certain circumstances. If you’re struggling to make your monthly payments, it may well be good for you to reduce those by extending your term and using your equity to buy a lower mortgage rate.
You might even benefit from an ARM. And, if you can do that without having to find closing costs, that too can be good.
Any decent, honest, reputable mortgage professional can help you when lower payments are your priority. They’ll explore your options, explain the upsides and downsides and let you decide how to proceed. Their aim is to make you better off.
Scammers will overpromise, use jargon and vague promises to make sure you don’t know your deal’s drawbacks and pressurize you into signing up to their proposal. Worse, in a process called “churning,” they often lure homeowners into repeatedly refinancing, each time leaving those borrowers worse off. Their goal is to make themselves better off by skimming your equity.
Scammers may skate over ethical boundaries but they rarely enter criminal territory. Clever ones can skim your equity without breaking any laws. And, even if they do cross a legal line, you’ll likely have a hard time proving they have in court.
By all means, go ahead and report your case if you believe you’ve been scammed. The FBI, the Federal Trade Commission, your state’s attorney general, the Better Business Bureau and others will likely be interested even if they don’t have immediate grounds for action. Your experience may point to a pattern of behavior on the part of an individual or company.
And remember, a good mortgage broker or lender may end up giving you the same deal as a scammer. The difference is, he or she won’t lie, make extravagant promises, pressurize you or let you sign without all the facts.
Avoiding mortgage fraud and equity stripping
There are simple rules for avoiding equity stripping:
- Distrust people who approach you; you should be the one getting in touch
- Don’t believe too-good-to-be-true promises
- Ask lots of questions and get answers in writing
- Get a Loan Estimate disclosure — lenders must by law provide one within three business days of application
- Make sure your closing disclosures match the last Loan Estimate you received from the lender and verify that the costs are reasonable.
- Most important: Get multiple competitive quotes for your refinance. And get Loan Estimates with your quotes when you can. Many lenders will provide them before you apply if you ask. Otherwise, apply to get your loan estimate — you are not obligated to go through with any loan just because you apply.
Feel free to ask questions. You’re not borrowing for a living and any good professional won’t mind answering even the dumbest inquiries. And, if you get stuck or unsure what to believe, you can always use The Mortgage Reports’ Ask an Expert service for free, impartial advice.
The FBI identifies other scams, some of them criminal, that can leave homeowners devastated. These include:
- Foreclosure rescue schemes — preying on desperate homeowners who fear foreclosure. They may ask you to sign over the home to them and offer to rent it to you while they bring your loan current. But they may just collect rent from you while allowing your home to go into foreclosure.
- Loan modification schemes — similar to foreclosure “rescue,” but they may get fees from you upfront for modification help, then disappear with it after taking no action on your behalf.
- Reverse mortgage fraud — stealing from vulnerable retirees, they may offer reverse mortgages with bad terms that steal the equity. This can be prevented by using HECM programs, which are administered by HUD and the most popular reverse mortgage programs by far.
If in doubt, check with our experts here. We are happy to provide advice when asked.
What are today’s mortgage rates?
Rates today are higher than they were earlier this year. However, mortgages are still highly affordable. Comparing quotes from competing lenders doesn’t just protect you from fraud; it can help you offset some of these rising costs by getting you a better deal.Verify your new rate (Dec 9th, 2018)