Wealth Building Lessons

Continuing on the thread of Mortgages, today’s post is by guest writer Anders Bylund of MortgageLoan.com.

Rampant mortgage fraud has been driving up home prices for years, and it’s not always easy to catch the bad guys in the act. Learn to pick up on the warning signs before it happens to you.

By now, you’ve heard all about the deflating housing bubble. But you might not have heard the whole story. Did you know that some of the inflation in housing prices a few years back came from mortgage fraud on a grand scale? Federal authorities are on the case now, but shady business has been going on for years.

How big is the problem?

In 2000, the FBI received 3,500 reports of mortgage fraud schemes. By 2004, the annual tally skyrocketed to 17,000. By 2006, it swelled to 28,000. This criminal activity is costing lenders more than $4 billion a year according to industry analysts, and consumers are footing a large part of that bill.

Mortgage fraud comes in two basic varieties: borrowers landing a larger or better-termed loan than they should, by misreporting their personal finances on application forms; and organized insider groups pumping up selling prices to maximize their percentages.

Both of these frauds create illusory value in the market—home prices not really backed by true property values—but the insider variety is the greater concern for investigators and consumers alike. It’s a conspiracy that requires appraisers, real estate agents, lawyers, and title workers to be in on the deal, and the methods can be quite sophisticated and profitable.

How to protect yourself

If you’re in the market for a mortgage loan and maybe a new home, there are some signs you can look for to protect yourself. If your agent or mortgage broker starts making lofty claims of ever-increasing home values, or promises that you’ll get a loan, regardless of your financial history, something’s up his sleeve.

Pushing for a cash-back loan is another red flag, as it increases the size of your mortgage and thus pumps up the middleman’s commission. If you start to feel like you walked into a used car dealership because of these high-pressure sales tactics, back away.

The rising housing market of the past decade masked these methods to some degree. It was hard to tell the difference between an exaggerated sale price and a legitimate rise in property values. Now that runaway real estate optimism has ceased, the shady operators are standing out.

Ask questions. Get references. Check the backgrounds and reputations of your real estate professionals, and make sure that you have estimates and contracts in writing. Fraud happens, but it doesn’t have to happen to you.

Recommended Reading:

1. How to Save Thousands of Dollars on Your Home Mortgage

2. The 106 Mortgage Secrets All Homebuyers Must Learn - But Lenders Don’t Tell

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