The financial crisis that began in 2007 and 2008, especially the subprime loan collapse, created an enormous amount of distressed homeowners, many of whom continue to struggle years later. Various deceptive and fraudulent practices by mortgage lenders, mortgage brokers, and others contributed to the crisis, and more fraudulent schemes emerged to take advantage of those who were affected. Congress took swift action to protect banks and other lenders against fraud, but homeowners must generally rely on existing consumer protection law to assert their rights.
A mortgage is a type of loan used to finance the purchase of real property. Since few people have enough cash on hand to pay the full purchase price for a property, buyers usually pay part of the purchase price and borrow the rest. The buyer/borrower signs a promissory note for the amount of the loan, as well as a deed of trust granting a lien to the lender. This gives the lender the right to foreclose on the property if the buyer/borrower fails to make payments. Several federal consumer protection statutes regulate the real estate sale and purchase process, such as by requiring lenders to disclose the estimated cost of a loan.
During and after the real estate market crash, many people saw the value of their properties drop to less than the amount they still owed on their mortgage loans. Mortgage fraud schemes targeting borrowers often exploit anxieties over property values, mortgage payments, and mortgage interest rates.
Predatory Mortgage Lending
The government has no distinct definition of “predatory lending.” The Federal Deposit Insurance Corporation (FDIC), which provides insurance coverage for deposit accounts, as well as guidelines for banks, has stated that the complexity of the real estate loan business makes a single definition of “predatory lending” impossible. “Predatory lending” generally includes many types of deceptive or fraudulent acts covered by consumer protection laws.
The FDIC identifies three common elements of predatory lending:
- Using a borrower’s assets, rather than income, to make unaffordable loans;
- Using deceptive or coercive measures to get a borrower to refinance a mortgage loan, for the purpose of charging the borrower high fees and other expenses; or
- Misleading a borrower about a loan, or concealing important information about the loan.
This type of scheme frequently targets homeowners who are at risk of defaulting on their mortgages, or who are already in foreclosure. It is possible to avoid foreclosure by negotiating with the lender, although difficulties in that area are a whole separate problem for homeowners. In a foreclosure rescue scheme, however, fraudsters deceive the homeowners about their ability to save the home from foreclosure.
This type of scheme might involve inducing the homeowners to transfer the property to them or to a third party, while telling them that they can buy the property back after some period of time. The fraudsters may then sell the property and keep the proceeds, while failing to make payments to the lender. They also charge the homeowners a fee for the “service.”
Fraudulent Loan Modifications
Lenders are sometimes willing to renegotiate the terms of a mortgage loan, reasoning that receiving payments from a homeowner at a lower interest rate is preferable to foreclosure. A loan modification scam involves a promise to negotiate better loan terms on a borrower’s behalf, in exchange for a fee. Once the homeowner has paid the fee, the fraudsters either fail to negotiate with the lender in good faith, possibly resulting in even worse terms, or they fail to negotiate at all. The borrower ends up with either the same payment terms as before, or even worse terms, and often ends up in foreclosure.
Reverse Mortgage Fraud
A reverse mortgage is a type of home equity loan that is only available to homeowners who are at least 62 years old. Rather than making monthly payments to a lender, a borrower who takes out a reverse mortgage on his or her home receives monthly payments from the lender. The money is repaid when the borrower dies or sells the residence. A reverse mortgage fraud scheme might target vulnerable elderly homeowners by offering to help them obtain a reverse mortgage, obtaining the reverse mortgage in a homeowner’s name, and then pocketing some or all of the payments from the lender.