Mortgage fraud is a term used to describe a broad variety of criminal actions where the intent is to materially misrepresent or omit information on a mortgage loan application to obtain a loan or to obtain a larger loan than would have been obtained had the lender known the truth. In federal courts, mortgage fraud is prosecuted as wire fraud, bank fraud, mail fraud and money laundering, with penalties of up to thirty years imprisonment. As the incidence of mortgage fraud has risen over the past few years, states have also begun to enact their own penalties for mortgage fraud.
Mortgage fraud is not to be confused with predatory mortgage lending, which occurs when a consumer is misled or deceived by agents of the lender. However, predatory lending practices often co-exist with mortgage fraud.
Examples of mortgage fraud
Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinqency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. In addition, lenders allow larger loans on owner-occupied homes compared to loans for investment properties. When occupancy fraud occurs, it is likely that taxes on gains are not paid, resulting in additional fraud. It is considered fraud because the borrower has materially misprepresented the risk to the lender to obtain more favorable loan terms.
Income fraud: This occurs when a borrower overstates his/her income to qualify for a mortgage or for a larger loan amount. This was most often seen with so-called "stated income" mortgage loans (popularly referred to as "liar loans"), where the borrower, or a loan officer acting for a borrower with or without the borrower's knowledge, stated without verification the income needed to qualify for the loan. Because mortgage lenders have begun to tighten underwriting standards and "stated income" loans are less available, income fraud is increasingly seen in traditional full-documentation loans where the borrower forges or alters an employer-issued Form W-2, tax returns and/or bank account records to provide support for the inflated income. It is considered fraud because in most cases the borrower would not have qualified for the loan had the true income been disclosed. The "mortgage meltdown" was caused, in part, when large numbers of borrowers in areas of rapidly increasing home prices lied about their income, acquired homes they could not afford, and then defaulted.
Employment fraud: This occurs when a borrower claims self-employment in a non-existent company or claims a higher position (e.g., manager) in a real company, to provide justification for a fraudulent representation of the borrower's income.
Failure to disclose liabilities: Borrowers may conceal obligations, such as mortgage loans on other properties or newly acquired credit card debt, to reduce the amount of monthly debt declared on the loan application. This omission of liabilities artificially lowers the debt-to-income ratio, which is a key underwriting criterion used to determine eligibility for most mortgage loans. It is considered fraud because it allows the borrower to qualify for a loan which otherwise would not have been granted, or to qualify for a bigger loan than what would have been granted had the borrower's true debt been disclosed.
Fraud for profit: A complex scheme involving multiple parties, including mortgage lending professionals, in a financially motivated attempt to defraud the lender of large sums of money. Fraud for profit schemes frequently include a straw borrower whose credit report is used, a dishonest appraiser who intentionally and significantly overstates the value of the subject property, a dishonest settlement agent who might prepare two sets of HUD settlement statements or makes disbursements from loan proceeds which are not disclosed on the settlement statement, and a property owner, all in a coordinated attempt to obtain an inappropriately large loan. The parties involved share the ill-gotten gains and the mortgage eventually goes into default. In other cases, naive "investors" are lured into the scheme with the organizer's promise that the home will be repaired, repairs and/or renovations will be made, tenants will located, rents will be collected, mortgage payments made and profits will be split upon sale of the property, all without the active participation of the straw buyer. Once the loan is closed, the organizer disappears, no repairs are made nor renters found, and the "investor" is liable for paying the mortgage on a property that is not worth what is owed, leaving the "investor" financially ruined. If undetected, a bank may lend hundreds of thousands of dollars against a property that is actually worth far less and in large schemes with multiple transactions, banks may lend millions more than the properties are worth.
Appraisal fraud: Occurs when a home's appraised value is deliberately overstated or understated. When overstated, more money can be obtained by the borrower in the form of a cash-out refinance, by the seller in a purchase transaction, or by the organizers of a for-profit mortgage fraud scheme. Appraisal fraud also includes cases where the home's value is deliberately understated to get a lower price on a foreclosed home, or in a fraudulent attempt to induce a lender to decrease the amount owed on the mortgage in a loan modification. A dishonest appraiser may be involved in the preparation of the fraudulent appraisal, or an existing and accurate appraisal may be altered by someone with knowledge of graphic editing tools such as Adobe Photoshop.
Cash-Back Schemes: Occur where the true price of a property is illegally inflated to provide cash-back to transaction participants, most often the borrowers, who receive a "rebate" which is not disclosed to the lender. As a result the lender lends too much, and the buyer pockets the overage or splits it with other participants, including the seller or the real estate agent. This scheme requires appraisal fraud to deceive the lender. "Get Rich Quick" real-estate gurus' courses frequently rely heavily on this mechanism for profitability.
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Mortgage lender A mortgage lender is an investor that lends money secured by a mortgage on real estate. In today's world, most lenders sell the loans they write on the secondary mortgage market. When they sell the mortgage, they earn revenue called Service Release Premium. 
BorrowerA mortgagor is the borrower in a mortgage—they owe the obligation secured by the mortgage. Generally, the debtor must meet the conditions of the underlying loan or other obligation and the conditions of the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor to recover the debt. 
Other participantsBecause of the complicated legal exchange, or conveyance, of the property, one or both of the main participants are likely to require legal representation.