Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators. This video discusses common mortgage fraud schemes mortgage loan originators are likely to encounter in their business. For course credit toward renewing your NMLS license, visit

Common mortgage fraud schemes

Mortgage fraud comes in many forms. Common mortgage fraud schemes include:

  • straw buyers;
  • air loans;
  • occupancy fraud;
  • reverse occupancy fraud;
  • income fraud;
  • buy and bail schemes;
  • appraisal fraud;
  • unlawful property flips;
  • employment fraud;
  • liability fraud;
  • debt elimination schemes;
  • foreclosure rescue schemes;
  • short sale fraud;
  • Social Security number fraud and identity theft;
  • house stealing;
  • multi-lien home equity fraud;
  • builder bailouts;
  • reverse fraud for property;
  • home equity conversion mortgage (HECM) fraud; and
  • affinity fraud.

Straw buyers are generally present in fraud-for-profit schemes. They are applicants paid for the use of their names, credit information and signatures. They mask the identities and intent of the primary fraud perpetrators. Common signs a straw buyer exists include:

  • mortgage payments are made by someone other than the borrower;
  • the buyer is a first-time homebuyer who will be significantly increasing their housing expense;
  • signs the borrower does not intend to occupy the property, e.g., the borrower will have an unrealistic commute after the purchase;
  • no real estate agent is employed;
  • power of attorney is used;
  • a boilerplate sales contract with few or no provisions, indicating a lack of a true negotiation;
  • inconsistent income, savings or credit patterns compared to the borrower’s history;
  • inconsistent signatures;
  • using gift funds for the down payment or closing costs; and
  • title to the property is transferred after the sales closes.

Air loans are loans to straw buyers on non-existent properties. Common signs of an air loan are:

  • signs of a straw buyer;
  • no real estate agent involved;
  • mortgage payments made by someone other than the borrower;
  • inability to independently validate the chain of title;
  • the lender is experiencing financial distress; and
  • common payer and mailing address for multiple loans indicates a larger scheme.

Occupancy fraud occurs when applicants falsely claim they will occupy the property as their primary residence to obtain a mortgage on more favorable terms. An example of this takes place when applicants are obtaining a mortgage for a house their non-household family members will occupy.

Reverse occupancy fraud occurs when a borrower buys a property as an investment and lists the rent from the investment as income to qualify for the mortgage, but instead occupies the property as their primary residence. Usually, this involves homebuyers whose verifiable income would not qualify for a mortgage, but who have significant liquid assets. This type of fraud is specific to certain regions of the country. Red flags for this type of fraud include:

  • subject properties are sold as investments;
  • purchasers have little or no established credit;
  • low employment income relative to rental income expected;
  • low employment income relative to assets; and
  • larger than normal down payments.