Mortgage delinquencies shot up by 180% between 2021 and 2022, and that was bad news for anyone in the lending business. Even with real estate prices going through the roof, mortgage applications keep rolling in, but so do the risks of fraud. For underwriters, the pressure is on. Missing a fake document could mean serious financial losses and a damaged reputation.

When a few clicks on a computer can produce near-perfect forgeries, it’s easier than ever for fraudsters to create convincing fakes. That’s why understanding and preventing mortgage fraud isn’t just important—it’s critical. In this article, we’ll dive into how using smart AI tools can help you catch fraud before it becomes a problem.

Mortgage fraud is on the rise

Mortgage fraud attempts surged by more than one-third between 2022–2023, leaving mortgage originators and brokers more vulnerable to mortgage lender fraud.

Worse yet, the shift to digital interactions has made home loan underwriting much more challenging. Anyone with a computer can easily edit PDFs of bank statements or other documents in a way that can be hard to detect with the naked eye. And if those amateurish attempts don’t work, there are plenty of online template farms that provide much higher quality, pre-made, editable document templates of any document needed for mortgage fraud. 

In our document fraud webinar, Jan Syrinek, Resistant AI’s Head of Product, highlighted how fraudulent tools are available to the public–especially with new generative AI capabilities.

’Generative AI not only helps create higher quality forgeries, it also helps to accelerate automation. And I think that’s the key thing here, that it makes automation more accessible to everybody—including fraudsters.’

In other words, the arms race is one, and relying on manual document reviews in mortgage underwriting processes is no longer tenable for home loan providers, who need to adopt mortgage fraud prevention and detection tools that can compete.

What is mortgage fraud?

Mortgage fraud refers to the misrepresentation or omission of material facts by the borrower, lender, or insider to gain an advantage during the mortgage underwriting process. 

How does mortgage fraud work?

Home loan fraud can be committed in a variety of ways, such as submitting fake documents, colluding with mortgage brokers, appraisers, and underwriters, and inflating property prices. The key is understanding why people commit home loan fraud in the first place.

Why do people commit home loan frauds?

People primarily commit mortgage fraud for two reasons: to profit financially or to secure housing they might not otherwise qualify for. 

Mortgage fraud for profit

Fraudsters who commit mortgage fraud for profit typically engage in activities like property fraud, appraisal fraud, and air loan fraud. Their goal is to manipulate the mortgage process to make quick money or launder illegal funds through real estate investments.

Mortgage fraud for housing

This form of housing fraud is usually less sinister than the ones done for profit. With the rise of inflation and a struggling economy, it is getting much more difficult than before to purchase real estate, driving up first-party fraud. The perpetrators involved in this kind of home loan fraud tend to be individuals genuinely seeking to qualify for a mortgage–making them prone to document fraud or forgery to inflate incomes or hide bad credit histories.

Common types of mortgage fraud

1 in 134 mortgage applications contained indications of fraud in the second quarter of 2023. 

Given these numbers, mortgage underwriters need to be stringent with their underwriting guidelines and the due diligence they conduct and be well aware of these 8 types of mortgage fraud. 

Income fraud

Income fraud refers to a fraudulent misrepresentation, omission, or declaration of the applicant’s income or current employer. These documents usually come in the form of fake or manipulated bank statements, pay stubs, employer references, and fraudulent employer contracts–which can be easily forged or generated online. 

For a mortgage loan underwriter to assess the veracity of these documents, it is recommended to use a document fraud detection service to assess them directly in seconds or to go directly to employers and request the aspiring homeowner’s work details. This helps mortgage underwriters to ensure that the applicant is still working with no recent changes such as a resignation, release, or retrenchment that could affect their ability to repay the loan. 

Air loans

Air loans, also commonly known as mortgage broker frauds, happen when a mortgage broker creates a fictitious property, borrower, and eventual buyer to defraud the lender. Fraudulent details such as credit histories, employment contracts, identification numbers, etc will need to be created to support this ‘fake transaction.’ Air loans are particularly damaging to lenders and financial institutions since the lack of real property or buyer means the funds tend to be irrecuperable.

Property fraud

Property fraud is a form of mortgage fraud where fraudsters doctor real estate deeds, documents, or details to transfer ownership of the property. These culprits tend to acquire, sell or mortgage the real estate asset by assuming the identity of the owner officially. They tend to go as far as entering this in public administration, generating an official record that highlights a sale or mortgage that never took place. Here are some examples of how it works:

• Secure mortgages illegally: Fraudsters may obtain mortgages on properties they don’t actually own–leaving lenders with defaulted mortgages and no legitimate claim to the collateral property.
• Defaulted payments: Once real estate fraud is uncovered, homeowners are usually unwilling or unable to make repayments–leaving lenders empty-handed yet again.
• Legal and reputation costs: When fraudsters are apprehended, lenders are stuck in long legal battles that make them vulnerable to additional penalties and potentially hefty consequences for unknowingly partaking in property fraud.

Appraisal fraud

Appraisal fraud, aka property flipping fraud, occurs when perpetrators purchase property, obtain a false appraisal, and then resell it at an inflated price. This tends to involve more than a single individual and can be easily classified into four main types: inflated appraisals, misrepresentation of property information, identity theft, and collusion. Here’s a closer look at how property fraud works:

Lastly, appraisal fraud can also go both ways–where a property is overvalued or undervalued. 

Occupancy fraud

Occupancy fraud is one of the examples of mortgage fraud where individuals falsely claim to live in the property they intend to purchase. People who engage in occupancy fraud are 75% more likely to default on their mortgage. Occupancy fraud occurs because mortgage applicants desire a better interest rate, a second home, a mortgage for others, or a smaller down payment. 

Here is how it works:

Asset rental fraud

Asset rental fraud occurs when unqualified borrowers borrow assets from others to appear qualified to obtain a mortgage. It is a type of home loan fraud where personal assets such as cash flow, equity, investments, and physical and non-physical assets are inflated. In some cases, borrowers can also forge genuine documents to prove their ownership of other people’s assets to obtain a fraudulent mortgage.

Inheritance fraud

Inheritance fraud happens when a business or individuals falsely proclaim to be an heir or beneficiary of a deceased person to gain legal access to their tangible and intangible assets such as real estate assets, investment bonds, etc. It is vital to note that some fraudsters can go as far as fabricating documents such as death certificates, wills, and more to ‘inherit’ a property illegally.

Liability fraud

Liability fraud is a type of fraudulent mortgage where an applicant hides other financial commitments such as hefty student debts, car loans, or even additional mortgages during the mortgage loan underwriting process. Hence, a mortgage loan underwriter must conduct due diligence such as checking an applicant’s credit report, bank statements, or even a title search to ensure that a candidate does not have additional liabilities.

Consequences of mortgage fraud

Mortgage fraud is an expensive lesson for any lender. However, each mortgage home loan fraud contributes to a slew of issues that involve more than just financial institutions and lenders. 

Here are some of the common repercussions of mortgage fraud:

Financial loss

More than a million American homeowners are 60 days behind on their mortgage repayments. For lenders and financial institutions, repetitive defaulted repayments lead to foreclosures. This leads to a loss of all future interest payments, which directly decreases revenue. In addition, financial institutions also lose out on the collateral value of the property due to economic fluctuations in the market. 

Increased liabilities

Mortgage fraud losses negatively impact loan loss reserves–which is a liability on the balance sheet. Hence, when loan loss reserves increase, the amount of liability increases. This directly affects profitability, retained earnings, and future capital of the lender. In turn, it also reduces the amount of assets a lender has at the end of a fiscal year.

Erosion of investors’ confidence and trust

Mortgage loan frauds in any fintech or financial institution indicate a lack of due diligence and bad lending practices. This erodes the investors’ confidence and trust, which negatively impacts the lender’s reputation–making it difficult for them to sell their loans. In the long run, lenders will struggle to survive and grow since loans remain unsold due to a tarnished reputation that goes around among investors. 

How do you fight mortgage fraud?

The best way to fight mortgage loan fraud is through a layered approach that involves a comprehensive mortgage fraud framework, protocols, and document fraud detection solutions. This ensures that preventative measures are taken during the home loan underwriting process–here’s how it works.  

Establish a mortgage fraud framework

A mortgage fraud framework is the first line of defense for lenders. One way to start is to categorize and incorporate mortgage fraud specifically in the company’s protocols and policies. This includes structuring internal data, frameworks, and processes to manage home loan fraud when it arises. Here are some ways on how to start:

Incorporate mortgage fraud protocols, policies, and processes

A company can start by establishing key policies, protocols, and processes to help employees mitigate mortgage fraud risks. This can be done through training internal staff, providing access to mortgage fraud information, and utilizing external resources such as an AI fraud detector. By doing so, a streamlined procedure is put in place, ensuring that all employees know what to do, where to report, and how to manage mortgage fraud cases once they arise. 

Collect, consolidate, and categorize internal data

A database of fraud losses is an impactful way to combat mortgage fraud. Start by creating a tracker that includes how much the company lost, the parties (brokers, solicitors, valuers, etc) involved, and any other relevant information. Even a simple Excel sheet will work wonders because monitoring these over time helps to detect fraud patterns, establish trusted partners, and encourage more stringent fraud controls in the future.

Set document fraud detection tools and measures in place

A forged or fake document is one of the most common indicators of mortgage fraud. Since mortgage applications are mostly approved via assessing documents–understanding document fraud becomes key–such as the common types of fake documents and how to spot them accurately. 

One way to combat document fraud is to utilize the best of both worlds: the instincts of an experienced underwriter and mortgage fraud detection tools such as an AI fraud detector. This strategy ensures that accurate conclusions can be drawn earlier–with confidence–leading to higher productivity. In addition, firms should ensure that junior associates are also trained on how to identify and manage document fraud during the loan application process. 

How do you detect mortgage fraud?

After setting preventative measures in place, detecting fraudulent, fake, or forged documents comes next. Lenders can either manually underwrite mortgages or automate part of the process. 

Here is a breakdown of how to detect mortgage fraud effectively:

Conduct manual underwriting for mortgages 

Experienced underwriters bring their laser-sharp instinct and a keen eye for details to the table. They tend to use their gut to detect suspicious activities, with confirmation through mortgage fraud red flags such as unsigned tax returns, etc. In addition, underwriters also use their attention to detail to scrutinize documents and get hard evidence like discrepancies in documents. These typical documents tend to be pay stubs, bank statements, credit reports, employer’s references, etc.

Use an AI mortgage fraud detection solution for underwriters

The widespread accessibility of generative AI, online editing tools, and template farms pave the way for all types of mortgage fraud. That’s why you should augment your underwriting instincts with an AI fraud detector that specializes in detecting fraudulent, forged, or fake documents. An AI-powered mortgage fraud detection solution for underwriters will help both inexperienced and experienced underwriters get to conclusions faster, and confidently conduct a mortgage fraud investigation or rescind a conditional mortgage loan approval if needed.

Why use AI fraud detection in mortgage underwriting  

Fighting document fraud in mortgage underwriting with the naked eye alone is a losing battle. The best way forward is to transform a lender’s defense line by incorporating AI fraud detectors– since it not only streamlines the underwriting process but also enhances document verifications with accuracy and precision. 

Without overhauling the existing framework for mortgage underwriting, an AI fraud detector also hastens the decision-making process. Easy to install or incorporate, it also improves the defense framework for any lender by automating the workflow–processing a vast amount of applications with faster processing time, providing insight into consumer data trends, connection to prior mortgage fraud cases, and compliance adherence to potential mortgage loan fraud.

Benefits of using AI in mortgage fraud detection

A good AI-powered mortgage fraud detection solution for underwriters can be revolutionary. Not only does it enhance the manual underwriting mortgage process, but it also saves time, money, and relationships. 

Here’s an in-depth look at how AI fraud detection is a game changer:

Saves time

Time is of the essence when it comes to approving mortgages. The areas affected are usually time taken to check each document, approve the mortgage, and investigate potentially fraudulent cases. For private mortgage lenders like LYNK Capital, only takes 2 minutes to conditionally approve home loans.

For lenders that prefer a closer look, a mortgage fraud investigation on tricky borrowers is usually conducted after using an AI fraud detection solution. In that case, fintech lenders and financial institutions can save up to 52 minutes per investigation–just like Habito–a UK-based mortgage broker. The best part? Due to the efficiency of automated AI mortgage fraud solutions, it can manage a vast amount of mortgage applications. 

Saves money

Each lender is estimated to lose $4.40 for every dollar lost to mortgage fraud. For any financial institution or fintech lender, it is a hefty lesson to pay. Hence, the only solution is to reduce the probability of mortgage lender fraud ahead of time–by incorporating AI mortgage fraud detection tools. By catching document fraud during the application process, it saves any lender a substantial amount of money–which tends to include legal fees, defaulted housing loans, PR costs for brand image, etc.

Saves relationships

A lender or financial institution’s profitability primarily depends on trust and its relationship with a borrower. However, the key is knowing which borrower to trust. With an AI fraud detection tool, mortgage lenders can catch 75% more fraud while knowing exactly who to lend to based on the documents submitted during the mortgage underwriting process. Incidentally incorporating accuracy and ascertained reliability, an AI mortgage fraud solution maintains a healthy status quo between lenders and borrowers without compromising on relationships or revenue.

AI-powered mortgage fraud detection solution for underwriters

As fintech lenders and financial institutions scale, understanding home loan frauds is no longer enough. On the contrary, it is much more important to keep up with the ever-changing landscape of technology–to incorporate AI fraud detection tools to avoid mortgage fraud. 

Start with Resistant AI, a proven AI fraud detection solution–that not only tells you what has been tampered with but also where the document comes from to help you connect the dots to prevent history from repeating itself.

Book a free demo with us today.

Frequently asked questions (FAQs)

What is document fraud?

Document fraud is the act of falsifying information on a document with the intent to deceive for personal gains, such as falsely inflating incomes, forging bank statements or credit reports, etc–which is primarily how mortgage fraud begins.

How much does mortgage fraud cost the US a year?

In the US, mortgage losses resulting from poor debt management and foreclosures are estimated to cost $70.8M based on the first quarter of 2024.

How much does mortgage fraud cost the UK a year?

Mortgage fraud costs about £1.3 billion a year (based on 2016), where 84 out of every 10,000 applications are fraudulent. 

Which state has the lowest mortgage fraud rate?

Based on CoreLogic’s mortgage fraud trend report, the infographic lists the area of St. Paul in Minneapolis as one of the least risky locations for mortgage fraud.

How do you protect against mortgage fraud in the US?

For mortgage lenders, the best way is to search for publicly available property tax records. It should highlight the tax history and records of the property over time to help underwriters ascertain the total amount of taxes and its assessed values. To search for property deeds, going to the county’s office directly should allow you to download and print property deeds for further assessment. 

How do you protect against mortgage fraud in the UK?

Apart from a layered approach of underwriters and an AI fraud detector, firms, and homeowners can go one step further by signing up for the free property alert service. It sends alerts on changes regarding chosen properties such as a new mortgage, change of ownership, etc for up to 10 real estate assets. In addition, businesses and homeowners are highly recommended to request a “Form LL Restriction” to protect their real estate assets