The FBI reports that recent mortgage fraud schemes are "exploiting the home equity line of credit (HELOC) application process to conduct mortgage fraud, check fraud, and potentially money laundering-related activity" as well as exploiting homeowners who are facing foreclosure.

California shares the dubious distinction of being one of the highest mortgage fraud states in the country, along with Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas, and Utah.

The FBI divides mortgage loan fraud into two categories: fraud for property and fraud for profit.

Mortgage Fraud for Property

Mortgage fraud for property usually involves minor misrepresentations so someone can buy a home to use as a primary residence. The buyers may embellish income and hide debt, but usually they do intend to repay the loan. Generally, the buyers know what they're getting into in this situation. The biggest challenge with this is that these buyers are a higher foreclosure risk, since they don't have the income level to support their new mortgage payments.

Mortgage Fraud for Profit

Mortgage fraud for profit is the biggest area of concern for the FBI and the mortgage industry, since it can have a negative impact on both homeowners and the lending industry. According to the FBI, "Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation." Illegal property flipping is the most common use of mortgage fraud for profit, where false appraisals and other fraudulent loan documents are used to purchase a property to flip to a new buyer at an inflated price.

According to the FBI, the concern with these illegal property flipping schemes is these flipped homes are sold at artificially inflated prices, so homes in surrounding neighborhoods also become artificially inflated. Per the FBI report, "When property values increase, property taxes increase as well. Legitimate homeowners also find it difficult to sell their homes as surrounding properties affected by fraud deteriorate."

The FBI has provided a nifty graphic to show the flipping process and how it affects lenders and property values:

Foreclosure Rates Increase with Mortgage Fraud

According to the FBI, "Mortgage loans based on fraudulent information usually result in delinquency, default, or foreclosure in a bear market." These are quite often loan applications that were filed using fraudulent information (overstated income and understated debt). Consulting firm BasePoint Analytics found that between 30 and 70 percent of early payment defaults are linked to significant misrepresentations in the original loan applications in their study of over 3 million loans.

Defrauding Homeowners Who Are Looking to Avoid Foreclosure

"Foreclosure rescue" programs attempt to convince homeowners that they can save their homes from foreclosure through deed transfers and the payment of up-front fees. What really happens is that there are often forged deeds involved in this process, and at times the home may be sold or a second loan may be obtained without the homeowner's knowledge, thus eliminating any equity that may have remained in that home.

Multiple HELOC's on a Single Home

Another mortgage fraud scheme is to open multiple home equity lines of credit (HELOC) on a single home. This is done by applying to multiple banks at a time, and having the new loans record within a few days of each other. This takes advantage of the fact that it can take a few days or more for a new lien to record on the home, and thus these new lenders are completely unaware of each other until these liens start to show up. They then find themselves in the 5th or 6th position on the home instead of the 2nd position as they had intended. And of course the money obtained from these multiple HELOC's will likely exceed the property's value.

HELOC's are also used for check fraud schemes and money laundering schemes, since they act much like a checking account. As long as deposits and withdrawals don't exceed the HELOC limit, money can be transferred into and out of the HELOC account without raising any red flags.

Mortgage Fraud in Santa Clarita

Much of what we've seen in Santa Clarita are the various lending schemes. Misrepresentations on loan documents are likely the most common, and as long as the homeowner can make the loan payments this isn't a huge concern for the lenders. However, this can lead to an increase in foreclosure rates in the area, and this is of concern to everyone.

What's scary are the HELOC schemes, where a dubious lender is able to get a homeowner a new HELOC far in excess of the property's value by providing fraudulent appraisals to support this inflated price. While this may seem minor on the surface, these too are often foreclosures waiting to happen, and it's impossible to sell these homes without either working out a short sale with the lender or repaying the funds received from the HELOC.

All homeowners facing the foreclosure process should seek qualified, experienced help to make sure that they aren't targeted by one of these mortgage fraud schemes.