Mortgage fraud in the United States: red flags and where to report

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Kooky

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Fannie Mae publishes the warning signs of mortgage fraud document by document, and several of the documents it lists belong to the sale itself: the sales contract, the earnest money deposit, the commission and the closing disclosure. This guide sets those published lists out as they stand, so that a reader in a brokerage can see which items in a sale file the lists name, what there is to check, and where a concern is reported.

It covers how Fannie Mae defines mortgage fraud, the schemes it names, the red flags it publishes for each document in a loan file, the two sections of the United States Code that carry the heaviest penalties, the bodies that take a report, and the latest enforcement figures from the Office of Inspector General of the Federal Housing Finance Agency. It describes what the official sources say to look for and where a concern goes. It is a description of general rules, not a judgment on any single file: whether a given transaction is lawful depends on its facts.

United States Code, title 18, sections 1014 and 1344, as copied by Cornell Law School's Legal Information Institute; Federal Housing Finance Agency Office of Inspector General, Semiannual Report to the Congress, 1 October 2025 to 31 March 2026.

How Fannie Mae defines mortgage fraud

Fannie Mae's mortgage fraud prevention page gives a one-sentence definition: mortgage fraud is a material misstatement, misrepresentation or omission relied upon to fund or purchase a mortgage. The same page extends the definition to a decision not to fund or purchase, and to a mortgage tied to a mortgage-backed security.

Three words in that definition do most of the work. "Material" means the statement mattered to the decision. "Omission" means that leaving something out counts in the same way as writing something false. "Relied upon" means the lender or the purchaser of the loan acted on what the file said. Nothing in the definition is limited to the borrower: it describes the statement, not the person who made it.

Fannie Mae then sorts mortgage fraud into two types, following the framework of the Federal Bureau of Investigation. In its words, fraud for profit occurs when industry professionals misuse their expertise to take part in fraudulent activity. Fraud for housing is committed by borrowers who take part in illegal activity in order to obtain or keep a home.

The schemes Fannie Mae names

Fannie Mae's page lists sixteen schemes by name: straw buyer; air loan; double sale; property flip; Ponzi, investment club or chunking; builder bailout or excessive sales incentive; buy and bail; foreclosure rescue; short sale; unauthorised fees or payouts; non-arm's-length short sale; short sale flip; reverse mortgage fraud; affinity fraud; reverse occupancy fraud; and synthetic identity fraud. The table below gives its description of six of them.

Fannie Mae also keeps a dated series of fraud alerts on the page. The newest, dated September 2026, concerns income and valuation misrepresentation in New York, on condominium purchases in Orange County. Earlier alerts cover mortgage broker fraud (June 2025), appraiser identity theft (January 2024), a borrower employment misrepresentation scheme (updated July 2021, with a list of 63 suspicious employers) and the reverse occupancy scheme (updated December 2018).

What a red flag is, and what it is not

Fannie Mae groups its warning signs into categories that follow the documents of a loan: high-level flags, the mortgage application, the sales contract, the credit report, employment and income, asset documentation, the appraisal, title, owner occupancy and the closing disclosure. The categories work as a checklist of where to look. They are not a list of offences.

The high-level flags come first. Fannie Mae names discrepancies in a Social Security number or an address, verifications addressed to a specific person, verifications completed on the day they were ordered or on a weekend or holiday, alterations such as deletions, correction fluid or squeezed numbers, mixed handwriting or type styles, and an excessive number of submissions to an automated underwriting system.

Occupancy: what the lists say for purchases and refinances

Whether a buyer will live in a property is a statement in the loan file, and Fannie Mae gives it a category of its own, split between purchases and refinances.

For a purchase, the published flags are these: real estate is listed on the application although the applicant is a renter; the applicant plans to lease the current home; the commute from the property to work is unrealistic; the applicant is moving down from a larger or more expensive home; the contract is subject to an existing lease; the occupancy affidavits show no intent to occupy; and the new homeowner's insurance is a rental policy.

For a refinance, the list changes with the documents available. Fannie Mae names a rental property listed by the borrower that costs more than the home being refinanced, bank statements or pay advices showing a different mailing address, a credit report showing a different address, an unrealistic commute, an appraisal that records the property as vacant or occupied by a tenant, occupancy affidavits showing no intent to occupy, a rental insurance policy, and a reverse directory that does not list the address.

One purchase flag is a term of the sale itself: a contract that is subject to an existing lease. Fannie Mae lists a related item under appraisals, a photograph showing a for-rent sign. The check in each case is whether what the file says about occupancy fits a property that appears to be let.

Reverse occupancy runs the other way. In Fannie Mae's description the borrower presents the purchase as an investment, relies on projected rent to qualify, and then moves in.

Straw buyers and the sales contract

A straw buyer, in Fannie Mae's wording, is a loan applicant used to disguise the true buyer or the true nature of the transaction. Fannie Mae's sales contract category lists the items to check in the contract.

The published flags are:

• the seller is a related party, a broker or the applicant's employer, which makes the sale non-arm's-length;
• the seller is not on title, or the purchaser is not the loan applicant;
• purchasers are added to or removed from the contract;
• no real estate agent is involved, or a power of attorney is used;
• a second mortgage exists but is not disclosed on the application;
• the earnest money deposit equals the entire down payment or is an odd amount for the local market, or its cheques carry inconsistent dates or a name or address that differs from the buyers';
• the commission is excessive;
• the contract is dated after the credit documents;
• the contract is generic boilerplate with little sign of real negotiation.

The absence of an agent is itself on the list: the items describe a file, not a profession.

The title category adds to the picture. Fannie Mae lists a seller who is not on title or has owned the property only briefly, a buyer with a prior financial interest in the property, an interested party such as a real estate agent or an appraiser appearing in the chain of title, and a buyer and seller with similar names, which it says could conceal a non-arm's-length sale. It also lists signs of financial strain on the property: tax or judgment liens, delinquent property taxes and recorded notices of default.

Concessions, side payments and the closing disclosure

The closing disclosure is the statement of who pays what at closing. Fannie Mae's description of a builder bailout explains why it matters: a seller pays incentives to the buyer that are hidden from the lender and raises the sales price to cover them, with an inflated appraisal in support, so that the loan is larger than the real price would carry. The Office of Inspector General of the Federal Housing Finance Agency uses close to the same terms for its category of condo conversion and builder bailout cases: the hiding of investor incentives and of true property values.

Both descriptions turn on what is hidden, and Fannie Mae's definition counts an omission relied upon to fund a loan alongside a misstatement.

Fannie Mae's closing disclosure flags are:

• borrower or seller names differ from the contract and title;
• the sales price is inconsistent with the contract, the approval or the appraisal;
• earnest money or builder deposits are excessive or inconsistent;
• payouts go to unknown parties;
• a refinance pays off liens that had not been disclosed;
• commissions, fees or points are excessive;
• the seller pays closing costs for a buyer who has enough assets for the down payment;
• cash to the borrower is inconsistent with the final application and the approval.

Appraisals, income and assets

The appraisal category covers the value on which the loan is sized. Fannie Mae lists an appraisal ordered by a party to the transaction, an occupant who is a tenant or unknown, an owner who differs from the seller named in the contract, an appraisal marked as a refinance when other documents show a purchase, and a price far above or below the predominant value in the market. It adds obsolescence that is minimised, large positive adjustments to comparable sales, and comparables that do not bracket the adjusted value, are not similar, are dated, or are distant or across boundaries. Photographs are on the list too: a for-rent sign, an odd vantage point, a mismatched address, or weather that does not fit the appraisal date. So are an appraisal dated before the contract, significant appreciation in a short time, and prior sales listed without explanation.

The employment and income category is the longest. Among its items: a generic job title; an employer whose address is a post office box, the property itself or the applicant's home; an applicant who lives far from the employer; an employer whose name resembles that of a party to the transaction; an employer who cannot be reached; earnings in round numbers; withholdings that are miscalculated; pay periods that overlap; irregular pay stub numbering; handwritten verifications; a W-2 that is not the employee's copy; and income that does not fit the type of job, or is unreasonable given the applicant's job, age, education or lifestyle.

Asset flags follow the money for the down payment: funds from sources other than deposits, such as gifts or sales of personal property; savings that do not fit the salary; statement dates out of sequence; recent deposits without a clear paper trail; account owners who are unknown parties; round-number balances; and an earnest money deposit whose source is unclear, does not appear among the withdrawals, or comes from an unrelated account.

The federal statutes and their penalties

Two sections of title 18 of the United States Code, as published by Cornell Law School's Legal Information Institute, set the heaviest federal penalties.

Section 1014, headed "Loan and credit applications generally; renewals and discounts; crop insurance", covers anyone who knowingly makes any false statement or report, or wilfully overvalues any land, property or security, for the purpose of influencing the action of a listed body. The covered actions include any application, advance, discount, purchase, commitment, loan or insurance agreement, and any change or extension of one. The listed bodies relevant to housing include the Federal Housing Administration, the Federal Housing Finance Agency, any Federal home loan bank, a mortgage lending business, and any person or entity that makes a federally related mortgage loan as defined in section 3 of the Real Estate Settlement Procedures Act of 1974.

Section 1344, headed "Bank fraud", covers whoever knowingly executes, or attempts to execute, a scheme or artifice to defraud a financial institution, or to obtain its money or property by means of false or fraudulent pretences, representations or promises.

The penalty clause is the same in both sections: a fine of not more than US$1,000,000, imprisonment for not more than 30 years, or both. Those are ceilings set by statute, not the sentence in any given case.

As copied by the Legal Information Institute, section 1014 names both a false statement or report and the overvaluing of land or property, and it uses the words "knowingly" and "wilfully". How those words apply to a set of facts is a question for a court. Both sections were read on that copy and not on an official government site; other federal sections, including those on wire fraud, mail fraud and conspiracy, were not read for this guide.

Where a suspicion is reported

The pages read for this guide sort reports by the kind of loan involved.

The hotline of the inspector general at the Department of Housing and Urban Development accepts reports of fraud, waste, abuse or mismanagement in the department's programmes, from employees, contractors and the public, and gives priority to matters with high dollar losses or significant community impact. For Federal Housing Administration originations and applications, its page sends ordinary questions to the FHA Resource Center and keeps for itself allegations that involve falsifying documents. Complaints under the Real Estate Settlement Procedures Act go to the Consumer Financial Protection Bureau, and general complaints about conventional mortgages to the Federal Trade Commission.

The inspector general of the Federal Housing Finance Agency accepts tips about fraud involving the agency, Fannie Mae, Freddie Mac, the Federal Home Loan Banks and their Office of Finance. Its hotline page lists single-family and multifamily loan origination and refinance fraud, loan modification and foreclosure rescue fraud, short sale fraud, embezzlement of closing proceeds, property flipping and deed theft. Reports may be made through an online form, which the page calls the quickest method, or by telephone, fax or post. A person filing chooses one of three options: to waive confidentiality, to remain confidential, or to remain anonymous. The office says it will protect a confidential filer's identity to the fullest extent permitted by law, and warns that anonymity may prevent an investigation.

The two companies have their own routes. Fannie Mae takes reports through its Suspected Mortgage Fraud Report, an online form, and by telephone. Freddie Mac states that its seller/servicers and industry participants are required to report mortgage fraud and suspicious activity through its Tip Referral Tool, and places its fraud prevention, detection and reporting requirements in Chapter 3201 of its Seller/Servicer Guide. Freddie Mac also keeps an Exclusionary List, which bars the people on it from transactions with the company.

The pages cited here do not set out a federal reporting duty specific to real estate agents; state licence law and brokerage policy are separate questions that those pages do not answer.

The latest published figures

The most recent figures come from the Semiannual Report to the Congress of the Federal Housing Finance Agency's inspector general, covering 1 October 2025 to 31 March 2026. The report describes the office as the primary federal law enforcement organisation focused on fraud against Fannie Mae and Freddie Mac, which together reported about US$7.8 trillion in assets at 31 December 2025 and have been in the agency's conservatorship since September 2008.

The money side of the same period: US$76,608,927 in criminal restitution and US$11,099,427 in criminal fines, special assessments and forfeitures, which the report totals at US$87,708,354. On those figures restitution is 87.3 per cent of the total. The report also records 14 investigative reports, and eight significant criminal investigations closed in the period that produced 33 convictions, sentences totalling more than 101 years in prison and more than US$96 million in restitution and forfeiture.

The report describes loan origination cases in these terms: falsified borrower income, assets, employment or credit, with fictitious Social Security numbers and altered documents such as W-2 forms and bank statements. One origination case it summarises involved a straw buyer. A financial adviser received 60 months in prison and more than US$1.3 million in forfeiture, and a loan officer 30 months, with a forfeiture that the report's text puts at about US$511,000 and its table at US$551,030. A family member used as the straw buyer on three loans received 14 days in prison and three years of supervised release.

Real estate agents appear in the summaries as well. The report records a listing agent on a US$17 million multifamily property who pleaded guilty to conspiracy to commit wire fraud, an agent who pleaded guilty to providing false documentation on loans insured by the Department of Housing and Urban Development, and an agent charged in an origination scheme in Ohio. It reports no sentences for them. Fannie Mae, for its part, published two trend analyses on 12 August 2026, one on mortgage fraud tips and one on loans, and its prevention page gives no numerical statistics.

Taken from Fannie Mae's published flags, the checks set out above can be listed briefly: the names on the contract, the title and the closing disclosure agree; the price is the same on all three; the deposit can be traced to the buyer; every payment at closing goes to a party the file identifies; and what the file says about occupancy fits the property. Fannie Mae states that a flag does not necessarily mean fraudulent intent; where a check does not hold, the concern is reported through the channels above, and any finding is for the bodies that take the report.

Kooky, from Shaka

Kooky edits Agents Estate and builds Shaka, the payment router he made for real estate professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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