What is an Air Loan Scheme?

Article Summary:

An air loan is one of many foreclosure schemes designed to make a profit from completed loan transactions. These types of scams can be extremely costly for lenders, who often end up losing money when the fraudulent mortgages go into default.

Mortgage fraud costs financial institutions in the United States billions of dollars each year, and the air loan fraud scheme is one of them. In this scam, a mortgage broker will create a fake property and a nonexistent borrower to secure a mortgage loan. Once the transaction has gone through successfully, they will then pocket the money and disappear.

Though this process sounds simple, there’s a lot of planning that goes behind it. In this article, we’ll dive deeper into how an air loan works, and also explore other types of mortgage fraud that you should be aware of.

What is an air loan?

In a nutshell, an air loan scheme is a type of mortgage fraud where a mortgage broker invents both a property and a property buyer. The broker then uses this as leverage to obtain a loan from a lender and negotiate a deal for the nonexistent borrower — earning profits as the intermediary of the transaction.

Once the loan transaction successfully goes through and profits are secured, the broker pulls the rug out from underneath the lender. The imaginary borrower then defaults on the loan — which makes sense because the person isn’t real. Because of this, the lender suffers a major loss because there’s no physical property to foreclose on and recoup the money.

All in all, the idea behind an air loan is that the broker convinces the lender that there’s already a demand for the property and that the loan will be repaid when in fact both the property and the borrower are fictitious. This means the entire loan amount that the lender provides goes directly into the fraudster’s pocket.

What is the difference between a mortgage lender and a broker?

A mortgage lender is a financial institution that provides loans to borrowers to purchase a property. On the other hand, a mortgage broker is an individual or firm that acts as an intermediary between borrowers and lenders. Typically, mortgage brokers have a network of lenders they work with and can provide borrowers with multiple loan options to choose from.

Another difference between the two is that a mortgage lender funds the loans, while a mortgage broker arranges the loan and typically does not provide the funding. Fortunately, you can compare mortgage loans without a broker by using the tool below.

What do mortgage financers do?

Mortgage financers provide funds to a borrower for the purchase of a property. Each mortgage financer has specific borrowing guidelines to assess the borrower’s ability to repay the loan.

In most cases, once a borrower is approved for the loan, they must put down a percentage of the purchase price as a down payment. The mortgage financer will provide the remaining funds. The mortgage will then be repaid over a period of time in installments with interest.

How an air loan works

Though the concept of a mortgage fraud scheme like this sounds quite straightforward, setting up successful fictitious transactions takes an immense amount of planning.

To deceive the lender who tries to verify information provided on the loan application, the broker will establish an office with a bank of telephones. From here, the broker pretends to be the borrower’s employer, credit agency, and even appraiser to “verify” the borrower’s credit history and even social security number.

And apart from convincing the lender that the made-up borrower is real, the broker must also convince the lender that the imaginary property exists. To do so, the broker has to fabricate ownership documents, the property’s title history, and even mailbox accounts.

Other types of mortgage fraud

Apart from air loans, there are many other fraud schemes that happen in the real estate and financial world.

  • Silent second mortgage. A silent second mortgage is usually used when the borrower can’t afford the down payment on the first mortgage. To cover the cost of the down payment, the borrower takes out a second loan. Because the existence of the second loan is ‘silent’ and hidden from the first lender, it’s illegal.
  • Equity skimming. Equity skimming is a form of real estate fraud where a person obtains title to your home before refinancing the property and taking out all of the equity.
  • Foreclosure rescue schemes. This is a common type of equity skimming scheme where an investor (scammer) targets homeowners in distress, offering to buy their property before the potential foreclosure happens. Then, the scammer will transfer the title from the owner and strip out the equity in the home.
  • Illegal property flipping. Illegal property flipping is when a con artist artificially inflates the appraisal value of a home through a fake appraisal and sells it for a high profit.

What is flipping a loan?

Loan flipping is a predatory lending practice where a lender encourages a borrower to refinance a loan. The lender may do this by promising the borrower more affordable rates. However, this refinancing comes with fees that only benefit the lender, not the borrower. In many cases, the new loan’s terms are actually worse for the borrower than the original loan, including higher monthly payments, stricter repayment terms, and costly prepayment penalties.

As a result, loan flipping can end up costing borrowers thousands of dollars in fees and interest payments, without actually improving their financial situation.

Key Takeaways

  • An air loan is an elaborate hoax and fraud scheme that involves the broker creating both an imaginary property and a buyer to cheat the lending bank, and earn false profits.
  • Planning a successful air loan fraud scheme takes a lot of effort. The broker has to convince the lender that both the property and the buyer are real by creating fictitious documents and pretending to be the borrower’s credit agency, employer, appraiser, etc.
  • There are many other types of mortgage fraud, including silent second mortgages, equity skimming, foreclosure rescue schemes, and illegal property flipping.
  • A mortgage broker is an entity that acts as an intermediary between mortgage borrowers and lenders.
View Article Sources
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  5. What is a Forgivable Loan? Definition and Examples — SuperMoney
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  7. What Is an Installment Loan? Definition & Examples — SuperMoney
  8. How To Qualify For A Personal Loan? — SuperMoney
  9. Best Mortgage Lenders | June 2022 — SuperMoney