Final answer:
Common mortgage fraud schemes include property value inflation, falsifying borrower information, and identity theft, among others. These practices contributed to the 2008-2009 financial crisis by spreading the risk of high-risk loans across the financial system, leading to widespread defaults and severe economic consequences.
Step-by-step explanation:
Common mortgage fraud schemes typically involve misrepresentation or omission of information to deceive lenders into extending loans under false pretenses. Some common schemes include inflating property values, fabricating borrower information, falsifying financial records, and identity theft. Additionally, 'flipping' properties at artificially high prices, using 'straw buyers' to conceal the identity of the true borrower, and engaging in complex fraud rings are other fraudulent activities associated with mortgages.
These deceptive practices contributed to the 2008-2009 financial crisis, where the securitization of high-risk mortgage loans into mortgage-backed securities meant a widespread dissemination of risk across the financial system. As banks did not retain these risky loans, their initial due diligence in approving loans diminished. Furthermore, these bundled loans provided investors with returns based on homeowners' payments. However, when housing prices ceased to rise and interest rates increased, many homeowners defaulted, leading to losses for banks and investors, and precipitating the worst financial crisis since the Great Depression.