In that sort of hypothetical the Mortgage bank is likely to take one look at your friend, see you with all the money for the down payment, and decide that you need to at least cosign the loan (if not be solely responsible). You would be on the hook for the reputation (and credit score) hit and certainly still paying off the rest of the loan or face foreclosure and possibly a criminal lawsuit for fraud.

Which yeah, leaves a lot of questions for why this is legal for an LBO. Where's the "credit score" hit on these PE firms doing LBOs? How is it that these investors are allowed to be their own mortgage bank, not require themselves to cosign the very loan they are providing the down payment equity for, and not be liable for damages such as bankruptcy of the entity they put on the hook for the loan?

If you give the friend the money as a gift, you have nothing to do with it, right? if you give it to him as a loan to inflate his assets and don't disclose that then you are committing a Federal crime.