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Alt-A Fraud Worse than Nonprime

FBI reports 46,717 SARs filed in fiscal 2007

May 13, 2008

By staff

Mortgage fraud is far more common in Alt-A loans than in nonprime or conforming loans, according to a new report from the Federal Bureau of Investigation. Annual losses from mortgage fraud could be in excess of $10 billion.

Mortgage fraud Suspicious Activity Reports totaled 46,717 during fiscal 2007, according to the 2007 Mortgage Fraud Report released today by the FBI. The number of SARs was up 31 percent from the prior year's 35,617. In 2005, 21,994 SARs were filed, while 17,127 were filed during 2004 and 6,936 were filed in 2003.

While total losses related to the SARs were unknown, 7 percent of the reports indicated $813 million in losses -- suggesting total mortgage fraud losses could have been in the neighborhood of $11.6 billion last year.

At the end of fiscal 2007, 1,204 fraud cases were pending with the agency, up from 818 in 2006 and 721 in 2005. In 2004, 534 cases were pending at yearend, and 436 cases were pending at the end of 2003. The FBI only investigates cases of at least $500,000.

The Department of Housing and Urban Development's Office of Inspector General reported 466 mortgage fraud cases pending as of Sept. 30, 2007, the FBI said. The Inspector General opened 151 of those case in 2007, compared to 239 in fiscal 2006. The decline was attributed to a decline in FHA market share.

The bureau said mortgage fraud was most concentrated in the North Central region, while the states with the most fraud were Florida, Georgia, Michigan, California, Illinois, Ohio, Texas, New York, Colorado, and Minnesota. The FBI field divisions with the most pending fraud investigations during fiscal 2007 were Los Angeles, Chicago, Detroit, Dallas, Atlanta, Miami, Denver and Houston. Cleveland and Salt Lake City were tied for the No. 9 spot.

Widely-used schemes included builder-bailouts, seller assistance, short sales, foreclosure rescue, and identity theft exploiting home equity lines of credit. Among regular players in mortgage fraud schemes are accountants, mortgage brokers, and lenders.

"Subprime mortgage issues remain a key factor in influencing mortgage fraud directly and indirectly," the report said. "The declining housing market affects many in the mortgage industry who are paid by commission. During declining markets, mortgage fraud perpetrators may take advantage of industry personnel attempting to generate loans to maintain current standards of living."

The FBI cited data that indicated fraud on Alt-A loans was three times higher than on nonprime loans for loans originated between 2002 and 2006. Compared to conforming loans, fraud on Alt-A loans was nearly four times higher.

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