An annual report from the government indicates mortgage fraud continued to increase last year, is even worse this year and is expected to deteriorate further. Areas of rising concern are schemes tied to reverse mortgages, commercial mortgages and distressed mortgages.
An estimated $14 billion in fraudulent mortgages were originated last year, according to the 2009 Mortgage Fraud Report “Year in Review” from the Federal Bureau of Investigation. Around $7.5 billion of the loans were insured by the Federal Housing Administration, and $6.5 billion were conforming.
The report was prepared by the Financial Crimes Intelligence, Directorate of Intelligence and is designed to help program managers at the FBI’s Financial Crimes Section, Criminal Investigative Division, better understand the threat of mortgage fraud as well as identify trends, allocate resources and prioritize investigations.
The report was based on open source reporting and reporting from the government and the mortgage industry. MortgageDaily.com was listed among the sources.
Pending FBI investigations related to mortgage fraud were 2,794, jumping from fiscal 2008’s 1,644. First-half 2010 investigations were running at 3,029. Two-thirds of the investigations involved more than $1 million in losses.
Overall mortgage fraud losses climbed to $2.798 billion in fiscal 2009 from $1.491 billion a year earlier. First-half 2010 losses are already at $1.961 billion — $0.788 billion worse than the same time last year.
The number of FinCEN Suspicious Activity Reports tied to mortgage fraud that were filed by financial institutions were 67,190 during fiscal 2009, climbing from 63,713 the prior year. During the first six months of the current fiscal year, 37,739 SARs were filed — up from around 33,339 during the same period last year.
But the FBI clarified that the mortgage fraud reported in SARs filings actually happened at varying points prior to the filing. The lag time can be two or more years before the fraud is discovered or reported.
At the Office of Inspector General at the U.S. Department of Housing and Urban development, the number of pending investigation rose 31 percent from fiscal 2008.
“Mortgage fraud perpetrators are industry insiders, including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, and bank and trust account representatives,” the report stated. “Perpetrators are also known to recruit ethnic community members as victims and co-conspirators.”
The distressed housing market is creating opportunities for mortgage fraud, and schemers are looking to cash in on billions of dollars from federal programs and initiatives resulting from the American Recovery and Reinvestment Act including the Hope for Homeowners Program, the Home Affordable Modification Program and the Home Price Decline Protection Program.
The programs are not transparent, according to the agency, and they lack accountability, oversight and enforcement.
Among the types of mortgage fraud schemes that were prevalent last year were foreclosure rescue, short-sale and loan modification schemes. Short-sale schemes involve a fraudulently low appraisal of the property to encourage the lender to take a bigger discount.
The elevated activity is expected to continue beyond this year.
Also on the FBI’s most unwanted list were reverse mortgage schemes — which the government warns remain a high concern. Reverse players — including originators, appraisers and real estate agents — recruit prospective borrowers through channels including church, seminars and advertising. They then steal their equity.
More than $100 billion in losses is projected commercial mortgage fraud by the end of this year. The $6.4 trillion commercial real estate market is getting hit with the same wave of fraud that the residential market experienced over the past few years.
“The same factors that contributed to the increase in residential mortgage fraud — lax underwriting, lack of quality control, and an inflated market — are also potentially causing a significant number of commercial real estate loans to fail,” the report said.
Debt-elimination schemes are also re-emerging.
California topped the worst states for mortgage fraud during 2009, followed by Florida, Illinois and Arizona. No. 5 was Georgia.
FBI field offices with the most pending investigations last year were Tampa, Los Angeles and New York.
The FBI said that the $25 million authorized annually for FHA includes some funds for reducing fraud. The funding runs from 2009 to 2013 and was the result of recent legislation.
But despite higher credit quality and increased due diligence, mortgage industry insiders claim there is still evidence of significant error rates in loan closures, the FBI cautioned. In addition, concern has risen that new Real Estate Settlement Procedures Act requirements are confusing the very people who must adhere to them.
Current market conditions continue to be fertile for enterprising scammers who exploit loopholes and gaps in mortgage lending.
