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Appraisal Fraud Leaps

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Lenders have made significant headway reducing fraudulent deposit and employment verifications, but appraisal fraud is way up. One-quarter of all mortgage fraud activity occurred in just three metropolitan areas.

Between 2008 and 2009, reported mortgage fraud and misrepresentation increased 7 percent according to the Twelfth Periodic Mortgage Fraud Case Report from the Mortgage Asset Research Institute.

The report was based on data submitted to the Mortgage Industry Data Exchange, or MIDEX, a central database of incidents of alleged fraud and material misrepresentation. It also reflects data from the Home Mortgage Disclosure Act provided by the Mortgage Bankers Association.

While 2009’s increase was lower than in prior recent years, the latest year still represented record submission volume.

“Collusion among insiders, employees and consumers is highly effective in times of recession because everyone has something to gain in times of desperation,” the report said. “Fraud and misrepresentation in the mortgage industry helped to facilitate the economic crisis, and reported issues as recent as those in 2009 are leading to new forms of collusion and opportunistic scamming.”

MARI said that 67,190 Suspicious Activity Reports tied to mortgage fraud were filed by U.S. financial institutions with the Financial Crimes Enforcement Network during fiscal 2009, increasing from 63,713 in fiscal 2008. Still, last year’s 5 percent increase was nowhere near the 62 percent jump in SARs filings from 2005 to 2006.

The report indicated that fraud is perpetrated where weak systems are vulnerable, and the mortgage industry is slow to respond to new forms of fraud — such as new scams tied to borrowers who face foreclosure.

Based on annual mortgage fraud activity as a share of annual originations, mortgage fraud in Florida was the worst of any state, with 2.92 times the level of fraud that would normally be expected. New York followed, with 2.17 times the expected level, then California’s 1.59, Arizona’s 1.58 and Michigan’s 1.36.

New Jersey and Virginia joined the top-10 list as newcomers.

MARI reported that 12 percent of all mortgage fraud reports occurred in the New York City-Northern New Jersey-Long Island metropolitan statistical area. Los-Angeles-Riverside-Orange County accounted for another 8 percent, and 5 percent were in Chicago.

Lying on loan applications was involved in 59 percent of the loans studied from last year, higher than any other category. While application fraud fell from 61 percent in 2008 and more than two-thirds since 2006 — the 2009 figure is likely to rise as more cases of fraud that happened last year are subsequently uncovered.

Fraudulent tax returns and financial statements were involved in just over a quarter of the cases, easing from 2008.

Appraisal-valuation fraud occurred on one-third of MIDEX fraud reports, jumping from 22 percent the previous year and accounting for “the most noticeable increase in reported fraud and misrepresentation type.” The increase was most pronounced in Florida, where appraisal fraud rose to 36 percent from 18 percent, and California, where it was up to one-quarter from 14 percent.

Of the loans with appraisal fraud last year, 36 percent involved incorrect or fabricated comparables, one-third omitted material information that would have impacted the value and three-quarters were tainted with inflated values.

A statement from Appraisal Institute President Leslie Sellers indicated that the “results are further evidence that lenders need to reconsider who they engage to perform appraisal assignments.” That statement went on to detail how disciplinary actions against appraisers have risen from 162 in 2005 to 413 last year and stood at 78 as of March 31 so far this year.

Fraudulent verifications of deposits were down to 14 percent from 2008’s 21 percent, and bogus verifications of employment fell to 9 percent from 15 percent.

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