Mortgage Fraud Cases Double

Losses tied to mortgage fraud were in the billions of dollars last year as open fraud investigations nearly doubled from two years earlier, according to FBI testimony today. Losses from the current financial crisis are expected to dwarf losses from the savings and loan crisis.There were 63,173 Suspicious Activity Reports filed during fiscal 2008, according to an FBI transcript of prepared testimony by FBI Deputy Director John S. Pistole. He was scheduled to testify today before the Senate Judiciary Committee. SARs, which are filed by financial institutions and through the Office of Inspector General at the U.S. Department of Housing and Urban Development, increased 36 percent from around 45,450 in 2007. Just 7 percent of SARs filed during fiscal 2008 included the total dollar loss attributable to mortgage fraud because of the lag between first identifying suspicious activity and liquidating the property through foreclosure. On just those loans, losses were $1.5 billion — suggesting that losses tied to all SARs last year were around $21 billion.

FBI photo of John Pistole

Pistole called for all mortgage lenders to be required to file Suspicious Mortgage Activity Report — or SMARt form — though safe harbor would be provided.The number of open mortgage fraud investigations was 1,600 during fiscal 2008 — nearly double the 885 in 2006. The investigations were handled by 180 special agents, up from 120 in fiscal 2007.

Pistole likened the current financial crisis to the savings and loan crisis that began two decades ago. In an effort to uncover financial crimes then, 1,000 agents staffed a series of FBI strike forces based in 27 cities — yielding more than 600 convictions and $130 million in ordered restitution.

But the S&L crisis is dwarfed by the current crisis — which has been impacted by mortgage fraud, he said. He cited testimony in 2004 from FBI Assistant Director Chris Swecker that warned of the consequences if unrestrained mortgage fraud became systemic within the mortgage industry.

“What has occurred has been far worse than Assistant Director Swecker predicted,” the transcript said. “Mortgage fraud and related financial industry corporate fraud have shaken the world’s confidence in the U.S. financial system.”

He testified that an unexpected consequence of the current financial crisis is the exposure of mortgage fraud schemes.

Pistole noted that fraud-for-profit schemes rely on industry insiders — such as appraisers, attorneys, real estate brokers and mortgage employees. This is where FBI efforts will be concentrated.

“Industry insiders are of priority concern as they are, in many instances, the facilitators that permit the fraud to occur,” he said.

Pistole indicated that a property flipping analytical computer application first developed by the FBI’s Washington field office has become a successful national initiative. Other weapons in the FBI arsenal include sophisticated investigative techniques like wiretaps and undercover operations.

A national mortgage fraud team launched in December is responsible for all management of the FBI’s mortgage fraud program at both the origination and corporate level. In addition, there are 16 mortgage fraud task forces and 39 working groups in the country.

Operation Malicious Mortgage, which was announced in June 2008, has so far yielded 164 convictions, $60 million in asset forfeitures and 81 sentencings tied to more than $1 billion in estimated losses.