Mortgage fraud, described as an “epidemic” by the FBI, is intensifying in the United States, according to reports released this month by two key mortgage industry sources.
The number of mortgage-related suspicious activity reports to the federal Financial Crimes Enforcement Network in the first half of 2005 was 33 percent higher than in the first six months of 2004, according to a report issued on behalf of the Mortgage Bankers Association by the Mortgage Asset Research Institute (MARI).
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“It’s getting worse,” said Mark Fleming, chief economist at CoreLogic, a provider of fraud prevention technology that publishes the quarterly Core Mortgage Risk Monitor. Collateral risk rose by 6.4 percent between the fourth quarter of 2005 and the first quarter of 2006, according to the CoreLogic report.
Residential real estate loan fraud is a national epidemic, costing communities nationwide an estimated $1 billion in 2005, compared with $429 million in 2004, according to the Federal Bureau of Investigation.
States including Georgia have enacted legislation to fight mortgage fraud and U.S. Sen. Barack Obama has asked the Senate Committee on Banking, Housing and Urban Affairs to hold hearings on mortgage fraud.
Both reports cited conditions in the mortgage industry as factors driving the increase.
“If rising interest rates produce a significant reduction in originations for 2006, additional cases could surface in the future at a rapid rate as some originators press to maintain high origination levels,” the MARI report said.
Or, as Fleming said, “You’re (brokers) going to work harder to find ways to make a loan work by pushing value to get your commission.”
The MARI report concluded that although 2005 statistics are still preliminary, “it appears that Florida, Utah and Georgia are leading the mortgage fraud pack.” Colorado and Illinois show steadily increasing problems over the last five years, the MARI report said.
In a note of hope, the MARI report said Georgia’s problems “appear to be abating in response to authorities’ strong anti-fraud activities.” In 2005, Georgia enacted the Residential Mortgage Fraud Act, a pioneering law combating mortgage fraud. The state is no longer at the top of the list in mortgage fraud, a position it occupied in 2004.
South Carolina showed the greatest improvement in its MARI Fraud Index over the past five years, the MARI report said.
Youngstown, Pa.; Akron, Ohio; Memphis, Tenn.; Toledo, Ohio; and Buffalo, N.Y., are in the greatest danger of succumbing to mortgage fraud, according to CoreLogic’s quarterly Core Mortgage Risk Monitor, which shows predictions of areas likely to experience negative economic consequences over the next 12 to 18 months because of mortgage fraud.
The top five markets showing the most noticeable increase in mortgage fraud are Alexandria, La.; Pascagoula, Miss.; Laredo, Texas; Morristown, Tenn.; and Lakeland, Fla., CoreLogic said.
CoreLogic provides mortgage lenders with tools to help identify elements of loan applications that might indicate mortgage fraud. Its system processes 55,000 applications a day, Fleming said, and the mortgage monitor index is based on the aggregation of the loan scoring by the system.
“The risk of mortgage fraud causing economic impact in vulnerable markets continues to rise at an unprecedented rate,” the CoreLogic report said.
MARI noted that the number of suspicious activity reports, may not be an entirely accurate representation of the amount of mortgage fraud. For one thing, only federally insured financial institutions are required to file such reports.
“We think there is a large number of mortgage fraud situations that are not covered by the statistics we report, based on SARs (suspicious activity reports),” the report quoted an FBI agent as saying.
Also, an increased number of mortgage originators are now submitting such reports, because commercial banks and thrifts, which are required to make such reports, acquired almost 150 independent mortgage banks (which are not) between 1997 and 2005.
Regardless, the MARI report concludes that incidents of fraud have risen, citing an FBI report on the subject that concluded that despite the limitations of suspicious activity reports, “Based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing.”