The number of suspicious activity reports related to mortgage fraud increased 31 percent in 2007 compared to the year before, to 46,717, with 60 percent of those incidents involving false claims on loan applications such as employment history and claimed income.

That’s according to an annual report on mortgage fraud by the Mortgage Asset Research Institute (MARI), which said Florida and Nevada led the nation in the rate of suspected mortgage fraud cases, followed by Michigan, California, Utah, Georgia, Virginia, Illinois, New York and Minnesota.

Colorado showed the greatest improvement in this year’s report, falling from ninth place last year to 17th, and leaving MARI’s list of the top-10 states for mortgage fraud for the first time in five years. Minnesota also fell from fifth place in 2006 to 10th in 2007.

Virginia made its first appearance on the top-10 list, at seventh, while Nevada moved from sixth place to second. Utah, which had dropped out of the top 10 in 2006, returned to fifth place last year.

MARI’s report, which relies on statistics from the FBI and the Financial Crimes Enforcement Network (FinCEN), does not capture all cases of suspected mortgage fraud, because only federally insured financial institutions are required to submit suspicious activity reports to regulators.

Although fraud perpetrated on or by independent mortgage banking companies is not reflected in the statistics, the numbers are considered a useful indicator of trends and for devising strategies for combating mortgage fraud.

While suspicious activity reports involving mortgage fraud have more than doubled since 2005, it’s believed that many incidents previously went undetected because rising home prices allowed perpetrators to sell or refinance fraudulently obtained properties.

Rising home prices "led some individual real estate investors to speculate and stretch the truth on applications for multiple properties, especially in active markets, such as Florida and Nevada," MARI reported. "They were aided in this tactic by industry professionals who hoped that any future loan problems would be covered by a profitable sale of the collateral. Credit standards were loosened. More importantly for fraud, documentation requirements were also reduced."

It may be three to five years before most of the fraud and misrepresentation in loans made in 2007 is uncovered, and during that period, many adjustable-rate mortgage (ARM) loans will be refinanced, "potentially blocking discovery of some of these issues," the report concluded.

At the moment, declining real estate markets in states like Florida, Nevada and California have left many borrowers unable to sell or refinance their properties, and misrepresentations are unmasked when they become delinquent on their loans.

Loan servicers are discovering a "substantial percentage" of prime and nonconforming delinquencies are for loans where the applicants said they planned to occupy a home, but which in fact were used as rental properties from the outset, MARI said.

While the most common type of fraud involved misrepresentations about employment history and claimed income, problems with undisclosed or incorrect debts, liens or judgments increased 50 percent between 2006 and 2007, MARI said.

The growing use of automated underwriting systems may have contributed to the rise in fraud — and could also present part of the solution, the report concluded.

Automated valuation models (AVMs) have a proven ability to assess the credit risk of borrowers, the report said — assuming the data that’s inputted is legitimate. But AVMs "have become less valuable or accurate as the amount of data collected is reduced (or) pieces are fabricated," MARI warned.

While many lenders have already instituted stricter requirements for low- or no-documentation loans — or done away with them altogether — MARI recommends that they go to greater lengths to know all the parties involved in the transaction — whether they be loan applicants, loan originators or their own employees.

MARI calls this process "identity risk management."

"As remote transactions continue to play a part in the lending process, and e-mortgages grow in acceptance and popularity, truly understanding the parties with whom you are doing business becomes an increasingly important part of the business transaction," the report concluded, recommending periodic screening of employees and vendors through an industry database, such as MARI’s MIDEX system.

While 2007 saw the lowest volumes of mortgage originations since 2002 and this year is expected to be worse, MARI warns that the danger of mortgage fraud is actually increasing.

With more lenders chasing a smaller pool of conforming business, there will be even more pressure to generate volume, the report concluded.

"Professional fraudsters will devise new and improved schemes to exploit the weaknesses in the current market," MARI said. "The need for lenders to know their borrowers, vendors and employees is greater than ever."


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