Lenders keep finding more fraud

Federally regulated banks filed 62,084 reports of suspected mortgage fraud through mid-summer 2008 -- a 44 percent increase from the previous year and nearly 10 times the 6,401 reports filed just five years ago.

Because mortgage fraud can take months or years to detect, the trend doesn't necessarily reflect the prevalence of fraud in newly originated loans, the Financial Crimes Enforcement Network (FinCEN) said in releasing a report analyzing fraud trends through June 2008.

In about 34 percent of the reports, the filing institutions said they detected the attempted mortgage fraud before funding the loans -- that compares with 21 percent of the time over the past decade.

These results suggest lenders "have become increasingly vigilant in trying to protect themselves from and report suspected fraud," FinCEN said.

Mortgage fraud is often uncovered during housing downturns because falling home prices can expose house-flipping schemes that relied on inflated home valuations and falsified borrower information.

It's often other stakeholders -- such as investors who purchase mortgage-backed securities, or mortgage insurers -- who uncover mortgage fraud when loans go bad.

Homes were already in foreclosure in 13 percent of the suspicious activity reports filed, FinCEN said, and about 8 percent of reports mentioned repurchase or buy back demands by investors. The same percentage of reports mentioned issues with insurers, such as denials of insurance claims.

In cases where investors may have been exercising their right to force lenders to buy back loans involving fraud or misrepresentations at origination, lenders didn't file suspicious activity reports until long after the suspected fraud occurred -- 19 months, on average, compared with 12 months for other reports. The same lag was noted in reports that referenced issues with insurers.

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The report suggests that much of the continued rise in mortgage fraud cases is a legacy of the lax standards some lenders employed during the housing boom. But with the government preparing to spend trillions of dollars to stimulate the economy, some lawmakers are worried that much of that money will be siphoned off by scammers unless laws are strengthened and law enforcement efforts stepped up.

After shifting about 2,000 agents into counterterrorism after the Sept. 11, 2001, attacks, the FBI has fewer than 250 agents working on financial fraud cases, said Sen. Patrick Leahy, D-Vt., at a hearing last month where legislation to address the issue was discussed (see story).

Leahy has introduced legislation that would provide $155 million a year to the Justice Department, allowing the FBI to hire 190 additional special agents and staff 50 mortgage-fraud task forces in cities with the biggest problems.

Senate Bill 386, The Fraud Enforcement and Recovery Act, would also extend federal fraud laws to private mortgage companies that aren't regulated at the federal level. The bill is scheduled for consideration by the Senate Judiciary Committee on Thursday.

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