With an industry database showing a 30 percent increase in loans involving suspected mortgage fraud in 2006, the Mortgage Banker’s Association is asking Congress to set aside $31.25 million over five years to hire more FBI investigators and prosecutors.
In its annual mortgage fraud report, the Mortgage Asset Research Institute (MARI) said the sharp increase in mortgage fraud is partially because lenders are finding more cases of fraud in loans originated in 2006. But the slowdown in the housing market has also helped reveal fraud cases previously masked by strong price appreciation.
After a loan is approved, it’s unlikely to be reported as fraudulent as long as borrowers continue making payments. But a slowdown in home-price appreciation has fueled delinquencies and defaults nationwide, as borrowers find themselves unable to refinance loans with balances that approach or exceed the value of their homes.
Once a loan becomes delinquent, a lender may discover that it was made under false pretenses.
The most common type of fraud in 2006 originations involved falsified employment histories and exaggerated income, MARI said.
Florida topped the MARI fraud index, followed by California, Michigan, Georgia, Utah, New York, Illinois, Minnesota, Colorado and Nevada.
California, which has enjoyed a low reported fraud rate for several years, climbed from eighth to second on the MARI fraud index in 2006, suggesting that the slowdown in the state’s housing market is revealing previously undiscovered instances of mortgage fraud.
In a letter to members, MBA president and chief executive officer Jonathan Kempner said that suspicious activity reports to federal regulators related to mortgage fraud have risen from 3,515 per year in 2000 to more than 28,000 in 2006, representing losses of about $1 billion.
Those numbers likely represent “only the tip of the iceberg,” Kempner wrote, because the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) collects reports only from federally insured lenders, not independent mortgage lenders.
Although MARI collects data from a broader variety of sources, including lenders, insurers and government agencies, it releases them in the form of an index for states and metropolitan areas, and does not disclose raw numbers of reports.
Kempner said the MBA has asked the House and Senate Appropriations Committees to set aside $31.25 million over a five-year period to provide 30 new FBI field investigators and two new prosecutors at the Department of Justice to coordinate prosecution of mortgage fraud cases. The MBA also advocates providing $750,000 for task forces that would target areas with higher-than-average concentrations of mortgage fraud.
While problems were once concentrated in relatively few states, mortgage fraud incidents are “now more evenly distributed across nearly all states,” MARI reported.
States with the fastest growth in mortgage fraud reports during the first quarter of 2006 were New Jersey (up 250 percent from the same period in 2005), California (214 percent), Arizona (213 percent) and New York (187 percent).
States that achieved reductions in reported cases of mortgage fraud included Georgia (where reported cases were 68 percent of 2005 levels), Colorado (78 percent), Illinois (81 percent) and Michigan (90 percent).
Instead of reporting raw numbers, MARI assigns a numerical measure to each state that indicates the extent of fraud problems.
The MARI Fraud Index, or MFI, indicates how the number of fraud reports for each state compares with fraud rates nationwide, given the number of loan originations in each state. A state that has 5 percent of fraud reports and 5 percent of loan originations would be assigned an MFI index of 100, while a state that has a reported fraud rate that’s twice what’s expected would have an MFI of 200.
Georgia has led the nation on the MARI Fraud Index in recent years with MFIs of 310 to 506. This year’s highest-ranking state, by contrast, has an MFI of 208, while Georgia reduced its MFI to 125.
MARI attributed Georgia’s “dramatic” improvement in large part “to the strong, coordinated stance against mortgage fraud that has been taken by a number of different groups in Georgia — industry members, mortgage and banking regulators, legislators and state law enforcement officials, coupled with the FBI and the United States Department of Justice.”
The Georgia Department of Banking and Finance introduced a new examination program that focused resources on anti-fraud efforts in late 2003, which led to an increase in cease-and-desist orders and license revocations.
In 2005, Georgia was first state to criminalize mortgage fraud, with penalties of up to 10 years in jail for first offenders and 20 years per property for violations involving multiple properties and loans.
Prosecutions of mortgage brokers, bank officers, closing attorneys, paralegals, real estate agents, appraisers and straw borrowers followed, at both the state and federal levels. One closing attorney received a 30-year federal sentence.
While 55 percent of all incidents reported to MARI involved application fraud, the percentage among subprime loans was even higher — 65 percent.
Fraud involving tax or financial statements was reported in 27 percent of incidents (16 percent among subprime loans), and 22 percent involved false verifications of deposit (14 percent among subprime loans). Other examples of reported fraud included appraisals (11 percent overall/14 percent subprime), verification of employment (9 percent overall/10 percent subprime), escrow/closing documents (8 percent overall/10 percent subprime), and credit reports (9 percent overall and subprime).
While the ranks of subprime lenders is thinning, and many of those who remain have tightened underwriting standards, more people chasing less business will create “severe pressure on all players” to approve loans for borrowers with marginal credit.
That, coupled with light penalties for fraud perpetrators in most states, make conditions “temptingly ripe for escalated mortgage fraud activity,” MARI predicts. “Professional fraudsters will devise new and improved schemes to exploit the weaknesses in loan origination processes.”
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