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Why Mortgage Fraud Is Worse Than Ever

By manybanking.com Staff
Mortgage fraud has increased by 26% from 2007 to 2008, according to a March 2009 report from the Mortgage Asset Research Institute (MARI). The report shows that the number of reported incidents is at an all-time high, despite the fact that the number of loan originations is actually down.

According to the study, the state of Rhode Island had the most cases of mortgage fraud through the first quarter of 2009. The state of Florida, which is also among the nation’s top foreclosure states, came in second in percentage of mortgage fraud. The rest of the top 10 list included Illinois, Georgia, Maryland, New York, Michigan, Missouri and Colorado.

The recent surge in mortgage fraud may have several causes, but the data suggests that overall tightening of lending standards is a major contributor. The credit crunch has made it more difficult for borrowers to access mortgages, which has created more desperation in the mortgage market. That desperation may have caused some borrowers to resort to fraud in order to obtain a loan.

The number one type of fraud according to MARI is mortgage application fraud. In 2008, application fraud accounted for 61% of reported incidents. This type of fraud involves falsification of income and other important information when applying for a loan. The second most common type of mortgage fraud involved supplying errant tax returns and financial statements. This accounted for 28% of reported fraud incidents in 2008. This type of fraud was up 60% from the previous year.

The third most common type of mortgage fraud according to the MARI study involved overestimating appraisals. Other types included those involving employment and deposit verifications, escrow and closing costs and credit reports.

The foreclosure boom seems to have given rise to a new form of mortgage fraud, foreclosure prevention schemes. This type of fraud is used to mislead homeowners facing foreclosure into turning over the deed to their home. Their home may then be sold without their knowledge even as they pay rent to the scammer.

Additionally, the study has highlighted mortgage fraud involving identity theft from the elderly and immigrants as a new danger. As is so-called “builder bail-out,” in which scammers seek out investor funds for fraudulent development projects that are never built.

In addition to tighter lending standards, increased rates of fraud reporting may also be a significant factor in the surge of reported mortgage fraud. In the days of subprime loans, which included exotic mortgage products like “No Doc” mortgages, lenders would often take the word of the borrower for loan approval. Now that the subprime market has collapsed, lenders are much more diligent about verifying the information provided on mortgage applications. Consequently, more instances of mortgage fraud are being discovered.

The MARI study was created for the Mortgage Banker’s Association and the findings were presented at their annual mortgage fraud conference. In the near future, the group plans to lobby the federal government to set aside funds that will help directly combat mortgage fraud.

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