Mortgage fraud at an all-time high

As the number of home sales dwindles and lenders tighten requirements for dolling out loans, desperation breeds dishonesty.

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By Catherine Clifford, CNNMoney.com staff writer

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With home prices plummeting, inventory levels spiking, and lenders hoarding cash, desperation has pushed the number of cases of mortgage fraud to record levels.
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NEW YORK (CNNMoney.com) -- The number of reported incidents of mortgage fraud has reached an all-time high even as the number of home loans being issued has shrunk, according to a report released Monday.

Cases of reported fraud surged 26% from 2007 to 2008, according to the Mortgage Asset Research Institute (MARI), a LexisNexis Service, which compiled the report for the Mortgage Banker's Association.

"With fewer loan originations today, the data suggests that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud," Denise James, LexisNexis Risk and Information Analytics Group director of Residential Mortgage Solutions, said in a written statement.

Another factor in the rise in reported fraud cases is deeper scrutiny of borrower details. "We have cited in the report that some of the increase in our incident report is a result of lenders doing more due diligence up front," James in a conference call.

But sometimes fraud goes unnoticed because of the complexity of the mortgage application process. "Fraud enjoys confusion," John Courson, president and chief executive of the MBA, said in the conference call. Therefore, his organization advocates a simplification of the mortgage transaction process.

State by state: Rhode Island had more cases of mortgage fraud than any other state, according to the report. Through the first quarter of 2009, Rhode Island recorded three times the rate of fraud that would be expected based on the number of mortgages originated in the state. This is the first time Rhode Island officially has made the top 10 list. It was retroactively boosted to the fifth place in 2007.

Florida recorded the second highest percentage of mortgage fraud compared with expectation, after leading the pack for 2007 and 2006. Illinois came in third, followed by Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.

Types of fraud: "MARI data shows that mortgage fraud is more prevalent today than it was at the height of the boom in mortgage loan originations," Courson said in a written statement.

Mortgage fraud serves two purposes, James noted on the conference call: making a quick buck or getting a home.

"Fraud for profit" is a scheme concocted to collect cash, with no interest in owning. In "fraud for housing," homebuyers fake documents that make them appear eligible so they can get a home or upgrade to a bigger one.

The most prevalent form of mortgage dishonesty in 2008 was application fraud. According to the report, 61% of all reported frauds in 2008 were a result of misrepresentation on the application for a mortgage. This is the fifth time application fraud has topped the list.

The second most prevalent type of fraud was due to misleading tax returns and financial statements, which represented 28% of fraud in 2008, up from 17% in 2007.

The third most frequent type of mortgage fraud involved overestimating the appraisal or valuation of the property. Other types of mortgage fraud included manipulation of the documents related to verification of deposit, verification of employment, escrow and closing documents and credit reports.

New fraud varieties: "Not only are we seeing traditional fraud trends, such as application fraud, but we are also seeing new types of emerging fraud occur," said James.

With a record number of homeowners entering foreclosure, foreclosure-prevention schemes will likely be a popular way of deceiving struggling home owners. A huckster, claiming to help the drowning homeowner, convinces the homeowner to give over the legal rights, or deed. Then, the scam artist rents the property back to the homeowner while simultaneously selling the property.

The report also cites elderly and immigrant identity fraud as a likely emerging trend. Lastly, the report predicts builder fraud will increase in popularity, where someone obtains investor cash for a project and then takes off with the money before the development is completed.  To top of page

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