Mortgage fraud: New and improved

Lenders have tightened standards, but scam artists have found new ways to beat the system.

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By Les Christie, staff writer

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NEW YORK ( -- The housing bust has not ended mortgage fraud - hucksters are just finding new ways to make dishonest bucks.

The number of fraudulent loans issued during the second quarter this year increased 45%, compared with the same period in 2007, according to the Mortgage Asset Research Institute (MARI), a service of LexisNexis.

The group counts as fraud any misrepresentation intended to get a better deal on a mortgage or a home sale.

During the boom, that might have meant a buyer who inflated his income to qualify for a bigger loan. Some went so far as to get a fake appraisal, invent a fake buyer, and after securing a mortgage, absconding with the cash.

Such ruses may not work in this environment, with lenders tightening up their standards.

But several scams still are effective, according to Jim Ronan of Interthinx, a provider to lenders of fraud-prevention services, and Robert Hagberg, a fraud investigator for mortgage giant, Freddie Mac.

"It's a constant battle to keep up with the innovative ways that scam artists come up with to defraud others," said Vincent Rabago, an Arizona assistant attorney general who works on mortgage fraud cases, "especially in the real estate industry where transactions are very complicated."

The new appraisal fraud

One modern gambit is under-appraising property values.

These schemes involve short sales, which come up when a struggling homeowner is "underwater," or owes more on his mortgage than the home is worth.

When done legitimately, the owner sells the home for the lower market value, and the lender agrees to accept just that amount and forgive the difference.

When illegitimate, fraudsters fake very low appraisals for the homes and use those appraisals to justify low short-sale prices - well below true market values.

If busy bankers don't check the appraisal closely, they may agree to sales of homes that should be worth $200,000, for $150,000 or even less.

The buyers - in cahoots with the owner - then flip them for a big profit.

The new 'liar loan'

Another fraud, one more often committed by average buyers than by career criminals, has also morphed into something new.

During the boom, many borrowers misrepresented their income or assets with "no-doc liar loans," approved on the basis of good credit scores with no documentation.

After the mortgage meltdown, no-doc loans vanished, but applicants who lie have not.

"Liar loans are now fully documented - but with really good fraudulent documents," said Hagberg.

In one case investigated by Interthinx, a New York man buying an investment property in Georgia provided documents that showed double his actual salary.

Advanced information technology and photocopying equipment have gotten so accurate that very convincing papers, including income statements, savings accounts and tax returns can be produced on demand.

Ronan said there are Web sites that provide believable documents that scam artists use.

"Because they say it's for 'novelty purposes,' you can't really do anything about it," he said. "They don't say it can be used to defraud."

Scams that misrepresent income or employment are still the most common type of fraud, according to MARI.

'Buy and bail'

This is a new scheme that had no equivalent during the boom years.

You're underwater on your mortgage and want a new, cheaper home down the block.

You could just bail on the existing home, but no lender would give you a mortgage for the new one.

So you tell the bank you plan to rent out the current home - even though you have no intention of doing so.

"This is a very difficult scam to pin down," said Jennifer Butts, a spokeswoman for MARI, because the rental agreements that borrowers proffer may not be scrutinized by lenders.

The Federal Home Administration announced in late September that it hoped to head off many buy-and-bails by no longer insuring mortgages if the homeowners had existing loans - unless they could show enough income to pay off both loans simultaneously.

But don't sell fraudsters short - they'll probably find brand new ways to get around the policy.

Correction: An earlier version of this article incorrectly indentified a U.K.-based Web site as being a provider of documents that could be used by scam artists. We have since removed the name of that Web site.  To top of page

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