Today the FBI has published its mortgage fraud report for 2008. The "Year in Review" highlights increasing reports of mortgage fraud in the form of Suspicious Activity Reports (SARs).
The FBI defines Mortgage Fraud as:
"Mortgage fraud is a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan. Mortgage loan fraud is divided into two categories: fraud for property and fraud for profit. Fraud for property/housing entails misrepresentations by the applicant for the purpose of purchasing a property for a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, their intent is to repay the loan. Fraud for profit, however, often involves multiple loans and elaborate schemes perpetrated to gain illicit proceeds from property sales. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation. Although there is no centralized reporting mechanism for mortgage fraud complaints or investigations, numerous regulatory, industry, and law enforcement agencies collaborate to share information used to assess the current fraud climate."Source: FBI Financial Crimes Section, Financial Institution Fraud Unit, Mortgage Fraud: A Guide for Investigators, 2003.
Based on information compiled from several sources that range from direct complaints all the way to US Postal Inspections, the FBI reports that, in 2008, mortgage fraud continued to escalate in the distressed real estate sector. In 2008, suspicious activity reports increased 36 percent to 63,713 after 46,717 filings were reported in 2007. While the total dollar loss attributed to mortgage fraud cannot be pinpointed, the report points out that at least 63% of all pending FBI mortgage fraud investigations during 2008 involved losses totaling more than $1 million. In 2008 FBI mortgage fraud investigations totaled 1,644, a 37 percent increase from 2007 and a 100% increase from 2006.
The FBI's outlines a wide variety of mortgage fraud offenders including mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, trust account representatives, investment banks, and credit rating agencies with a criminal activity which is relatively low-risk with high-yield returns.
The report indicates that the schemes most directly associated with the escalating mortgage fraud problem continue to be those defined as fraud for profit. Popular schemes include builder bail-out, short sale, foreclosure rescue, credit enhancement, loan modification, illegal property flipping, seller assistance, bust-out, debt elimination, mortgage backed securities, real estate investment, multiple loan, assignment fee, air loan, asset rental, backwards application, reverse mortgage fraud, and equity skimming. Many of these tactics use various strategies like the use of a straw buyer, identity theft, silent seconds, quit claims, land trusts, shell companies, fraudulent loan documents (to include forged applications, settlement statements, and verification of employment, rental, occupancy, income, and deposit), double sold loans to secondary investors, leasebacks, and inflated appraisals.
When considering how mortgage fraud will evolve as the housing market continues to weaken, here are a few thoughts to consider.
Institutions are using more tools in order to crack down on potential fraud as increased loan losses have forced them to dig deeper to find fraud that was more difficult to catch in the past. Most would think that with the contraction in the real estate and mortgage market that the originators who were involved in these activities would have been flushed from the market. However, according to the findings, this doesn't appear to be true. Are there more fraudulent activities or are financial institutions paying closer attention and reporting more suspicious activities than in the past?
Wouldn't a better representation of mortgage fraud be losses sustained from fraud rather than the number of filings of suspicious activity? These numbers have also climbed, however the data does not tell the whole story.
There are many types of mortgage fraud and not all of them lead directly to poor loan performance and foreclosures. The real reason we are seeing increasing fraud numbers is simply job losses and declining home values. In the past, if fraud was committed, it didn't always cost financial institutions money. If an originator overstated someone's income to qualify, they generally made sure the person could make the payments somehow, either from reserves or other sources of income that couldn't be documented on the loan application. However, when that person loses their job, as many people have, their payments stop getting made and the lender starts to investigate.
Many cases of fraud are not discovered until after the loan has been closed and funded. If the borrower never makes a payment or stops making payments, the lender goes through the file and looks for inconsistencies. They may see that the applicant's income looks inflated and now indicates a fraudulent loan application. So this once performing loan is now being reported as fraud. Cases like this are undoubtedly on the rise with rampant job loss and underperforming loans. If that person didn't lose their job, the loan would have most likely never been seen as fraud.
Declining values have also led to a spike in the findings of fraud. While housing was booming, it was easy for a consumer to sell their home if they were not able to make their payments. Now they are stuck. Let's say a borrower indicated on an application that they intended to occupy the home as a primary residence, but instead rented it out. They may have a $2,000 mortgage payment and receive rent of $1,650. They are okay with this because they see the appreciation of their property as the payoff down the road. Two years later, their home's value has dropped by $60,000. They no longer see a potential gain in the property's value, so they stop making the mortgage payments. The lender investigates and now we have another reported case of fraud.
Although the number of new mortgage fraud strategies may limited by increased oversight in the future, until jobs start being created and the demand for housing returns, we will most likely see continuing growth in complaints as more borrowers become deliquent.
