Source: http://www.fbi.gov/publications/fraud/mortgage_fraud07.htm

Key Findings

§  Mortgage fraud continues to be an escalating problem in the United States. Although no central repository collects all mortgage fraud complaints, Suspicious Activity Reports (SARs) from financial institutions indicated an increase in mortgage fraud reporting. SARs increased 31-percent to 46,717 during Fiscal Year (FY) 2007. The total dollar loss attributed to mortgage fraud is unknown. However, 7 percent of SARs filed during FY 2007 indicated a specific dollar loss, which totaled more than $813 million.

§  Subprime mortgage issues remain a key factor in influencing mortgage fraud directly and indirectly. The subprime share of outstanding loans has more than a doubled since 2003 putting a greater share of loans at higher risk of failure. Additionally, during 2007 there were more than 2.2 million foreclosure filings reported on approximately 1.29 million properties nationally, up 75 percent from 2006. The declining housing market affects many in the mortgage industry who are paid by commission. During declining markets, mortgage fraud perpetrators may take advantage of industry personnel attempting to generate loans to maintain current standards of living.

§  Analysis of available information indicated that mortgage fraud was most concentrated in the north central region of the United States. Data from law enforcement and industry sources were compared and mapped to determine which states were most affected by mortgage fraud during 2007 and indicated that the top 10 mortgage fraud states for 2007 were Florida, Georgia, Michigan, California, Illinois, Ohio, Texas, New York, Colorado, and Minnesota. Other states significantly affected by mortgage fraud according to available sources included Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut.

§  The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market. Several of these schemes have emerged with the potential to spread as the recent rise in foreclosures, depressed housing prices, and decreased demand place pressure on lenders, builders, and home sellers. Emerging and re-emerging schemes for 2007 included builder-bailouts, seller assistance, short sales, foreclosure rescue, and identity thefts exploiting home equity lines of credit.

“The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market.”

-Chris Swecker, former FBI Assistant Director, Criminal Investigative Division, Introductory Statement: House Financial Services Subcommittee on Housing and Community Opportunity, 7 October 2004

Introduction

Mortgage Fraud: Two Categories 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. It is this second category that is of most concern to law enforcement and the mortgage industry. Gross misrepresentations concerning appraisals and loan documents are common in fraud for profit schemes and participants are frequently paid for their participation.

Mortgage Fraud is defined as the intentional misstatement, misrepresentation, or omission by an applicant or other interested parties, relied on by a lender or underwriter to provide funding for, to purchase, or to insure a mortgage loan. Combating mortgage fraud effectively requires the cooperation of law enforcement and industry entities. No single regulatory agency is charged with monitoring this crime. The FBI, Department of Housing and Urban Development-Office of Inspector General (HUD-OIG), Internal Revenue Service, Postal Inspection Service, and state and local agencies are among those investigating mortgage fraud.

Mortgage fraud is a relatively low-risk, high-yield criminal activity which is accessible to many. However, according a Financial Crimes Enforcement Network (FinCEN) report, finance-related occupations, including accountants, mortgage brokers, and lenders were the most common suspect occupations associated with reported mortgage fraud.¹ Perpetrators in mortgage industry occupations are familiar with the mortgage loan process and therefore know how to exploit vulnerabilities in the system. Victims of mortgage fraud may include borrowers, mortgage industry entities, and those living in the neighborhoods affected by mortgage fraud. As properties affected by mortgage fraud are sold at artificially inflated prices, properties in surrounding neighborhoods also become artificially inflated. When property values are inflated, property taxes increase as well. Legitimate homeowners also find it difficult to sell their homes as surrounding properties affected by fraud deteriorate. When properties foreclose as a result of mortgage fraud, neighborhoods deteriorate and surrounding properties depreciate.

Financial Institution Reporting of Mortgage Fraud Increases

Although no central repository collects all mortgage fraud complaints, Suspicious Activity Reports (SARs) from financial institutions indicated an increase in mortgage fraud reporting. Financial institution reporting indicated that 46,717 SARs were filed during FY 2007 (see figure 1).

The dollar losses attributed to mortgage fraud are unknown. However, 7 percent of SARs filed during FY 2007 indicated a dollar loss of more than $813 million (see figure 2)².

The fact that only 7 percent of SARs from financial institutions documented a loss may be attributed to the fact that losses were unknown at the time of reporting, or fraud was discovered before loan funding, and therefore a loss was not incurred. The $813 million statistic is significant, as it hints to the total amount of financial institution and industry entity losses not subject to SAR filing.

Mortgage Fraud in a Depressed Housing Market

During 2007, mortgage loan originations, including purchases and refinances, were down from 2006 and foreclosures were up nationally, contributing to a slump in the housing market. Many mortgage industry professions are paid by commission. During declining markets, mortgage fraud perpetrators may take advantage of industry personnel attempting to generate loans to maintain current standards of living.

The housing market is expected to continue its downward trend. The Mortgage Bankers Association (MBA) estimates that mortgage loan originations will continue to decline through 2009 (see figure 3).³

According to an MBA report from January 2008, existing home sales are expected to decline by 13 percent during 2008 from 2007. Likewise, new home sales are expected to decline 15 percent from 2007 figures. Median home prices are also expected to decline in 2008.⁴ The current and future market conditions will have mortgage industry professionals pursuing a smaller pool of customers. As such, professional fraudsters will devise new and improved schemes to exploit the weaknesses in the housing market.⁵

The financial impact subprime lending has had on the mortgage industry and the economy as a whole has been widely reported. The subprime share of outstanding loans has more than doubled from 2003, putting a greater share of loans at a higher risk of failure (see figure 4).⁶

Subprime mortgage loans are designed for persons with blemished or limited credit histories. To compensate for the increased credit risk, subprime loans carry a higher rate of interest than prime loans.⁷ According to First American CoreLogic LoanPerformance data, 64.5 percent of the securitized subprime loans originated during 2005 had adjustable rates; 79.4 percent of these loans were 2/28 hybrid adjustable-rate loans (HARMS).⁸ These HARMS had fixed mortgage rates for the first two years after origination and were subject to reset in 2007. Therefore, once the loan introductory “teaser rate” expired, the rate was subject to increase.

Wall Street Journal, March 2008 “So far, banks and insurers have written down more than $150 billion in securities tied to subprime-mortgage loans.” - Excerpt from: Carrick Mollenkamp and Mark Whitehouse, “Banks Fear a Deepening of Turmoil,” Wall Street Journal, 17 March 2008.

The upward movement in interest rates and the declining housing market subjected borrowers to increased payment shock and elevated the possibility of default. The recent decline in the housing market and property depreciation exacerbated the subprime problem. As properties depreciated and demand decreased, property owners could not sell their homes to satisfy their debts.

A report by MARI indicates that two factors pressured the industry into non-traditional lending practices that contributed to fraud. The first includes the persistent drive of mortgage lenders to hasten the mortgage loan process, and the second involves the escalation of home prices of recent years.⁹ According to congressional statements, by the spring of 2004, regulators began to document the fact that lending standards were easing. Also, interest rates were increasing.¹⁰ Notably, mortgage fraud SARs filed during 2004 more than doubled from 2003 (see figures 1 and 4). These recent events likely resulted in an increase in mortgage fraud as higher housing prices tempted borrowers to exaggerate income and assets to qualify for a mortgage loan. Mortgage fraud perpetrators also likely seized the opportunity to take advantage of the relaxed lending practices to commit fraud for profit.

Alt-A loans are designed for prime-quality borrowers, and in many instances do not require documentation, making them ideal for fraud exploitation. Alt-A loans include stated income, stated income/stated asset or no income/no asset loans that are offered by both prime and subprime lenders. BasePoint Analytics, a fraud analysis and consulting service, analyzed loans that were originated between 2002 and 2006; nearly 1 million Alt-A loans and 3 million nonprime loans were evaluated. The relative fraud-loss rate of Alt-A loans was more than three times higher than nonprime loans. Losses within Alt-A loans were caused by income misrepresentations, employment frauds, straw buyers, investor-related frauds, and occupancy frauds.¹¹ The Federal National Mortgage Association (Fannie Mae) conducts random post purchase reviews. Statistics generated from these reviews indicate that misrepresentations within Alt-A loans are higher than the overall population of loans (see figure 5).¹²

Top Areas for Mortgage Fraud

Data from law enforcement and industry sources were compared and mapped to determine which areas of the country were most affected by mortgage fraud during 2007. Information from the FBI, HUD-OIG, FinCEN, Mortgage Asset Research Institute (MARI), Fannie Mae, RealtyTrac Inc., Interthinx®, and Radian Guaranty Inc., indicated that the top 10 mortgage fraud states for 2007 were Florida, Georgia, Michigan, California, Illinois, Ohio, Texas, New York, Colorado, and Minnesota (see figures 6 and 7 for a breakdown of source data). Other states significantly affected by mortgage fraud according to aforementioned sources included Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut.

Analysis of available information indicated that mortgage fraud was most concentrated in the north central region of the United States (see figure 7). This region is followed by the west and southeast regions.

Breakdown of Sources Used to Identify Top Mortgage Fraud Areas

Federal Bureau of Investigation Regional analysis of FBI pending mortgage fraud-related investigations as of FY 2007 revealed that the north central region of the United States led the nation with the most pending investigations. The north central region was followed by the west, southeast, south central, and northeast, respectively (see figures 7 and 8).

FBI mortgage fraud investigations at the end of FY 2007 totaled 1,204, a 47-percent increase from FY 2006 and a 176-percent increase from FY 2003 (see figure 9).¹³ Fifty-six percent of pending FBI mortgage fraud investigations in FY 2007 were associated with dollar losses of more than $1 million (see figure 10). FBI field divisions that ranked in the top 10 for pending investigations during FY 2007 included Los Angeles, Chicago, Detroit, Dallas, Atlanta, Miami, Denver¹⁴, Houston, Cleveland and Salt Lake City¹⁵ (tied for 9th), respectively.¹⁶

Financial Crimes Enforcement Network

According to SAR reporting, the Los Angeles, Miami, San Francisco, Chicago, Atlanta, New York, Sacramento, Detroit, Tampa, and Phoenix Divisions, respectively were the top 10 FBI field offices impacted by mortgage fraud during FY 2007 (see figure 11).¹⁷

US Department of Housing and Urban Development - Office of Inspector General

HUD-OIG is charged with detecting and preventing waste, fraud, and abuse in relation to HUD programs. As part of this mission, HUD-OIG investigates mortgage fraud related to Federal Housing Administration (FHA) loans. As of 30 September 2007, HUD-OIG had 466 single family (SF) residential loan investigations pending. In FY 2007, HUD-OIG opened 151 SF mortgage fraud investigations, a decline from the 239 SF mortgage fraud investigations opened during FY 2006. This decline can be attributed to the substantial decline in FHA market share. One reason for the FHA loss of market share was the increased prevalence of subprime loans from commercial lenders; many of those who might typically have applied for FHA loans instead opted for subprime loans. In addition, FHA loan levels were often not competitive in many real estate markets. Consequently, HUD-OIG witnessed a parallel decline in FHA mortgage fraud investigations. Recently, FHA has made several significant changes in its SF loan program, including substantially increasing loan levels in high-cost areas, and making efforts to have those currently holding subprime loans, or facing foreclosure, to refinance those loans with FHA. As a result, the FHA market share is expected to increase, with a parallel increase anticipated for HUD-OIG’s investigative case load.¹⁸

HUD-OIG’s top 10 mortgage fraud states based on investigations opened during FY 2007 included Ohio, Maryland, Illinois, Georgia, Texas, Virginia, California, North Carolina, Michigan, and New York, respectively. Also, the top 10 state for pending investigations during the same time period included California, Illinois, Texas, Maryland, Ohio, Georgia, New York, Colorado, Florida, and Missouri.¹⁹

Mortgage Asset Research Institute

During 2007, Florida, Nevada, Michigan, California, Utah, Georgia, Virginia, Illinois, New York, and Minnesota were MARI’s top 10 states for reports of mortgage fraud across all SF loan types (see figure 12).²⁰ MARI maintains the Mortgage Industry Data Exchange (MIDEX) database which contains incidents of alleged mortgage fraud/misrepresentations from hundreds of mortgage industry entities including Fannie Mae, Freddie Mac, HUD, mortgage insurers, and numerous lenders. MARI annually releases a report to the mortgage industry highlighting the geographical distribution of mortgage fraud based on MIDEX submissions. Individual states are ranked using the MARI Fraud Index (MFI). The MFI is an indication of amount of mortgage fraud found through MIDIX subscriber fraud investigations in various geographical areas within a particular year relative to the amount of loans originated. New states added to MARI’s top 10 for 2007 included Utah and Virginia.

Figure 12: MARI’s Top 10 States for 2007 Reported Fraud in Single Family Loan Types

Figure 12: MARI’s Top 10 States for 2007 Reported Fraud in Single Family Loan Types
State	MFI Rank 2007	MFI Rank 2006
Florida	1	1
Nevada	2	6
Michigan	3	3
California	4	2
Utah	5	11
Georgia	6	4
Virginia	7	14
Illinois	8	8
New York	9	9
Minnesota	10	5

Interthinx®

Interthinx® is a provider of proven risk mitigation and regulatory compliance tools for the financial services industry. Data from Interthinx® fraud