Posted on 24 Aug 2010
In the aftermath of the housing market collapse, it became harder for swindlers to conduct mortgage fraud -- but nevertheless, a study by one research firm finds that losses from mortgage fraud rose 17% in 2009 after dipping 57% in the two years after it peaked in 2006.
Research firm CoreLogic collected data for the Wall Street Journal, reviewed 7 million home loans made by hundreds of lenders across the country to cull the data.
The firm found evidence of mortgage fraud ranging from falsified credit reports to identity theft. No-doc loans are a thing of the past, and many lenders now require borrowers to furnish proof of employment, tax forms, credit reports, bank statements and other documents.
Fraudsters have adapted to the new restrictions. With banks less apt to lend to borrowers with shaky finances, criminals rely more on falsifying documents, recruiting loan officers and other bank insiders to work for them, and stealing identities to get loans, federal investigators and mortgage industry research reports.
In 2009, $14 billion in loans, or about 0.7% of all mortgage loans made in the U.S., were originated with fraudulent application data. The figures are a fraction of the mortgage market, but the increase is sharp.
CoreLogic, which tracks fraud only by mortgage value, examines about 7 million loans each year using a proprietary computer program that detects discrepancies in loan documents and predicts the likelihood of fraud. The real losses to banks won't be known for several years when banks are forced to write off the value of the loans' value.
"Even though we have certain compliance measures in place, people will adapt whatever scheme," said Sharon Ormsby, the FBI's section chief for financial crimes. "It doesn't matter if the market is going up or down."
The kinds of fraud that contributed to the mortgage crisis and the collapse of the housing market were relatively simple. Crooks took advantage of the size of mortgage loans and the lax rules governing who qualified for them.
In one common con, they would recruit as accomplices "straw buyers" with good credit to apply for "no-doc" loans, which required no documentation or proof of income, to buy their house. Good credit was required because lenders generally did check a borrower's credit score, even if they didn't require pay stubs or bank statements.
When the bank sent funds, typically to make a down payment or for a home-equity loan, the schemers and the fake buyer would split the profits and walk away, leaving the house to fall into foreclosure and the bank stuck with the loss.
Since the mortgage crisis, banks and the government-sponsored entities that underwrite or insure mortgages, including Fannie Mae, Freddie Mac and the Federal Housing Administration, have tightened lending standards and closely scrutinize mortgage applications.
"Fraud continues to be a pervasive issue, growing and escalating in complexity," said an April report from LexisNexis's Mortgage Asset Research Institute (MARI), which cited as reasons easy access to records via the Internet and, in many cases, the vulnerability of cash-strapped homeowners.
MARI's breakdown of the numbers reflects the shift in technique. Fraud related to falsified credit reports has declined each year since the boom years, MARI reports, while the share of mortgage fraud involving false appraisals jumped 50% between 2008 and 2009.
Application fraud—in which borrowers lie about their names, where they live, how much money they earn, their employment, their debt or their assets—remains high, accounting for 59% of all mortgage fraud.
Not everybody gets away with it. A defendant in a New Jersey dragnet, a mortgage consultant with Newark-based Invest & Investors LLC, allegedly paid accomplices $15,000 apiece to steal the identities of several New Jersey residents who earned $90,000 or more and had good credit ratings. The consultant then used those identities to obtain second mortgages on a number of homes in the Newark area, according to U.S. Attorney Paul J. Fishman, head of the office prosecuting the case.
But since good credit ratings are no longer enough to get a mortgage, the consultant also needed friends who worked for the lenders to pull off the caper.
"Having players at every level of a conspiracy makes it easier to carry out fraud," said Fishman. "But each bad actor and criminal act is also another chance for law enforcement to find a way in."