Study: Mortgage fraud reports increase 26 percent for 2008

WASHINGTON -- The mortgage industry, applying far more scrutiny after a tidal wave of defaults, reported a record number of mortgage fraud incidents last year, with Rhode Island making its first appearance as the nation's top fraud hot spot.

The number of mortgage fraud reports among loans made last year grew 26 percent from a year earlier, according to a study released Monday by the Mortgage Asset Research Institute.

The increase came as lenders tightened their standards, making it more difficult for borrowers to qualify for home loans without large down payments, solid credit and proof of their incomes. With credit far tighter, about $1.4 trillion in home loans were made last year, down about a third from a year earlier, according to trade publication Inside Mortgage Finance.

The recession has also increased pressure on shady mortgage lenders and brokers -- as well as borrowers -- to lie on loan applications, according to the fraud report. "There's a lot more desperation, with the economy being what it is," said Jennifer Butts, one of its co-authors.

More than 60 percent of mortgage fraud cases last year stemmed from falsified applications, while 28 percent came from tax returns or financial statements, and 22 percent came from appraisals, the study said.

One fast-growing scheme, the report said, is coming from "foreclosure prevention specialists" who offer to rescue distressed borrowers and sometimes trick the borrower to sign over the deed to their house. While some states have recently toughened penalties for such scams, but only a few state attorneys general are able to seek criminal charges and jail time.

During the long housing boom, fraud was easy to conceal as long as home prices kept rising. But with prices sinking, the industry has every incentive to make sure loans are legitimate.

Lenders are getting somewhat better at detecting fraud before loans are made, but "clearly there's still a huge issue out there," said Denise James, director of residential mortgage solutions for LexisNexis, which owns the mortgage research institute.

The information collected in the 11th annual report comes from about 600 mortgage companies, including small community banks, mortgage insurers and mortgage finance giants Fannie Mae and Freddie Mac.

Rhode Island's place at the top of the report was a puzzle to its authors. The most prevalent type of fraud in that state was inflated home appraisals, while fraud on mortgage applications was the most common in the other states.

While reports of mortgage fraud in Rhode Island have been growing somewhat, the jump hasn't been extreme, said Steven Cayouete, Rhode Island's chief bank examiner. The state's No. 1 ranking "just doesn't make sense," he said.

Florida, which had been No. 1 for two straight years, dropped to No. 2. Illinois ranked third, followed by Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.

The report does not detail the exact number of fraud cases nationally or by state. Instead, the group calculates a "fraud index" by comparing fraud cases with the number of home loans made in each state. Rhode Island's rate, the report said, was three times expected levels.

John Courson, chief executive officer of the Mortgage Bankers Association, issued a statement calling the report "essential reading for mortgage bankers who need to understand where mortgage fraud is coming from, what to watch for and how to protect our companies and communities."

As awareness of the mortgage fraud problem grows, law enforcement agencies are stepping up their efforts to combat it. The FBI created a Washington-based national mortgage fraud team in December and has more than 1,600 open mortgage fraud investigations, more than double the number of such cases just two years ago.

With so many ongoing cases, FBI investigators are not focusing on individual borrowers but industry professionals generating fraud schemes that could total as much as hundreds of millions of dollars.