Federally regulated banks filed 62,084 reports of suspected mortgage fraud through mid-summer 2008 – a 44 percent increase from the previous year and nearly 10 times the 6,401 reports filed just five years ago.
Because mortgage fraud can take months or years to detect, the trend doesn’t necessarily reflect the prevalence of fraud in newly originated loans, the Financial Crimes Enforcement Network (FinCEN) said in releasing a HYPERLINK "http://www.fincen.gov/news_room/nr/pdf/20090225a.pdf" t "_blank" report analyzing fraud trends through June 2008.
In about 34 percent of the reports, the filing institutions said they detected the attempted mortgage fraud before funding the loans – that compares with 21 percent of the time over the past decade.
These results suggest lenders “have become increasingly vigilant in trying to protect themselves from and report suspected fraud,” FinCEN said.
Investors Play Investigators
Mortgage fraud is often uncovered during housing downturns because falling home prices can expose house-flipping schemes that relied on inflated home valuations and falsified borrower information.
It’s often other stakeholders – such as investors who purchase mortgage-backed securities, or mortgage insurers – who uncover mortgage fraud when loans go bad.
Homes were already in foreclosure in 13 percent of the suspicious activity reports filed, FinCEN said, and about 8 percent of reports mentioned repurchase or buy-back demands by investors. The same percentage of reports mentioned issues with insurers, such as denials of insurance claims.
In cases where investors may have been exercising their right to force lenders to buy back loans involving fraud or misrepresentations at origination, lenders didn’t file suspicious activity reports until long after the suspected fraud occurred – 19 months, on average, compared with 12 months for other reports. The same lag was noted in reports that referenced issues with insurers.
Loose Standards, Easier Fraud
The report suggests that much of the continued rise in mortgage fraud cases is a legacy of the lax standards some lenders employed during the housing boom. But with the government preparing to spend trillions of dollars to stimulate the economy, some lawmakers are worried that much of that money will be siphoned off by scammers unless laws are strengthened and law enforcement efforts stepped up.
After shifting about 2,000 agents into counterterrorism after the Sept. 11, 2001, attacks, the FBI has fewer than 250 agents working on financial fraud cases, said Sen. Patrick Leahy, D-Vt., at a hearing last month where legislation to address the issue was discussed.
A Senate committee approved the bill Thursday, sending it to the full Senate for consideration. The two-year $490 million funding package would authorize the FBI, the Justice Department and other law enforcement agencies to hire more fraud prosecutors and investigators, and FBI mortgage-fraud task forces would receive more assistance from federal prosecutors, Reuters reported.
