Although there have been no substantial cases of mortgage loan fraud in the commonwealth in the last two years, the FBI believes it may become a problem in the coming decade.

Last year, $60 billion was reported lost by lenders in the United States, according to Special Agent Joseph L. Hobbs, supervisor of the bank fraud squad at the Federal Bureau of Investigation’s Boston office.

“We in the FBI are looking at mortgage fraud becoming a big problem in the future,” he said during a session on mortgage loan fraud at the 13th Annual New England Mortgage Banking Conference held recently in Newport, R.I.

The good economy is one of several factors contributing to this projection. Consumers have more money to spend on more goods and services, “so there’s a big pie for the [criminal element] to try to get,” he said. Also contributing to the difficulty is the fact that the same case may be investigated by the local, state and federal authorities all at the same time, he said.

William F. Gearin, of Worcester-based Financial Institution Security Consulting Services, said there’s bound to be an upswing in the number of fraudulent loans that will be discovered.

“It’s hard to say in terms of how many fraudulent mortgage loans are out there right now – God knows,” he said. “What will precipitate [the increase] is the adjustment that is inevitable in the economy … that will trigger a lot of bad loans to the surface that are currently sitting [below the surface] now.

“There’s an old adage in lending saying that ‘bad loans are made in good times.’ We are in awfully good times now. I know that from talking with credit officers and lenders, they are concerned with the quality of borrowers that are going on the books,” said Gearin.

According to Hobbs, the industry is changing faster now than at any other time in history. As a result, there are new and creative forms of financing which allow for higher-risk loans, he said.

New technology adds to the likelihood of institutions being duped, said Hobbs, such as the increase of low-cost, high-quality computer and copying equipment and the proliferation of hacker tools. Criminal groups have greater access to the information they need to commit fraud, he said.

“It’s much easier to produce fraudulent documents, fraudulent identification … Internet availability of documentation and fraudulent identification products has exacerbated the situation. Computer production of documents that look exactly like the original make it exceedingly difficult for a … lender to look at a document and determine its originality,” said Gearin.

Even more troubling is the lack of real punishment if a person is found guilty of fraud, Hobbs said. “A person that sells a little bit of crack cocaine … can be sentenced to 20 years in a federal penitentiary … we have a situation where we have a branch manager taking $632,000 and was sentenced to time served [60 days] and one year [of] probation,” he said.

The manager was ordered to pay back the money, which she said she had already spent. The bank will never recoup its money, Hobbs said.

“I don’t think society’s in tune with the damage that can be inflicted [through this type of crime],” said Hobbs.

‘The Quick Buck’
According to Hobbs, fraud falls into two main categories. Fraud for housing involves cases where one person, who is an ideal buyer, acts as a straw to borrow money but another person actually receives the money. This type of fraud usually involves a single loan and records often are misrepresented, such as false social security numbers or employee records. The borrower may even intend to pay the money back. The person wants the property or wants to access some of the money and may work with an employee of the lender to perpetrate the fraud, said Hobbs.

In the second type, fraud for profit, there is no intention of ever paying the money back, Hobbs said. One of the people involved in the fraud often is an industry professional – an employee of the lending institution – and the goal is profit.

“They’re looking to make the quick buck and get out as quick as they can,” he said.

In these cases, a percentage of the profit is usually paid to the industry professional. A straw buyer may be used to conceal the identity of the person.

Within the fraud-for-profit category, there are several types which may occur. These include property flips, where a few people work a quick buy and sell of loans; a double-sold loan, where the loan originator alters closing documents and uses fraudulent documents to sell the same loan to more than one lender; a silent second, where buyers borrow the down payment from a seller and give a mortgage that is not disclosed to the primary lender; or the inflated appraisal, where the borrower is in collusion with the appraisal agent, he said.

In order to combat fraud, Hobbs suggests a common-sense approach.

“That first line really has to be more diligent,” he said, referring to the loan processor. That’s where many of these fraudulent loans can be stopped, he said. If something doesn’t add up, don’t process it.

To managers, he suggested not letting their guard down. Don’t just sign off on loans if you’re the final stop on the way, he said.

“If you’re working with someone for 15 years, you’re less likely to examine it [documents] as closely as if it were a new employee,” he said.

“Lenders and banks in general do a great job of assembling information. They do an exceedingly good job in analyzing the information they gather. They do a terrible job in analyzing the documents [for originality],” said Gearin.

“We always seem to find time to verify the non-existence of the collateral after the money is lost, but we can’t seem to find time to do it in the process of preparing the loans,” said Gearin. He recommended placing a simple telephone call to verify that information in the loan application is correct. “Phone before you loan,” he said.