Reported incidents of mortgage fraud rose 26 percent from 2007 to 2008, according to a new report by the industry group Mortgage Asset Research Institute, or MARI.
Application fraud was the most commonly reported type of fraud, representing 61 percent of all cases. Fraud related to tax returns and financial statements was up 60 percent from 2007, representing about one in four reported cases.
Other types of fraud included misrepresentations related to appraisals or valuations, verifications of deposit, verifications of employment, escrow or closing costs, and credit reports.
Rhode Island, which as recently as 2004 ranked among the 10 states with the least mortgage fraud, topped MARI’s mortgage fraud index, followed by Florida, Illinois, Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.
According to the Financial Crimes Enforcement Network (FinCEN), which collects suspicious activity reports from federally insured financial institutions, most fraud isn’t detected until months or even years after a loan is made, often when declining home prices expose house-flipping schemes.
In a recent report documenting a 44 percent annual increase in cases of suspected mortgage fraud through mid-2008, FinCEN noted that lenders didn’t file suspicious activity reports until an average of 12 months after a loan was funded.
In cases where secondary-market investors appeared to be exercising their right to force lenders to buy back loans, it took lenders an average of 19 months after a mortgage was funded to file a suspicious activity report (see story).
At best, FinCEN said, only about one in three cases of attempted fraud is detected before a loan is funded. Many newly reported cases of fraud are actually related to loans made during the housing boom and don’t necessarily reflect the number of fraudulent loans being funded today. …CONTINUED
In its report, MARI said the increase in mortgage fraud reports is partially explained by better detection during the origination process, and "renewed commitment to reporting fraud cases" by its more than 600 members, who have a role in more than 80 percent of wholesale mortgage originations.
MARI collects reports from independent mortgage banking companies that are not represented in FinCEN’s reports. Unlike FinCEN, MARI does not reveal the number of reports it receives, instead issuing summaries and an index that’s intended to show the prevalence of mortgage fraud by state.
Given the reduced volume of loan originations in 2008, the increase in mortgage fraud reports indicates the problem "is more prevalent now than in the heyday of the origination boom," with fraud incidence at an "all-time high," MARI concluded.
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