Fannie, Freddie repurchase demands reveal fraud

Demands by Fannie Mae and Freddie Mac that lenders repurchase loans made during the housing boom are driving an increase in reports of suspected mortgage fraud, government regulators say — although short-sale "flopping" and fraud associated with loan modifications appear to be a continuing problem on newer loans.

Two reports issued by the Financial Crimes Enforcement Network (FinCEN) show lenders and regulators filed 35,135 suspicious activity reports (SARs) related to mortgage fraud in the first half of 2010, up 7 percent from a year before.

But 78 percent of the suspicious activity reported in the first quarter of 2010 occurred more than two years ago, FinCEN said, compared with 44 percent during the same period of 2009.

There was a similar but less pronounced trend during the second quarter, when 74 percent of suspicious activity occurred more than two years ago, compared with 54 percent in the second quarter of 2010.

The discovery of mortgage fraud through mortgage industry loan review processes, quality control measures, regulatory and industry referrals, and consumer complaints often lags by two years or more, the FBI said in releasing its annual report on mortgage fraud in June.

Fannie and Freddie have made $13.3 billion in mortgage repurchase requests to lenders through Sept. 30, according to regulatory filings. Analysts expect that such repurchase requests — made when loans that are in default are found not to have met Fannie and Freddie’s underwriting standards — could ultimately cost lenders more than $100 billion.

The FinCEN reports attempt to identify areas where mortgage fraud continues to be a problem in more recent loans by ranking states, counties and metropolitan areas by the number of suspicious activity reports filed per capita that involve activity on or after Jan. 1, 2008.

During the second quarter, Nevada had the highest number of mortgage-related SARs per capita involving activity since Jan. 1, followed by Florida, California, Georgia, Maryland, North Carolina, Illinois, Washington, D.C., Washington and New Jersey.

Top 20 counties for mortgage fraud

Source: FinCEN

At the county level, four Southern California counties were ranked among the top 10: Los Angeles (1st), Orange (4th), San Diego (6th) and Riverside (8th). Rounding out the list were Miami-Dade, Fla. (2nd), Cook County, Ill. (3rd), Maricopa County, Ariz. (5th), Broward County, Fla. (7th), Clark County, Nev. (9), and Gwinnet County, Ga. (10th).

Within the 50 most populous metropolitan areas, Miami ranked highest in terms of subjects per capita after Jan. 1, 2008, followed by Atlanta, Las Vegas, Los Angeles, San Jose, Washington, D.C., Riverside, Orlando, Chicago and San Diego.

Although a majority of mortgage fraud-related SARs submitted in the first half of the year reported activities that took place between April 2006 and June 2008, they also revealed that fraud remains an issue with newer loans, particularly on distressed properties.

SAR reports referenced "short sale" 827 times during the first quarter of 2010, and "broker price opinion" 41 times — terms FinCEN said are sometimes associated with property "flopping" sales of foreclosed properties to straw buyers at artificially low prices. The properties are typically flipped at a higher price.

In the first half of 2010, depository institutions and regulators submitted more than 1,000 SARs, citing $336.7 million in suspicious activity related to applications for government-sponsored mortgage relief. The number of SARs referencing these programs peaked in May at 278 filings and $85.7 million in suspicious activity.