Mortgage Fraud Defined
Mortgage fraud is a material misstatement,misrepresentation, or omission relied upon by anunderwriter or lender to fund, purchase, or insurea loan. Mortgage loan fraud is divided into twocategories: fraud for property and fraud for profit.Fraud for property/housing entailsmisrepresentations by the applicant for thepurpose of purchasing a property for a primaryresidence. This scheme usually involves a singleloan. Although applicants may embellish incomeand conceal debt, their intent is to repay the loan.Fraud for profit, however, often involves multipleloans and elaborate schemes perpetrated to gainillicit proceeds from property sales. Grossmisrepresentations concerning appraisals andloan documents are common in fraud for profitschemes, and participants are frequently paid fortheir participation. Although there is no centralizedreporting mechanism for mortgage fraudcomplaints or investigations, numerous regulatory,industry, and law enforcement agenciescollaborate to share information used to assessthe current fraud climate.Source: FBI Financial Crimes Section, FinancialInstitution Fraud Unit, Mortgage Fraud: A Guidefor Investigators, 2003.in 2009, representing a 120 percent increase in foreclosures since 2007. The Las Vegasmetropolitan statistical area (MSA) reported the most significant rate of foreclosure, with more than12 percent of its housing units receiving a foreclosure notice in 2009, followed by Cape Coral-FortMyers, Florida (11.9 percent), and Merced, California (10.1 percent).Analysis of available law enforcement and industry data indicates the top states for mortgage fraudduring 2009 were California, Florida, Illinois, Michigan, Arizona, Georgia, New York, Ohio, Texas, theDistrict of Columbia, Maryland, Colorado, New Jersey, Nevada, Minnesota, Oregon, Pennsylvania,Rhode Island, Utah, and Virginia.Prevalent mortgage fraud schemes reported by law enforcement and industry in FY 2009 includedloan origination, foreclosure rescue, builder bailout, equity skimming, short sale, home equity line ofcredit (HELOC), illegal property flipping, reverse mortgage fraud (currently the FHA’s Home EquityConversion Mortgage [HECM] and the primary reverse mortgage loan product being offered bylenders and targeted by fraudsters), credit enhancement, and schemes associated with loanmodifications.Emerging mortgage fraud schemes and trends reported by law enforcement and industry in FY2009 included schemes associated with various economic stimulus plans/programs, commercialreal estate loan fraud, short sale flops, condo conversion, property theft/fraudulent leasing offoreclosed properties, and tax-related fraud. Law enforcement sources also reported increases ingang members, organized criminal groups, and domestic extremists perpetrating mortgage fraud,and the resurgence of debt elimination/redemption schemes.
Mortgage fraud continued to increase in 2009despite modest improvements in variouseconomic sectors. While recent economicindicators report improvements in various sectors,overall indicators associated with mortgage fraud,such as foreclosures, housing prices, contractingfinancial markets, and tighter lending practices byfinancial institutions, indicate that the housingmarket is still in distress. In addition, the discoveryof mortgage fraud via mortgage industry loanreview processes, quality control measures,regulatory and industry referrals, and consumercomplaints lag behind these indicators, often up totwo years or more.U.S. housing inventory increased from 127 millionunits to 130 million units from 2007 to 2009,
U.S.properties in foreclosure increased more than 120percent,
and U.S. home prices declined eachconsecutive year since 2007.
Meanwhileunemployment increased from 7.7 percent inJanuary 2009 to 10 percent in December 2009.
The ongoing discovery of the lack of due diligencein historical subprime loans, loan modificationre-defaults,
increasing prime fixed-rate loandelinquencies,
and the expected increases overthe next three years
in the interest rates onAlternative A-paper (Alt-A)
and Option AdjustableRate Mortgage(ARM)
loans raise the chance forfuture mortgage defaults. During the next twoyears, a total of $80 billion of prime and Alt-A loans and a total of $50 billion subprime loans are due torecast.
These factors combine to fuel a mortgage fraud climate rife with opportunity. Consequently,mortgage fraud perpetrators are continuing to take advantage of the opportunities provided in adistressed housing market.Mortgage fraud continued through 2009 despite increased government-mandated scrutiny of mortgageloan applications and institutions and recent government stimulus interventions. From 2008 through2009, the U.S. Congress passed various stimulus packages
aimed at stabilizing the current economicclimate and releasing enormous funds into the economy, but each has potential fraud vulnerabilities.
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