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Thursday, March 08, 2007

FBI: "Mortgage Fraud is pervasive and growing"

by Calculated Risk on 3/08/2007 01:39:00 AM

From the FBI annual report on financial crimes, mortgage fraud:

... the true level of Mortgage Fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. However, based on various industry reports and FBI analysis, Mortgage Fraud is pervasive and growing.
Fraud is probably widespread, but I suspect the most common type of fraud - fraud involving borrower misrepresentations - will not be punished.
The FBI investigates Mortgage Fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and Mortgage Fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.

Fraud for Housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan.
Although there are many Mortgage Fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders.
So the FBI is focusing on industry insiders and will probably not pursue borrower misrepresentations. My guess is the second most common fraud is some sort of appraisal fraud.
Inflated Appraisals - An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.
I suspect most appraisal frauds will be difficult to prosecute. Then there are cases like this:
Amerifunding was a Mortgage Brokerage owned and operated by Gerald Small in Colorado, which maintained two "warehouse" lines of credits, each at a large federally-insured financial institution in the U.S. In order to support a lavish lifestyle, Small created fictitious loans to live off of the lines of credit. The borrower information, name, and social security number, were invented. Eventually, one of the creditors asked for verification of identification thereby defeating the "invention" process. To deal with this, Small placed an advertisement for a $100,000+ Account Representative position at his company. Applicants eagerly completed applications inclusive of names, social security numbers and copies of driver's licenses which Small wasted no time in utilizing for more fictitious loans. Investigation determined that Small had kited over $200 million in fraudulent mortgage loans and used the stolen identities of 47 job applicants to obtain mortgage funding for fictitious home loans, or "air loans" totaling over $21.5 million during a 24-month period.