Trends in mortgage fraud schemes exposed

Debt elimination may be emerging strategy for scam artists
Inman News
A new analysis of a decade of suspected mortgage fraud cases shows a rise in identity theft and Internet or telephone-based loan approvals to obtain fraudulent loans, and warns that debt elimination schemes may be the new frontier for scam artists as interest rates rise and growth in housing equity slows.

The study, by the Treasury Department's Financial Crimes Enforcement Network, also found a dramatic increase in the number of suspicious activity reports filed by lenders involving mortgage fraud. But it's not clear whether the numbers reflect an increase in the number of fraudulent loans or an increase in awareness of suspected fraudulent activity.

Lenders filed 7,093 reports of suspected mortgage loan fraud in the first quarter of 2006, a 35 percent increase from the same time last year, according to the latest numbers from FinCEN.

Since investigators began collecting data on mortgage fraud in suspicious activity reports in 1996, the number of reports involving fraudulent home loans has increased by 1,411 percent. But the increase in loan fraud as a percentage of all suspicious activity is not as dramatic. Loan fraud represented 4.9 percent of all suspicious activity reports in 2005, a little more than double the 2.1 percent reported in 1997.

Part of the reason for the dramatic increase in the number of suspected mortgage loan fraud cases is an increase in the number of home loans, FinCEN said in its analysis. The number of residential loans increased by 153 percent between 1997 and 2003.

In 2003, lenders issued 42 million home loans, a 33 percent increase from the year before. Between 2003 and 2004, there was a 92 percent increase in the number of suspicious activity reports documenting suspected mortgage loan fraud.

But the increase in filings "may be attributed to an increase in overall mortgage lending concurrent with the decline in interest rates in the 2002 (to) 2005 time frame and a broader awareness of this fraudulent activity," the report said.

Although the report does not attempt to provide a definitive answer to the question of whether mortgage fraud is in fact on the rise, it does provide insight into the techniques used to obtain fraudulent loans.

The study looked at 82,851 suspicious activity reports describing instances of suspected mortgage loan fraud between April 1, 1996, and March 31, 2006. A random sample of 1,054 narratives was reviewed for additional analysis.

The report noted that mortgage fraud schemes often involve the complicity of industry insiders such as mortgage brokers, real estate agents, property appraisers, and attorneys and title examiners involved in settlement. Typical fraudulent activities include appraisal fraud, fraudulent flipping, straw buyers and identity theft.

Purchase loans constituted 83 percent of all instances of suspected mortgage fraud, while just 12 percent were refinance loans. Material misrepresentations and false statements were reported on 66 percent of the narratives studied, including altered bank statements, altered or fraudulent earnings documentation such as W-2s and income tax returns, fraudulent letters of credit, altered credit scores, and invalid Social Security numbers.

Identity fraud was reported 23 percent of the time, and identity theft was involved in 4 percent of the reports. Mortgage brokers - who today are believed to originate two-thirds of mortgage loans - originated the loans in 37 percent of the suspicious activity reports.

Appraisal fraud and fraudulent property flipping turned up in 11 percent of the narrative reports, and 42 percent of filers said they suspected such activity involved the collusion of mortgage brokers, appraisers, borrowers or real estate agents or brokers.

Common types of appraisal fraud included a failure to use comparable properties to establish property values, a failure to factor in the actual condition of the property, the appraiser's participation in a fraud scheme, and the unauthorized use of an appraiser's name and seal.

Nearly 64 percent of the reports involving fraudulent property flipping described collusion by sellers, appraisers and mortgage brokers.

Reports of fraudulent property flipping have remained steady over the past four years. Although a spike in appraisal fraud was seen in 2004, there was a slight decrease in the trend in 2005, FinCEN reported. But that's not necessarily an indication that appraisal fraud and fraudulent property flipping are decreasing, because activities associated with flipping - straw buyers and false statements - are increasing.

Information on identity theft was not collected until July 2003. FinCEN found reports of identify theft increased by nearly 102 percent between 2004 and 2005, when it was a factor in 941 reports. That number is expected to reach 1,140 this year.

The number of suspected mortgage fraud cases involving retired and elderly borrowers is also on the rise, with 236 instances reported in 2005, up from 169 2004. "The growing number of retired and elderly citizens could provide a burgeoning target for mortgage loan fraud," the report said.

Although less than one percent of suspected mortgage fraud cases were originated over the Internet or telephone, 28 phone-originated problem loans were reported in 2005, nearly twice as many as in 2004. The 29 Internet originated loans included in suspicious activity reports in 2005 represented a nearly ten-fold increase from the three reported in 2004.

"The use of the Internet and related technology to receive and process loan applications is increasing," the report said. "The growing faceless nature of these transactions increases the opportunities for fraud (especially identity fraud) and, coupled with 'low-document' or 'no-document' loans, creates a condition vulnerable to fraudulent activity."

With interest rates on their way back up - and because many homeowners aren't building up equity in their homes as quickly as they were when home values were appreciating at double-digit rates - FinCEN warns that debt elimination could be an emerging mortgage fraud scheme.

Lenders are reporting debt elimination schemes in which borrowers attempt to pay off their mortgages with non-negotiable checks, or fake instruments such as bills of exchange or subrogation and security bonds, or claim a mortgage is invalid and the debt never existed.The claims often rely on an interpretation of Section 1-207 of the Uniform Commercial Code that has never been affirmed or supported by any court or governmental authority, FinCEN said.

Other types of debt elimination schemes reported included attempts to fraudulently release mortgage liens from municipal land records. Once the land title appears clear of all mortgage debt, homeowners obtain another mortgage loan based on what appears to be a clear title. A subsequent lender may believe it has a first priority lien on property when in reality there is little or no equity to secure the loan.

Another "emerging" mortgage fraud scheme is asset rental fraud, in which a borrower's assets are exaggerated or inflated by temporarily depositing funds into the loan applicant’s bank account for the time required to qualify for a loan. Lenders report that the funds may come from friends or family, or a mortgage broker attempting to qualify an ineligible borrower. The temporary funds - which are sometimes "rented" for a fee - are withdrawn from the bank account after the loans are approved.