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Mortgage fraud up more than 30 percent last year

by Broderick Perkins

(4/27/2012) Erate Exclusive - With California's Silicon Valley yielding the highest metro per capita level of mortgage fraud reports by county, reports of mortgage fraud tapered off by the end of last year, but that didn't keep year long numbers in 2011 from topping mortgage fraud reports in 2012.

Unfortunately, federal relief programs announced or updated early this year, are among the conditions attracting a horde of mortgage rescue charlatans out to make 2012 even worse.

The U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) said mortgage loan fraud reported suspicious activity reports (MLF SARs) rose 31 percent last year as financial institutions reported 92,028 cases, compared to 70,742 in 2010.

The big culprit was increased demand for mortgage repurchases. Mortgage repurchase requests can kick the loan back to the lender for collection, foreclosure or some other resolution.

Mortgage repurchase demand

Private mortgage insurers, investors and others typically request the buy backs on defaulted or seriously delinquent loans, but Fannie Mae and Freddie Mac are also getting into the act on loans that aren't delinquent.

Mortgage repurchases are making headlines because closer federal scrutiny in the drive for more transparency is turning up problems that stem from original misrepresentations made by borrowers when applying, misleading warranties in contracts for sold loans and fudged appraisals.

"The FinCEN report shows we're seeing financial institutions spotting activity that appears to be fraud before it happens and in the process, helping to prevent it," said FinCEN Director James H. Freis, Jr.

"Even though we're seeing the market work through its backlog of the book of business now in default, FinCEN data is revealing possible fraud that institutions are using to help defeat scammers," Freis added.

In the majority of income fraud-related SARs, whistle blowers detected a misrepresentation before funding a loan request, based on record checks during the underwriting process, and declined the application.

Also, in all of the debt elimination SARs, those filing fraud reports recognized that documents submitted to cancel mortgage obligations or pay off loan balances were invalid, and communicated to customers that their mortgages were still due.

"Having systems in place to detect fraud at the point of origination is essential in preventing another mortgage crisis from occurring again. Throughout the origination process, everyone involved must be incentivized to red flag fraud and not to turn a blind eye simply to get the deal done to realize a profit. Maintaining some form of skin in the game is the best way for all concerned to keep a watchful eye in the long run," said Nancy Osborne, Chief Operating Officer of Erate.com, a Santa Clara, CA-based financial information publisher and interest rate tracker.

In 2011, 84 percent of reported fraud activities occurred more than two years prior to reporting, compared to 77 percent in 2010. In 2011 fourth quarter, 80 percent of reported activities occurred more than two years prior to filing, compared to 82 percent in 2010 fourth quarter.

The report also contained a hint of good news: financial institutions submitted 17,050 MLF SARs in the 2011 fourth quarter, a 9 percent decrease in filings over the same period in 2010 when financial institutions filed 18,759 MLF SARs.

"While too soon to call a trend, the fourth quarter of 2011 was the first time since the fourth quarter of 2010 when filings of MLF SARs had fallen from the previous year," the report said.

New fraud targets government programs

Unfortunately a new breed of fraud is cashing in on the spate of large government settlements and improvements to existing mortgage relief programs.

Scammers are masquerading as representatives of the new National Mortgage Settlement and the National Independent Foreclosure Review, both underway this year. They are also revictimizing struggling homeowners looking for refinanced or modified mortgages under two federal programs improved this year, the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP.

Consumers approached by someone claiming to represent these programs, should back away and check thePreventLoanScams.org site for help and guidance.

FinCEN also found, by county, the top five counties with the highest per capita MLF SAR subjects in 2011 were Santa Clara County, Orange County, Riverside County and Los Angeles County, all in California, as well as Broward County, FL.

The top five states were: California, Hawaii, Florida, Nevada, and the Washington, D.C. (counted as a state for purposes of this report).

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