Mortgage fraud reports rise, but some fraud may still be undetected

Introduction

Reports of suspected mortgage fraud — fueled by the current economic crisis — are up in 2008, according to two new reports by the FBI and the Financial Crimes Enforcement Network, or FinCEN, an arm of the Treasury Department.

Those who are allegedly committing the fraud may be some of the same folks who helped create the crisis in the first place, according to the FBI’s 2008 Mortgage Fraud Report. But the bureau and FinCEN might have trouble catching them because non-bank mortgage lenders, responsible for almost half of all subprime loans, don’t have to report suspicious activity to the feds, as other financial institutions do.

Even so, the totals on suspected fraud are alarming. In its twice-yearly SAR Activity Review – By the Numbers, FinCEN tallies all the so-called Suspicious Activity Report forms, or SARs, filed by financial institutions, casinos, money services businesses, and the securities and futures industries. SARs are far from a guarantee that a crime has taken place, but their numbers are considered important indicators of trends; they are filed when a financial institution sees suspicious behavior or patterns of suspicious transactions.

In 2008, banks and other depository institutions filed almost 65,000 SARs reporting suspicions of mortgage fraud, up from nearly 53,000 the previous year. As PaperTrail reported in December, mortgage fraud reports have been on the rise for years: In 2000, just 3,515 SARs on mortgage fraud were filed.

The increase in SARs may be translating into more FBI mortgage fraud investigations. The bureau conducted 1,644 such investigations in fiscal year 2008, a 100 percent increase from fiscal year 2006. Sixty-three percent of the 2008 investigations involved dollar losses of more than $1 million.

The bureau relies “a lot” on SARs to identify mortgage fraud, said FBI spokesman Bill Carter. “In many instances that’s how we are alerted to the fact that there may be criminal activity taking place,” he said. Subprime loans, Alt-A, and option-ARM loans are commonly used in mortgage fraud schemes, according to the FBI report. Alt-A loans typically have less documentation of income or employment than prime loans, and option-ARMs are adjustable rate mortgages that give borrowers the option to choose very low initial payments.

FinCEN spokesman William Grassano cautioned that the rise in suspected fraud reports may reflect a lag in the data; fraud that took place in 2006 or 2007 may be reported in 2008 or later. And, he said, “people are more aware” of mortgage fraud, which may translate into more reports.

But even though credit markets have tightened since the crisis hit, mortgage fraud continues at a brisk pace.

“When the economy is not good, the long knives come out,” said Grassano. People interested in committing fraud are “looking for people who are in desperate straits,” he said. The FBI’s report similarly notes “the downward trend in the housing market during 2008 provided a favorable climate for mortgage fraud schemes to proliferate,” with emerging schemes targeting distressed properties and borrowers facing foreclosure.

The schemes “are being conducted by industry professionals who are in a position to exploit the current depressed housing market,” according to the report, including mortgage brokers, lenders, investors, investment banks, and credit rating agencies.

The FBI has particularly identified FHA-backed mortgages as “an attractive market for exploitation by former sub-prime lenders.”

But the problem may even be larger than the raw numbers indicate, as non-bank mortgage originators don’t have to file SARS under current law, according to Grassano. So there would be no SARs from non-depository mortgage companies — companies like Ameriquest, ranked No. 2 in the Center’s recent list of Top 25 Subprime Lenders, or New Century Financial, ranked No. 3. That’s a significant gap, because those non-depository mortgage lenders were responsible for $677 billion in subprime loans, according to a recent Center analysis — almost half of all subprime loans made in those three years.

The loophole in the current law for nonbank lenders drew criticism from Congresswoman Maxine Waters, a California Democrat, who serves on the House Committee on Financial Services. “Given their role in the meltdown, subprime lenders should be held to the same requirements as other lenders, or at a minimum, should be required to file Suspicious Activity Reports,” Waters told PaperTrail via email.

Whatever happens on that front, the amount of suspected fraud may continue to rise. Recent administration efforts to rekindle the housing market and economy are likely to be targeted too, says the FBI. “Perpetrators may focus their fraud efforts against new targets that have been created as the result of actions to combat the mortgage fraud crisis,” the report concludes.