Data Show U.S. Mortgage Fraud Explosion: Industry and FBI Crusade for Justice
Reported incidents of mortgage fraud in the U.S. spiked 42 percent in Q1 over last year according to a report released this week by Mortgage Asset Research Institute (MARI). In April, The FBI released a mortgage fraud report of its own that casts a broader glance at the fall-out and how it breaks down from the law-enforcement perspective.
Focus on Mortgage-Industry Reported Data
MARI’s report compiles data submitted by its army of mortgage industry clients regarding Q1-originated loans that have since been classified as fraudulent. MARI pulls its data from its Mortgage Industry Data Exchange (MIDEX) database, which aggregates reported incidents of fraud and verified misrepresentations submitted by its 600-plus mortgage industry subscribers involved in an estimated 80 percent of U.S.-originated wholesale mortgages.
With the mission of advancing the mortgage industry’s new crusade against mortgage fraud, MARI analyzes these data and will regularly report on the national composition of and emerging trends in residential mortgage fraud.
States under MARI’s Q1 spotlight are hardly surprising for anyone who has been following the markets hardest hit by the foreclosure epidemic. But it is interesting to see how MARI and the FBI each approach the data, break down the numbers, define fraud and report on troublesome trends in the types of fraud that are most frequently reported.
States Topping the MARI’s Mortgage Fraud Charts
- Florida: In MARI’s report, Florida takes first place with 24 percent of all domestic properties showing material misrepresentation reported and verified on loans that originated during Q1. Last year, MARI’s ranking placed Florida in the top spot for 2007.
- California: The Golden State takes the red ribbon in Q1 mortgage fraud rankings, up from a fourth-place ranking in 2007.
Three-way Tie for Third Place
- Illinois, up from the eighth-place spot in 2007;
- Maryland, a state that missed MARI’s 2007 Top 10 List; and
- Michigan, maintained its third-place ranking from 2007.
MARI’s Most Common Fraud Types and Trends
For all states, the top fraud incident type cited in MARI’s report was in “General Application Misrepresentation” followed closely by misrepresentations related to “Income” and “Employment.” According to the report, MARI continues to see growth in identity-based types of fraud in loan transactions.
Fraud Definitions and Enforcement Challenges
A report issued earlier this year by the FBI “2007 Mortgage Fraud Report” – a great read with some unsettling photos and an array of disturbing and highly detailed data. Here, the FBI defines mortgage fraud a little differently than MARI, and ranks its Top 10 Mortgage Fraud states based on a broader base of data than MARI’s report. According to the Fed, mortgage fraud falls into two general categories: Fraud for housing and fraud for profit.
- Fraud for Housing: This entails misrepresentations by the applicant who is purchasing a primary residence. This scheme usually involves a single loan. Although applicants may embellish income and conceal debt, the FBI recognizes that their intent is to repay the loan.
- Fraud for Profit: As far as the FBI is concerned, this tends to involve multiple loans and elaborate schemes to generate illicit proceeds from property sales. According to the FBI, this form of fraud that is of greatest concern to law enforcement and the mortgage industry. Gross misrepresentations concerning appraisals and loan documents are common in fraud-for profit schemes and players often are paid off for participating.
According to the FBI’s report, which culls data from the FBI, HUD-OIG, FinCEN, MARI, Fannie Mae, RealtyTrac, Interthinx, and Radian Guaranty, the comprehensive 2007 mortgage fraud state rankings are as follows:
FBI’s 2007 Top 10 Mortgage Fraud States:
- Florida,
- Georgia,
- Michigan,
- California,
- Illinois,
- Ohio,
- Texas,
- New York,
- Colorado, and
- Minnesota.
More States Hit by Mortgage Fraud
The FBI says that other states significantly affected by mortgage fraud in 2007 include Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut.
Government Fraud Investigations Widespread and Challenging
As far as the FBI is concerned, mortgage fraud reporting is up, sparking greater demand for investigations and straining their capacity in several field offices.
FBI mortgage fraud investigations at the end of FY 2007 totaled 1,204, a 47-percent increase from FY 2006 and a 176-percent increase from FY 2003. In addition, 56 percent of pending FBI mortgage fraud investigations in FY 2007 were associated with dollar greater than $1 million.
FBI Reports Top 10 Cities for Mortgage Fraud Investigation
Field divisions that ranked in the top 10 for pending investigations during FY 2007 include:
- Los Angeles,
- Chicago,
- Detroit,
- Dallas,
- Atlanta,
- Miami,
- Denver,
- Houston,
- Cleveland, and
- Salt Lake City.
There’s More than Catchy Marketing Behind FBI’s Plan of Fraud Attack
Remember the photo ops from “Operation Malicious Mortgage” a few month’s back, as real estate entrepreneurs and others were shown in handcuffs? The FBI currently reports that to be effective, the fight against mortgage fraud requires the cooperation of law enforcement and industry entities. Yet the report also points out that no single regulatory agency is charged with monitoring this epidemic, even though many government entities are charged with simultaneously investigating the problem.
No doubt these communications lapses, variations in state laws, shrinking tax bases and law enforcement budgets are posing even more challenges to officials fighting this widespread and complex “crime wave.”
The Enforcers
The FBI, Department of Housing and Urban Development-Office of Inspector General (HUD-OIG), Internal Revenue Service, Postal Inspection Service, and state and local agencies all are investigating mortgage fraud, but coordination of fraud investigation efforts is a daunting, highly-technical and costly endeavor.
The Industry that Eats its Own
The Fed’s report also cites a Financial Crimes Enforcement Network (FinCEN) report that finds the mortgage fraud perpetrators tend to be working in finance-related occupations. Profiles for investigation include accountants, mortgage brokers, and lenders as the most common suspects associated with the crime.
Government Agencies Poise for Cooperation, Data Sharing
In response to the growing law enforcement burden, The FBI is working with the Department of Justice (DOJ)-Mortgage Fraud Working Group on a number of mortgage-fraud related issues, including the creation and finalization of standard loss valuation criteria associated with mortgage fraud violations, and assisting the banking industry with the construction of a centralized repository of mortgage-related documentation.
The FBI also has conducted a Mortgage Fraud Summit to address the most severe mortgage fraud problems nationally and to strategize a plan of attack, including the use of undercover agents for “sting operations.”
Currently the FBI reports that it has formed mortgage fraud working groups or task forces in 32 field divisions, including Anchorage, Albuquerque, Atlanta, Buffalo, Charlotte, Chicago, Cincinnati, Cleveland, Detroit, Dallas, Denver, El Paso, Honolulu, Houston, Indianapolis, Jackson, Kansas City, Louisville, Memphis, Miami, Minneapolis, Milwaukee, Portland, Pittsburgh, Philadelphia, Phoenix, Sacramento, San Diego, San Francisco, Salt Lake City, Tampa, and Washington, DC.
Let the Real Estate Entrepreneur Beware
Who knows how all this will play out in our little corner of the Real Estate Universe. But a lot of the reports I’ve been reading indicate that scrutiny on real estate investors who work as flippers, in short sales and pre-foreclosures is likely to grow as lenders and law enforcement entities alike search for bad guys and scapegoats to blame for housing market’s woes.
This is in part due to some bad apples casting an unfair stigma on honest and ethical investors. But in my opinion, it also is because we are easy targets as independent business owner/operators. In many cases, independent entrepreneurs lack the resources and protections that lenders, mortgage brokers and even property appraisers have as integral parts of the established — and broken — system.
Staying on top of the laws in your markets is more important now than it has ever before been in our industry. I’ve been covering developments in this blog in May and in this month’s “REI Alert: Foreclosure-Consulting, Equity-Stripping Tackled in 11 New State Laws“ post.
Although I can’t give you legal advice, I can give you tools. And I’ll continue to provide you with the latest developments that could affect your business. This info may not be glamorous. In fact, it’s usually as dry as the Palm Desert. But staying informed is a great way to avoid hassles — and unexpected, heartburn-inducing legal fees down the line.