Mortgage fraud is not only a continuing problem amid the housing crisis; it's actually becoming worse, according to a recent report by the Mortgage Asset Research Institute (MARI). Mortgage fraud is blamed as one of the factors that brought about the housing market's downturn, and a 42 percent increase in reported cases in the first quarter of 2008 could be a sign of greater problems to come.
Creative brokers and loan officers are helping to tweak loan applications in order to qualify applicants for a loan their credit history wouldn’t normally have allowed. The most common type of fraud found in the report pertained to an applicant’s employment history, more specifically misrepresenting their job descriptions and earnings, according to CNN Money.
Being "creative" with one's job description is a common form of fraud
A big increase was seen in the number of undisclosed or misreported debts, liens and judgments.
The state of Florida led the way in number of mortgage fraud cases, accounting for a quarter of the country's reported fraud incidents. California ranked second and saw an astounding 214 percent increase in cases of mortgage fraud between 2005 and 2006, according to ABC News. Illinois, Maryland and Michigan shared a three-way tie for third place.
In Maryland, 69 percent of fraud cases stemmed from tax return and financial statement misrepresentation, which was an unusually high proportion compared to other states, according to the Los Angeles Times.
With lending standards tighter than ever, it was a surprise to MARI that fraud increased so much in such a short amount of time. Unfortunately, just tightening standards isn’t the answer, according to the Los Angeles Times, especially in markets fraught with speculators, such as California and Florida.
Part of the problem is that the structure of the industry remains the same, with mortgage brokers and loan officers being rewarded with commission and continuing to push for higher volumes of loans, according to CNN Money.
According to MARI, “Mortgage fraud will not disappear—in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry.”
While the majority of fraud cases involved “average” home-buyers and some application tweaking from their lending officer, there was still some criminal involvement, according to CNN Money. Identity theft accounted for 6 percent of fraud cases in the state of Illinois, for example.
According to a 2007 report by the Federal Bureau of Investigation, “the downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market.”
MARI asks lenders to identify low-quality loans at the earliest possible point in order to help eliminate this kind of fraud and decrease costs, in order to continue pursuing high-quality loans for the marketplace. With regulatory institutions struggling to combat every problem, even more responsibility may fall on lending institutions to help clean up the industry.
Whatever the solution is, the pressure will be on to fix a broken situation, as mortgage fraud has accounted for nearly $1 billion in losses in the last decade.
