WASHINGTON -- The once-booming housing market and risingpopularity of nontraditional home loans have produced an unwantedbyproduct: a 35 percent increase in suspected mortgage fraud.
A new report by federal regulators indicates the fraud is beingperpetrated by people seeking to buy homes or others in cahoots withbrokers and agents who cheat the system.
The Treasury Department's Financial Crimes Enforcement Network,known as FinCen, on Friday released its first report on mortgageloan fraud, which is said to be one of the fastest-growing white-collar crimes in the country.
The agency undertook the review after seeing a significant risein the number of so-called suspicious activity reports -- forms mostoften used to report suspected money laundering -- that it receivedfrom U.S. banks concerning mortgage loan fraud.
The sample of 1,054 reports reviewed by FinCen came fromfinancial institutions in all 50 states, the District of Columbia,Puerto Rico, Guam and American Samoa. The highest incidences ofsuspected mortgage fraud in 2005 were in California, Florida,Georgia, Illinois and Texas.
FinCen found that suspected mortgage fraud as measured by reportsfiled continues to grow, rising by 35 percent in the first quarterof this year from the January-March period in 2005 -- possiblybecause of "increased awareness of the potential for fraud in adynamic real estate market."
Although growth in the housing market appears to have cooled thisyear, "opportunities for fraud are still present," FinCen's studysays.
The use of false statements by prospective homebuyers andidentity theft were cited in a number of the reports banks filed toFinCen.
Mortgage fraud poses a growing risk to banks and other lenders,it says. Federal banking regulators have said that mortgage fraud isgrowing because it can be very lucrative and fairly easy toperpetrate, especially in areas where home prices have been risingrapidly.
While some people engage in mortgage fraud because they want toqualify to buy a home by inflating the value of their assets, otherswho use more sophisticated schemes are driven purely by profitmotive and have no interest in the property for themselves. Mortgagefraud often involves the loan application process or the propertyappraisals required for mortgage approvals.
Increasingly popular unconventional loans, which let borrowersobtain mortgages with less documentation of their income and assets,can inadvertently facilitate fraud.
And the growing use of the Internet and telephone to processmortgage loan applications means that lenders may never meetborrowers, enhancing the potential for fraud.
The more intricate schemes -- appraisal fraud, fraudulentflipping of property, use of straw buyers and identity theft --often are committed with the complicity of real estate industryinsiders like agents, mortgage brokers, appraisers and titleexaminers. Some fraud does not become evident until mortgage loansbecome delinquent.
Last year, the FBI and other law enforcement agencies mounted"Operation Quick Flip," an effort to disrupt and dismantle mortgagefraud rings. From July 5 through Oct. 27, a total of 81 people werearrested, 156 individuals and companies were indicted, 89convictions were obtained and 60 people received prison sentences,according to the government. Lenders suffered $606.8 million inlosses from the actions of those involved, the government said.
The FinCen report cited a number of types of false statementsused in mortgage fraud, including altered bank statements, alteredor fake documentation of earnings such as W2 forms and income taxreturns, fraudulent letters of credit, misrepresentation ofemployment, altered consumer credit scores, invalid Social Securitynumbers, failure to fully disclose a borrower's debts.
In addition, some mortgage brokers have used identities of priorcustomers to obtain loans for new customers who cannot qualify.
The regulators also found schemes in which borrowers signedmultiple mortgages on the same property from multiple lenders andfraudulent bankruptcy filings to stall or prevent foreclosure.
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