Reported incidents of mortgage fraud are on the rise despite fewer loan applications, according to a report by the Mortgage Asset Research Institute. In the second quarter of 2008, reported incidents of fraud increased by 45 percent, compared with the first quarter in 2007.

Florida leads the country in reported mortgage fraud, followed by California and Illinois. Nationwide, fraudulent activity most often occurs at the beginning of the loan process.

With tighter industry credit standards in place, information related to the financial profiles of borrowers are the most likely to be misrepresented. More than 65 percent of loan applications are deemed fraudulent because of an incorrect name, occupancy or asset is misrepresented during the application process. Misrepresentations related to income accounted for 36 percent of fraudulent applications and employment misrepresentations accounted for 20 percent of fraud incidents.

The report did not detail who misrepresented the information – it could be the borrower, the lender or another professional involved in the mortgage loan process.

In addition to outlining the causes of fraudulent applications, the report also includes three ways the mortgage loan industry can fight mortgage fraud and prevent losses, including:
– Lenders need better fraud detection tools to evaluate applications
– The mortgage industry needs to collaborate to better share information
– Lenders need to flag suspicious loans in the early stages of the application to limit the potential of fraud

The quarterly report is based on data submitted to MARI on loans that have been classified as fraudulent. Submission of data is voluntary and MARI staff verified cases of misrepresentation. MARI is a service of LexisNexis.

Dec. 2, 2008.