The FBI recently released a report describing the mortgage fraud crimes in the United States for the fiscal year 2009. The report found that mortgage fraud activity increased in 2009, with a 71 percent increase in pending FBI mortgage fraud investigations compared to 2008. Of these investigations, 66 percent involved dollar losses totaling more than $1 million.
The United States is facing a distressed housing market, despite an increase in 3 million housing units in the U.S. inventory from 2007 to 2009, with foreclosures up by more than 120 percent and home prices decreasing annually from 2007 to 2009. In addition, unemployment in the U.S. increased from 7.7 percent in January 2009 to 10 percent in December 2009.
In the face of this economic crisis, the government has injected the economy with funds aimed to stabilize the troubled economy. Unfortunately, many of these efforts for financial reform are vulnerable to fraud as well. Mortgage fraud perpetrators are taking advantage of the weak economy and seeking loop holes in the system in order to commit fraud for financial gain.
In their topographic study, the FBI found that the Western region of the United States had the highest rate of mortgage fraud for 2009, followed by the Southeast, North Central, Northeast and South Central regions. The top states reporting mortgage fraud for 2009 are: “California, Florida, Illinois, Michigan, Arizona, Georgia, New York, Ohio, Texas, the District of Columbia, Maryland, Colorado, New Jersey, Nevada, Minnesota, Oregon, Pennsylvania, Rhode Island, Utah and Virginia.”
Current schemes resulting in mortgage fraud include: “loan origination, foreclosure rescue, builder bailout, short sale, credit enhancement, loan modification, illegal property flipping, seller assistance, bust-out, debt elimination, mortgage backed securities, real estate investment, multiple loan, assignment fee, air loan, asset rental, backwards application, reverse mortgage fraud and equity skimming.” The majority of these schemes are described as for-profit fraud. Many schemes involve other techniques, including: “the use of straw buyers, identity theft, silent seconds, quit claims, land trusts, shell companies, fraudulent loan documents (including forged applications, settlement statements, and verification of employment, rental, occupancy, income, and deposit), double sold loans to secondary investors, leasebacks and inflated appraisals.” New and emerging schemes in mortgage fraud include: “commercial real estate loan fraud, condominium conversions, first time homebuyer tax credits, bankruptcy fraud, flopping and short sales, property theft/fraudulent leasing of foreclosed properties, tax-related fraud, and the resurgence of debt elimination/redemption schemes.” These schemes exploit the distressed real estate market and tighter lending practices of financial institutions.
The main perpetrators of mortgage fraud are mostly industry insiders, including: “mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, and bank and trust account representatives.” In addition, these perpetrators were found to recruit ethnic groups and gangs to act as partners in crime (known as affinity fraud).
Victims of mortgage fraud include not only borrowers and real estate entities, but also individuals living in communities affected by mortgage fraud. Within mortgage fraud, homes can be sold for inflated prices, causing an artificial inflation of the price of surrounding property as well as property taxes. When homeowners default on their inflated loans, homes are foreclosed and the neighborhood deteriorates in value, making it difficult for individuals not directly involved in the fraud to sell their homes.
To respond to the mortgage fraud crimes and the expected increase in them, the FBI has taken a few proactive measures. It created the National Mortgage Fraud Team in December 2008 to help FBI field offices identify fraud perpetrators, organize investigative strategies, and provide resource information. The FBI also has created and fostered partnerships with law enforcement and mortgage industry officials and is working on new strategies to detect and fight mortgage fraud. Other organizations, including HUD, Federal Trade Commission, Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), are helping the FBI promote mortgage fraud awareness through postings and alerts.
Read the full report on the FBI Website