The Two Types of Mortgage Fraud, Plus a Primer on Tax Sales

In our world, mortgage fraud is mortgage fraud. But for fraud investigators, mortgage fraud is divided into two categories: fraud for housing and fraud for profit.

Fraud for housing is when a borrower fudges the numbers on his or her loan application to get enough money to buy a property.

Fraud for profit is when someone decides it's his mission in life to steal from financial institutions. There is typically more than one loan involved, and it's likely that there is a ring of people engaged in the fraud. Often someone inside a loan company is part of an operation. The FBI said insiders are involved with 80 percent of the cases it is are working on.

"Fraud for profit is the area that law enforcement is focusing on because it represents the largest financial risk to government-regulated financial institutions," said Merle Sharick, a vice president of the Mortgage Asset Research Institute.

While the main focus is on fighting fraud for profit, Sharick said, there is renewed emphasis on fraud for housing now that many more of those loans are going bad.

"In the past, we haven't worried so much about fraud for housing as long as the borrowers made their payments," he said. But as the mortgage market gets tighter, everyone is taking a closer look at these loans.

Sharick acknowledged that some level of fraud is a constant. "It's not as obvious when times are good and property values are soaring," he said. "But when that changes, we start seeing stability of prices or even depreciation in some markets. Then it's different, and people become desperate."

MARI recently published its 10th annual report on mortgage fraud. It put Florida atop its fraud index.

"People have been coming to Florida and investing in condos and properties down there for a long time, and when their investment doesn't work out, they find a way to take advantage either by flipping properties or getting a group of investors together to buy properties with very little money down. . . . That can fuel a mortgage-fraud problem," Sharick said.

Nevada, Michigan, California and Georgia also are among the 10 states with the most mortgage fraud, according to the report.

"Georgia has dropped down on the list because the state has enacted a number of new laws and has become more aggressive in prosecuting people who have participated in mortgage fraud," Sharick said.

How big is the problem? The FBI estimated that as much as $4.2 billion in mortgage fraud occurred in 2006.