Mortgage Fraud Up As Credit Tightens

By Dina ElBoghdady
Washington Post Staff Writer
Tuesday, March 17, 2009

Mortgage fraud jumped by 26 percent last year even though fewer loans were issued nationwide, and Maryland ranked among the top five states with the most serious problems, according to an industry study released yesterday.

The study by the Mortgage Asset Research Institute concluded that fraud is more prevalent than it was at the height of the lending boom. The group singled out the most troubled states based on cases it gathered from roughly 600 lenders, mortgage insurance firms and mortgage investors, as well as federal data on loan originations.

Rhode Island topped the list, followed by Florida, which had held the No. 1 slot in 2007. Incidents of fraud in Rhode Island were three times what would have been expected given the number of loans made last year, the report said, although the authors said they weren't sure why.

Next on the list were Illinois, Georgia and Maryland, which landed on the top-10 list for the first time in the study's 11-year history, up from No. 15 in 2007. The state had the highest percentage of fraud on tax returns and financial statements.

But Sarah Bloom Raskin, Maryland's commissioner of financial regulation, said the report's findings do not mesh with information that has been released by other sources, including the FBI and mortgage financier Fannie Mae, which have not ranked Maryland or Rhode Island near the top of their lists.

"I have no idea where [the report's] numbers come from, and I don't rely on their report as a benchmark," Raskin said. "It doesn't make sense. In Maryland, we've got some of the toughest laws in the country."

The Mortgage Asset Research Institute, an arm of information company LexisNexis, prepared its report for the Mortgage Bankers Association.

By most accounts, mortgage fraud is rising as lenders clamp down on who qualifies for a mortgage. Home loan originations dropped to $1.49 trillion last year after peaking at $3.95 trillion in 2003, said Guy Cecala, publisher of Inside Mortgage Finance. They were down 39 percent from $2.3 trillion in 2007.

"I don't think there's any denying that mortgage fraud is not going away any time soon, and it has risen as a percentage of loans," Cecala said.

The authors of yesterday's report attributed the spike in fraud incidents in part to more aggressive reporting by lenders. But they also said that the tighter lending environment is enticing borrowers and real estate industry professionals to act illegally.

"The data suggest that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud," said Denise James, one of the authors.

The most common type of fraud continues to be misrepresentation of income and other key facts on loan applications. That kind of fraud represented about 61 percent of all the cases reported in the study, followed by fraud on tax returns and then appraisals.

The incidents used to reach the study's conclusions were reported voluntarily and in the aggregate without revealing details about cases. The findings were released at a mortgage fraud conference hosted by the Mortgage Bankers Association.

Filling out the top-10 list were New York, Michigan, California, Missouri and Colorado.

John Courson, president and chief executive of the mortgage bankers group, said his organization wants the federal government to set aside $31 million for the next five years to help the Justice Department and FBI combat mortgage fraud.

John S. Pistole, deputy director of the FBI, told a Senate panel last month that the number of FBI mortgage fraud investigations jumped to 1,600 in fiscal 2008 from 881 in fiscal 2006.

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