April 27th, 2010

Mortgage fraud is still on the rise, according to a report released Monday, despite efforts by law enforcement and policy makers to rein it in. Incidents of mortgage fraud perpetrated by industry professionals increased 7% in 2009, after jumping 26% the year before, said the Mortgage Asset Research Institute (MARI), a division of LexisNexis. The worst-hit states include Florida, California, Arizona, New York, New Jersey and Maryland. (See table below).

10 Top scam states - The places where mortgage fraud hit hardest.

Source: Mortgage Asset Research Institute

The jump in mortgage fraud is a troubling trend, given that it played a big role in setting the housing crisis in motion, with mortgage professionals doing things like listing false income claims for borrowers, and overstating a home's appraised value. And the statistics may not capture the entire picture, according to Jennifer Butts of LexisNexis Mortgage Asset Research, since fraud isn't usually detected until a loan goes bad.

"We believe that mortgage fraud is significantly understated," said Butts

Mortgage fraud hot spots

Florida was the worst hit state, according to MARI, with a mortgage fraud index reading of 292. That means the Sunshine State had nearly three times the expected level of fraud given the number of loans issued there. A score of 100 would indicate the state had exactly the amount of fraud expected and a score of 0 would mean no fraud at all. Although Florida's reading was the highest in the nation, it was still a huge improvement over 2008, when it was 430. New York was the second worst state for mortgage fraud with a mortgage fraud index reading (MFI) of 217, up 14% from 2008. California was next at 159 and Arizona was fourth with 158. New York's second place ranking was primarily due to illegal activity in the New York City metropolitan area. The Big Apple had the highest rate of mortgage fraud of any metro area in the nation, while Los Angeles came in second and Chicago third.

The report described several types of fraud that were detected most often. These include so-called "liar" loans, in which mortgage professionals knowingly listed false income claims for borrowers; inflated appraisals, in which mortgage loan officers or brokers pressure appraisers to overvalue a home so it would qualify for a bigger mortgage; and false occupancy claims, which is when buyers claim they will live in a home but are actually buying it for investment purposes.

The nature of fraud has changed somewhat since the housing bust, according to Denise James of LexisNexis Risk Solutions. "New trends continue to emerge," she said. With the explosion in foreclosures in many U.S. communities, for example, foreclosure rescue scams are proliferating. One example of this kind of crime occurs when scam artists convince distressed owners to sign over their deeds, which the scammers claim they need to keep the homes out of foreclosure. The scammers then turn around and sell the homes to straw buyers, financing the sales with inflated appraisals. They get, say, an appraisal of $100,000 for a house worth $30,000. When the deal closes, they take the cash and walk away, failing to make any payments. That sticks the banks with properties worth far less than they gave out in mortgage loans. The growing rate of mortgage fraud could exacerbate the country's foreclosure problem. The United States is already on course to have more than a million homes lost to foreclosure in 2010, according to RealtyTrac, the marketer of foreclosure properties.