Housing Market Primed for Mortgage Fraud

Subprime loans, which dramatically increased after 2003, are a considerable factor influencing mortgage fraud due to their higher failure rate, according to the FBI's 2007 mortgage fraud report.

"Subprime mortgage issues remain a key factor in influencing mortgage fraud directly and indirectly ... during 2007 there were more than 2.2 million foreclosure filings reported on approximately 1.29 million properties nationally, up 75 percent from 2006," the report said.

According to the FBI report, mortgage fraud is most concentrated in the north central region of the United States, and notes the top 10 mortgage fraud states include Florida, Georgia, Michigan, California, Illinois, Ohio, Texas, New York, Colorado, and Minnesota.

"Mortgage fraud continues to be an escalating problem in the United States. Although no central repository collects all mortgage fraud complaints, Suspicious Activity Reports (SARs) from financial institutions indicated an increase in mortgage fraud reporting," the report noted.

The FBI reviews SARs it receives from the Treasury Department's Financial Crimes Enforcement Network (FINCEN) to look for indicators pointing to potential mortgage fraud.

The number of suspicious reports has grown in recent years. In 2003, the FBI received about 7,000 reports. According to the bureau, in 2007 they received 46,717 reports. According to an FBI official, for the first half of fiscal year 2008, the bureau has received 33,359 reports.

To cope with mortgage fraud, the FBI has set up 35 mortgage fraud task forces across the country. "The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market," the report said.

The report acknowledged some scams that have become more prevalent in recent years, besides illegal property flipping and using straw buyers who fill out false loan applications:

Mortgage Rescue Scams

In March, ABC News reported on mortgage rescue scams, which have become more prevalent. In the schemes, predatory con artists promise financially strapped homeowners the ability to refinance mortgages, but it's a ruse. They charge a fee and then disappear, leaving homeowners facing foreclosure and with even less money.

ID Theft on Home Equity Line of Credit

Swindlers steal an individual's information used to establish a home equity line of credit account. After an advance is granted, the perpetrator sends a facsimile to the financial institution, requesting that the funds be wire transferred to another account.

Builder Bailout Scam

To off-load inventory of homes, a builder or developer makes an offer to a buyer with no down payment after the builder inflates the sale of the property. Believing a down payment had been made, the bank or lender funds the mortgage at a certain level but is actually funding 100 percent of the mortgage.

The builder acquires the funds from the sale of the home, keeping the profits. If the home forecloses, the lender and buyer have reduced equity from the inflated price.

As a result of the subprime loans fuelling the ongoing credit crisis and recent economic troubles, the FBI has investigated the issue. FBI Director Robert Mueller recently confirmed that the FBI is investigating 19 institutions related to the subprime lending crisis, and the financial and investment vehicles used by those firms.

In a speech last month, Mueller said, "We likely will see more corporate fraud cases in the months to come because of the ripple effect of the subprime crisis and its impact on the credit market. We are targeting accounting fraud, insider trading and deceptive sales practices. These investigations may well lead to other instances of fraud, from investment banks and private equity firms to hedge funds."

The FBI currently has about 200 agents working more than 1,300 mortgage fraud investigations, has set up task forces across the country, and is working with the Justice Department's Mortgage Fraud Working Group.

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