Stepped-up law enforcement and increased banking scrutiny appear to be curbing the rate of mortgage fraud in some areas of the country, including California and Nevada, prompting determined schemers to take their business to other states.
Nearly a year after the FBI set up a task force in Southern California, the state has dropped from fourth place to eighth for mortgage fraud, according to a report released Monday by the Mortgage Asset Research Institute, a branch of data firm LexisNexis.
"People who were doing frauds and making a lot of money are more desperate to maintain that lifestyle," said Jennifer Butts, a co-author of the institute's report. "We have seen cases of people who are indicted for loan fraud in one state making a small change to their business name and moving to the next state."
The incidents of mortgage fraud nationwide increased 26% in 2008 from 2007, according to the report. The institute does not release raw numbers but says it weighs reports of deception in financing applications against the number of loans originated in each state.
But the geography of mortgage fraud appears to be shifting. Nevada dropped out of the top 10 after nearing the head of the list in recent years. And Rhode Island, which had not been in the top 10 for the last 11 years, has emerged as the state with the biggest fraud problem. The report was released Monday at the annual meeting of the Mortgage Bankers Assn. in Las Vegas.
About 61% of all the reported fraud was related to lies on mortgage applications. About 28% of the frauds were related to tax returns and financial statements. The remaining fraud types were related to appraisals, verifications of deposit, verifications of employment, closing costs and credit reports. In each case, a real estate professional was involved in the fraud: brokers, bankers, appraisers or others.
The 11th annual report draws on information given to the institute by about 600 lenders and insurance companies, including Fannie Mae and Freddie Mac, following investigations of frauds that were used to secure a loan. The frauds are rooted out sometimes within a week of the loan closing and sometimes several years later.
John Courson, chief executive of the Mortgage Bankers Assn. and former chairman of the California Housing Finance Agency, said regulators and prosecutors in California had worked hard in the last two years to go after fraud participants and were starting to see the results in the number of reports.
"In the state of California, both the current attorney general and the local district attorneys have been very strong in enforcement and prosecution," Courson said.
The FBI set up a mortgage fraud task force in June 2008 composed of nine different agencies to go after mortgage fraud in Southern California. The Los Angeles County district attorney's office set up a similar task force. The FBI is investigating more than 100 mortgage fraud cases in the Los Angeles area and more than 1,800 nationwide, agency spokeswoman Laura Eimiller said.
"Some of these investigations can be very lengthy, but it's safe to say over the next year or two you will see a large number of charges being brought," Eimiller said.
At the state level, state Sen. Fran Pavley (D-Agoura Hills) has introduced a bill that would make mortgage fraud a felony.
"This is rampant and has affected the lives of thousands of people in the L.A. area alone, and yet if a broker is caught making deliberate misstatements and falsely filling out qualifying forms, they won't receive more than a slap on the wrist," Pavley said.
When home prices were rising, lenders looked the other way and did not want to admit that they had bad loans on their books, the report says. Now that prices are dropping and the extent of loan fraud is becoming more obvious, the industry has tightened lending standards and dramatically cut the number of new loans.
For scam artists, a growth area appears to be foreclosure prevention, according to the report's authors. These fly-by-night businesses promise to help borrowers save their homes only to steal the home out from under them.
"When we had double-digit growth in appreciation, lenders were counting on the collateral to mitigate the losses that they would experience on a fraudulent loan," said Denise James, one of the report's authors. "Now, the people buying these loans in the secondary market want to see that there is more work being done to make sure the documentation is there to back up these loans."
(BEGIN TEXT OF INFOBOX)
How they rank
These are the states with the highest incidence of mortgage fraud in 2008, according to the Mortgage Asset Research Institute, which collects data from most of the country's mortgage lenders:
1. Rhode Island
6. New York