Mortgage fraud is expected to escalate

By Abigail Goldman

Friday, July 17, 2009 | 2 a.m.

The FBI’s 2008 Mortgage Fraud Report is not this summer’s feel-good beach read.

But between the dry graphs and data that make up the report, released last week, emerges a plot line as simple as a supermarket paperback’s: Mortgage fraud was bad last year and will probably be worse this year.

Nevada, not surprisingly, was listed as one of the top 20 states for mortgage fraud.

Las Vegas FBI agents are investigating twice as many mortgage fraud cases this year compared with last year, according to supervisory special agent Scott W. Hunter, who leads the FBI’s local white collar crime section. Hunter would not disclose exact numbers, however.

Nationwide, reports of suspected mortgage fraud filed by financial institutions grew 36 percent in fiscal 2008. And all signs seem to indicate that even more reports of suspected fraud will be filed this year, the FBI document states.

This prediction is based on year-to-date numbers, of course. But it also falls in line with an accepted pattern: The worse the real estate market, the more the fraud. Or, to take a line directly from the FBI report, we’re in the midst of a “favorable climate for mortgage fraud schemes to proliferate.”

The FBI determined the top 20 states for mortgage fraud last year by polling various financial institutions, real estate tracking companies and law enforcement agencies for their in-house fraud rankings, then listing the states that topped the various rankings with the most frequency.

One company that was polled, Interthinx, ranked Nevada first last year for possible fraudulent mortgage loan activity — based on the number of loan applications the company reviews and flags for suspicious content, such as inflated property value, phony incomes and signs of identity theft. And our first-place ranking has held steady; in the first quarter of 2009, almost half the Nevada loan applications Interthinx reviewed had at least one indicator of fraudulent activity.

The Mortgage Bankers Association, which was also surveyed by the FBI for the 2008 report, found that Nevada had one of the country’s highest rates of delinquent payments. RealtyTrac determined Nevada had the nation’s highest percentage of houses in some state of foreclosure in 2008: 7.29 percent.

More recent RealtyTrac records indicate the problem is getting worse: In May, foreclosure filings were reported for one out of every 54 Las Vegas metropolitan area houses — a 78 percent increase from May 2008.

Meanwhile, as the subprime market collapsed, the number of Federal Housing Administration-backed mortgages boomed. Though this seems encouraging — the end of sneaky subprime loans — the number of FHA borrowers who defaulted before they could make a single payment grew 182 percent nationwide from 2007 to 2008.

“This is attributed to the weak economy, relaxed underwriting, and fraud,” the FBI report states.

Real estate boosters will surely contend that things are turning around, and every homeowner hopes they’re right. But even an uptick in the market doesn’t mean that mortgage fraud will be mitigated. In fact, the very government programs designed to revitalize the depressed market might just open a new can of worms. Billions of dollars sunk into housing recovery could “provide new targets for mortgage fraud perpetrators,” the FBI report states.

“Lawmakers may not have fully realized the inherent vulnerabilities associated with these and similar programs,” it says, “including the lack of transparency, accountability, oversight, and enforcement that predispose them to fraud and abuse.”

And that’s a nasty no-win theory: When the market goes down, fraud goes up. And when the market is bailed out, fraud artists may find another way.

That’s this paperback’s cliffhanger. We have to wait to find out.