Fraud statistics and estimates
By PATRICK CROWLEY
5/25/2005

MortgageDaily.com has recently completed an analysis of government statistics, industry reports and material on hundreds of mortgage fraud cases. In this first of a three-part series, statistics and estimates of fraud are discussed.

Criminal exploitation of the mortgage industry is turning the American dream of home ownership into a law enforcement nightmare.

From the halls of Congress to the headquarters of the FBI, from courtrooms across the country to prison cells in nearly every state, mortgage fraud has grown to become a major criminal enterprise that has exploded with the booming growth of the nation's $2.5 trillion mortgage lending industry.

"The number of incidents of mortgage fraud is increasing and the types of incidents are becoming more severe and costly to the (mortgage) industry," Williams Matthews, vice president of the Mortgage Asset Research Institute in Virginia, which tracks industry fraud trends, told Congress in April.

"Ramifications of mortgage fraud to the industry range from monetary losses incurred by financial companies to destroyed professional reputations and even criminal and administrative actions," Matthews said, according to a written transcript of his testimony before the House Subcommittee on Housing and Community Opportunity.

"The financial losses incurred by a company can be catastrophic," he said.

So concerned is the Mortgage Bankers Association that the Washington-based lobbying and trade group has launched an online resource center "to better arm...members in their battle against the growing problem of mortgage fraud," the association said in a statement.

The Web site includes fraud alerts, resources for lenders to protect themselves from fraud and updates on fraud news from around the nation.

One of the problems in combating mortgage fraud is that there is no definitive answer as to how widespread the problem is in the country.

The FBI said in September that it had 533 pending mortgage fraud investigations compared to just 102 in 2001.

In its May 2005 Financial Crimes Report to the Public, the FBI said the number of active cases it is working on is 642, compared with 534 for all of last year.

Suspicious Activity Reports for mortgage fraud, which are basically tips about potential fraud investigated by the federal government, jumped from 4,220 in 2001 to 17,127 last year.

"There is increasing concern that mortgage fraud perpetrated against residential mortgage bankers has grown quite large in the past several years," the MBA said in a report issued in January.

But in the May report the FBI said "the true level of mortgage fraud is largely unknown."

"A significant portion of the mortgage industry is void of any mandatory fraud reporting," the FBI said. "The mortgage industry itself does not provide estimates on total industry fraud.

But, the bureau said, "based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing."

Florida and Georgia, two fast growing Sun Belt states, have the worst problems with mortgage fraud, the FBI said.

Other states in the FBI's list of top 10 places with the biggest mortgage fraud problems are California, Nevada, Utah, Colorado, Missouri, Illinois, South Carolina and Michigan.

All told, 26 states have been identified as having significant mortgage problems.

There is some belief, however, that the mortgage fraud problem is being exaggerated.

D. James Croft, executive director of the Mortgage Asset Research Institute, wrote in a recent paper that he has seen figures indicating annual losses from mortgage fraud total $30 billion.

But he argues that figure is a "myth" and the actual amount of losses is much less.

"Even the most elementary analysis shows this number is unrealistic," Croft said. "It has taken on a mythical life of its own, with no basis in reality."

The $30 billion figure assumes that 12 percent of mortgage loans generate fraud losses, according to Croft's analysis.

"The mortgage industry could not survive with a 12 percent delinquency rate, let alone a 12 percent rate of loans generating fraud-related losses," he said.

Like others who have studied the issue Croft says the lack of hard data makes tracking the problem difficult.

But even if a central source of mortgage loss figures existed "solid numbers on fraud losses would be hard to obtain," he said.

"This is due to the fact that many institutions themselves are unsure of what constitutes a fraud loss and what is an economic loss," Croft said. "The average mortgage lender or servicer has a difficult time quantifying its losses."

While Croft says the industry has "a long way to go before we can quantify mortgage fraud loss...anecdotal evidence suggests that the annual figure is substantial."

Some of the losses in mortgage fraud schemes can be staggering.

Take "Operation Clean Deed," an undercover FBI investigation into a Charlotte, N.C., mortgage fraud ring that caused lenders and mortgage companies to lose more than $130 million. Six people were charged in 2002 in a North Carolina federal court.

Fraud is also having a deep impact across America, from Wall Street, where the stock prices of financial institutions can be impacted by fraud, to Main Street, where fraud can increase the cost of a home.

"The potential impact of mortgage fraud on financial institutions and the stock market is clear," Chris Swecker, assistant director of the FBI's Criminal Investigative Division, told the House Financial Services Subcommittee on Housing and Community October, testified last fall.

"If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market," Swecker said, according to a written copy of his testimony.

"Investors may lose faith and require higher returns from mortgage backed securities," he said. "This may result in higher interest rates and fees paid by borrowers and limit the amount of investment funds available for mortgage loans."

Individual homebuyers can be devastated by fraud, Ecima "Lez" Trujillo, National Field Director for the ACORN Housing Corp. consumer advocacy and watchdog organization, told the same Congressional committee in October.

"Mortgage fraud is a nationwide problem," Trujillo told the committee, according to a written copy of his testimony. "While it hurts the bottom line of financial institutions when they are taken advantage of, it devastates the lives of citizens when they are victimized by these scams."

Victims often see their credit damaged or destroyed, lose tens of thousands of dollars and even have their homes taken away in foreclosure actions.

"Mortgage fraud is a complicated and troubling issue...(that) causes far worse anguish for many of the families we represent," Trujillo said. "We hear their stories, and we believe strongly their experiences must be part of the debate in how to end mortgage fraud."

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