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Calculating the Real Cost of Mortgage Fraud

Many believe mortgage fraud is partly to blame for the wave of foreclosures that are swamping many housing markets. And a quick scan at national headlines speaks to the depth of the issue.

In early January alone, there were several high profile convictions:

  • Six people in Boston were arraigned in a $2 million mortgage fraud scheme.
  • A Naples, Fla. man was sentenced to seven years in prison and ordered to pay more than $11 million in restitution for setting up straw deals to obtain inflated mortgages.
  • A Colorado man was sentenced to 31 years in prison after a mortgage fraud scheme.
  • Two North Carolina men were sentenced for their part in a $6 million mortgage fraud scam.
  • Two New Jersey men were convicted in a multimillion-dollar mortgage fraud and property flipping scheme.

Those are just a few of the many early January mortgage fraud headlines from coast to coast. Indeed, prosecution of mortgage fraud is on the rise as the U.S. Justice Department makes the issue a priority. U.S. Attorney A. Brian Albritton has publicly declared that “Mortgage fraud will not be tolerated.”

The Cost of Mortgage Fraud

When you examine the cost of mortgage fraud, it’s easy to see why the federal government is cracking down on the crime. Again, many believe mortgage fraud added to the financial crisis in the subprime mortgage industry and the fall of banks. Consider the latest statistics compiled by the Mortgage Asset Research Institute on the pervasiveness of mortgage fraud:

  • As of March 2008, the Federal Bureau of Investigation (FBI) was investigating more than 1,200 mortgage fraud cases – that’s a 50 percent increase from 2006.
  • The FBI also reports that about half of the mortgage fraud cases it is investigating report losses exceeding $1 million and some exceed $10 million.
  • According to the Financial Crimes Enforcement Network, the number of suspicious activity reports (SARs) submitted relating to mortgage loan fraud increased 1,411 percent from 1996 to 2005.
  • According to the TowerGroup, losses from mortgage fraud were about $2.5 billion in 2008 – and the firm expects comparable losses to continue for the next few years.

Although there is a level of fraud that exists where home buyers and/or their mortgage brokers falsify documents in order to get a loan approval, the FBI estimates fraud for profit accounts for up to 80 percent of the problem. That leaves 20 percent – or more – of the issue in the hands of consumers and mortgage brokers.

Keep Client Safe with the SAFE Act

As a real estate broker, you can help protect your clients. Relying on inflated appraisals, disguising purchase loans as refinances, or working with an exclusive appraiser are red flags and could be signs of potential fraud.

The federal government has put measures in place, such as the Secure and Fair Enforcement of Mortgage Licensing, or SAFE Act, to discourage mortgage brokers from these practices. A key component of The Housing and Economic Recovery Act of 2008, the SAFE Act aims to better protect consumers and curb fraud by encouraging states to establish minimum standards for licensing and registration of state-licensed mortgage loan originators and has also established a nationwide mortgage licensing system and registry for the residential mortgage industry to increase the accountability and tracking of loan originators. If a broker is convicted, that conviction would be listed in the registry.

The bad news is the registry is not yet publicly available. The good news is systems are actively being put in place to protect homebuyers from dishonest mortgage brokers so the housing market will be less prone to negative impacts from mortgage fraud in the future.

Posted in Legal
 
6 comments on “Calculating the Real Cost of Mortgage Fraud
  1. Anita Rich says:

    It is always easy to find someone to blame.. In this case they do deserve it but here is my question… If we can not go back in time.. what good does it do to dwell on the damage that has been done?
    I would like to find a way to build up trust, morale and momentum in the real estate industry.. Please do not think I am overly enhusiastic or unrealistically positive.. I just feel we must get our heads out of the sand and hope we can erase the damage because we can not.. I believe the public needs to see us emerge once again as the professionals most of us are with confidence… and it is great if we have lenders who can be trusted .. lenders who know how to be creative while ethical..
    There is and will be fraud… we can not totally control that.. but I feel we can concentrate on what we can control and re-establish the great value in real estate…Please join me.

  2. Art Aviles says:

    I believe we need to make it more accessable and easier to make complaints for mortgage brokers and loan originator we know of breaking the rules and the law. A lot of times we think it is not right to “snitch” because of Karma, but in any other field, if there was a doctor or an attorney per say, breaking the law and committing fraud in their fields, their industry and colleagues would come down on them immediately and report them to the proper authorities. We need access to these departments that will take these matters serious and not just put them in the back burner like some Departments of Real Estate do today.

    Let’s better this industry continuing to rise the ethics and deminish the fraudulant agents out there who continue to bring our value down. We need to bring the education lever up and enforce the licensing process to filter out the bad apples.

  3. Bob T. says:

    Quick question. Can someone tell me if I have missed many of my mortgage payments, can I still get a mortgage loan modification? And if so, will get get huge fees tacked on to my home loan balance? thanks to anyone who answers.

  4. Hollie W says:

    Mortgage fraud could be curtailed greatly if local, state and federal governments encouraged lenders to report fraud. Most fraud is spotted by internal audits and auditors, they would like to report the fraud and make everyone aware of it and aid in the prosecution of these persons. However, nothing is done with the information because the company who discovered it fears repercussions and liability of sharing the information, therefore nothing is done and valuable information is lost that could lead to prosecution. Say for example XYZ mortgage discovers a fraud ring, only one of their files is being audited by the mortgage insurance company. XYZ mortgage will not let anyone else know that they discovered 10 other files found in the fraud ring because they will then become liable for them and open themselves up to more losses than the one they already suffered. So the fraudsters get off scott free.

  5. P.L says:

    So, this post was a time saver!

  6. collinpl says:

    Its really a great post. Mortgage frauds are on the rise with lucrative very low interest rates. People just to save money fall prey to such frauds. The agents or other brokers should really ensure a genuine mortgage trade.

    Thanks
    Collin paul
    HowMuchHomeCanIAfford.org

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