Mortgage Fraud Suspicion Soared 44% Before Housing Collapse

By Dawn Kopecki

April 3 (Bloomberg) -- Suspected mortgage fraud by borrowers, brokers and other participants soared 44 percent in the year before the U.S. housing market collapsed, outpacing all other types of dishonest financial activity reported by financial institutions, the Treasury Department said today.

Cash-out mortgage refinancings, home-equity credit lines and stated-income or low-documentation loans helped lead the increase for the 12 month period ended March 31, 2007, the Treasury's Financial Crimes Enforcement Network in Washington said in a report. The network used data from suspicious activity reports, or SARs, that financial institutions are required to file.

Mortgage delinquencies have risen to record levels following a period of lax underwriting standards that allowed some people to obtain loans with limited verification of their finances or fraudulent personal information. New York Attorney General Andrew Cuomo last year began an investigation into what he called widespread industry collusion to inflate home appraisals.

``Fraud is a growing concern for all mortgage lenders, one which hurts everyone involved in the mortgage process, lenders and consumers alike,'' Kieran P. Quinn, chairman of the Mortgage Bankers Association in Washington, said in a statement today.

The U.S. last year had its biggest annual slump for existing home sales in 25 years and the first decline in single-family homes prices since the Great Depression.

In 31 percent of the filings in the latest period, lenders suspected fraud before the loan even closed. Growth in the mortgage filings outpaced all other types of SARs reports by financial institutions by more than 6-to-1, the report said.

California, Florida

California and Florida topped the Treasury network's list for generating the biggest increase in mortgage SARs filings in 2006. Suspected loan fraud surged 71.3 percent in California, 53 percent in Florida, 51.5 percent in Michigan, 48.7 percent in Arizona and 46.3 percent in New York, the report said.

Mortgage brokers were cited as being involved in the fraud in more than a quarter of all filings, the data shows. Reports of appraisal fraud also continued to rise, making up 13 percent of filings, the Treasury network said. Roughly 43 percent of the reports flagged questionable stated income or other data from borrowers, the report said.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: April 3, 2008 15:03 EDT