Borrowers misstated their financial information to meet lending standards, industry data shows.

December 2, 2008: 2:44 PM ET

MIAMI (AP) -- Reported incidents of mortgage fraud grew by 45% in the second quarter compared to the year-ago period, as borrowers misstated their financial information to maneuver around tighter lending standards, industry data released Tuesday showed.

Florida properties led the way with about one-fifth of mortgage fraud incidents reported in the second quarter, the Mortgage Asset Research Institute reported. California was second, and Illinois third, the data showed.

Mortgage fraud incident reports had increased 42% in this year's first quarter, compared to the first quarter of 2007.

The largest increase in mortgage fraud in the first half of this year involved borrowers misstating their financial profile, which is not surprising as borrowers try to get around stricter lending guidelines, the report said.

Some basic examples of fraud included false bank statements made on computers and pay stubs with white correction liquid on them, said Jennifer Butts, the institute's director of operations.

The industry has partly been blamed for lax lending standards that helped drive an overheated housing market. Mortgage fraud has cost lenders about $1 billion over the past decade, the Mortgage Bankers Association has said.

But it appears that fraud reports are increasing, partly because lenders are scrutinizing applications and industry professionals more closely to reduce risk, said Denise James, director of market planning for mortgage services for LexisNexis, which owns MARI.

Nationally, more than 65% of fraud incidents in the first two quarters were categorized as general application misrepresentation of the buyer's true name or assets. Among the other more common mortgage fraud cases were misrepresentation of income, appraisals, employment history, and debt and assets.

The metro areas of Miami and Tampa were one-two in Florida for mortgage fraud. In California, Los Angeles and San Francisco led the way. Chicago and Rockford were tops in Illinois.

The report concluded that lenders need better tools to find inconsistencies in mortgage applications. Also, the industry needs to share information better and flag suspicious loans from the beginning of the process, the report said.

The report is based on data submitted by the institute's subscribers, which are mostly lenders, about loans that were originated in the second quarter and were deemed fraudulent.