FBI investigations of mortgage fraud increased 400% in 2009, compared with five years earlier, according to an Office of Thrift Supervision (OTS) report on fraud and insider abuse (download here). The FBI investigated more than 2,100 mortgage fraud cases in 2009. The OTS said at least 63% of all pending FBI mortgage fraud investigations during fiscal year 2008 involved dollar losses of more than $1m each. The OTS attributed the growth in the number of investigations to declining economic conditions, liberal underwriting and declining house values. “With the rapid growth of markets such as real estate and the development of new technology associated with refinancing and computer-driven underwriting methods, the opportunity for mortgage fraud continues to escalate,” the OTS said. “Warehouse lines have been particularly vulnerable, with their 90-day window of ‘purchasing’ mortgages and awaiting ultimate repayments from final investors.” According to the OTS, equity stripping and property flipping are among the more common fraudulent activities. Additionally, 80% of all mortgage fraud involves collaboration or collusion by industry insiders, according to the report. Mortgage fraud schemes continue to adapt to a changing economy, including today’s housing market where 14% of all mortgages are delinquent or in foreclosure proceedings, according to the Mortgage Bankers Association. For example, OTS noted that foreclosure rescue scams usually involve upfront payments in exchange for promises of resolution that are never delivered. “Ultimately, the scam results in unsuspecting victims losing their homes to foreclosure,” the OTS said. “While this type of fraud is not perpetrated directly against the savings association, the end result can have a negative impact on the association.” The OTS noted red flags for a number of fraudulent mortgage schemes, including straw borrower schemes, “builder bailout” schemes and flipping schemes. For example, in a straw borrower scheme, borrowers may purchase properties listed as primary residences but located outside their home state. Or an investment property may be represented as owner-occupied. In a typical “builder bailout” scenario, OTS said, no-money-down sales may appear or silent second mortgages may be involved. Additionally, the sales price may be upwardly adjusted and the appraisal may be inflated. In a flipping scheme, the appraisal may be fraudulent and the buyer’s income may be inflated. OTS also warned that the property may have been owned by the seller for only a short time, and that the seller may not be listed on the title. Write to Diana Golobay. Additional reporting by Jacob Gaffney
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