Reported incidents of mortgage fraud in the U.S. are at an all-time high, increasing 26 percent from 2007 to 2008, according to a new report released Monday by the Mortgage Asset Research Institute (MARI). For the first time, Rhode Island lead the way, ranking first in the country for mortgage fraud with more than three times the expected amount in relation to its origination volume. Florida, which ranked first in 2007 and 2006, dropped to second place, followed by Illinois, Georgia, Maryland, New York, Michigan, California, Missouri and Colorado. “With fewer loan originations today, the data suggests that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud,” said Denise James, LexisNexis Risk & Information Analytics Group director of Residential Mortgage Solutions.  “Not only are we seeing traditional fraud trends, such as application fraud, but we are also seeing new types of emerging fraud occur.” The top fraud incident type in 2008, representing 61 percent of all reported frauds, was application fraud, according to MARI. Frauds related to tax returns and financial statements were the second most common incident type, accounting for 28 percent of reported frauds in 2008 -- a whopping 60 percent increase from 2007 -- followed by appraisal or valuations fraud. The report also recorded frauds related to verifications of deposit, verifications of employment, escrow or closing costs, and credit reports. Mortgage fraud also takes the form of foreclosure prevention schemes by supposedly "knowledgeable foreclosure specialists," identity theft against elderly and immigrants, and a so-called "builder bail-out" form of fraud in which investors are urged to buy into condo conversion or planned community development projects. Despite the emerging types of fraud being reported and the record-setting figures reported for 2008, the cloud may have a silver lining: James, the report's co-author, said MARI believes some of the increase in incident reports resulted from a heightened awareness on the part of lenders. The second author of the MARI report, Jennifer Butts, encouraged further education on the part of lenders to catch even more incidents of fraud. Although it may lead to larger numbers of fraud suspicion reports, it would also effectively lead to a long-term reduction the the number of fraudulent mortgages. "Lenders can start utilizing technology and information to verify the verify the very earliest stages to see if anything looks wrong," Butts said in a conference call about the report. "Maybe there needs to be some additional due diligence at the end" of the process, she said, although she acknowledged the mortgage industry is no different than other industries. "We're all about speediness," she said. "It lends an opportunity for insiders...who take advantage of that.... Fraud will most certainly erupt where there are vulnerabilities." A chief means of combating this vulnerability is to simplify the mortgage process, since "fraud enjoys confusion" and there are plenty of opportunities for confusion amidst all the fine print and paperwork involved, said John Courson, president and chief executive officer of the Mortgage Bankers Association. He said instances of appraisal-related fraud should decline in coming months after the revised Home Valuation Code of Conduct goes into place May 1, enacting various "firewalls" on the process. To a media inquiry following the conference call, Courson said "I must reject the premise that it was the loan that caused the fraud." Instead of blaming the various products available through mortgage bankers, he encouraged the creation of systems designed to "root out the fraud" during the application process, as well as increased funding to the FBI and Department of Justice specifically to pursue perpetrators of mortgage fraud, whether they be consumers intent on maintaining a certain standard of living regardless of ability to pay, or profit-seeking mortgage industry "insiders" looking to swindle the system. “MARI data shows that mortgage fraud is more prevalent today than it was at the height of the boom in mortgage loan originations,” Courson said. “This report is essential reading for mortgage bankers who need to understand where mortgage fraud is coming from, what to watch for and how to protect our companies and communities.” And it appears many subjects of mortgage fraud are likely to be exploiting not just the mortgage sector, but a range of financial institutions. The Financial Crimes Enforcement Network (FinCEN) released Thursday a report that revealed subjects reported for suspected mortgage loan fraud may also be involved in other financial crimes such as check fraud, money laundering, stock manipulation, structuring to avoid currency transaction reporting requirements and others. From depository institution Suspicious Activity Reports (SARs), FinCEN identified approximately 156,000 mortgage fraud subjects, and found that 2,360 were reported for suspicious activity in 3,680 of the other SAR types. “The interconnected nature of suspicious activity across multiple financial sectors covered by FinCEN’s Bank Secrecy Act regulations underscores the immense value of combining insights from the different sectors for the purpose of detecting and thwarting criminal activity” said FinCEN Director James H. Freis, Jr. Kelly Curran contributed to this report. Write to Diana Golobay at diana.golobay@housingwire.com and to Kelly Curran at kelly.curran@housingwire.com.