Falling home prices and inappropriate mortgage underwriting have grabbed the headlines and much of the blame for mortgage credit woes in recent months, but the rise of mortgage fraud may end up being the lasting story that lives on when the current crisis is gone. New research released Thursday predicts that losses from mortgage fraud will reach a stunning $2.5 billion in 2008 alone, and that comparable losses will continue for several years thereafter.

TowerGroup, which conducted the study, said that mortgage fraud is difficult to track and takes many forms — for example, fraudsters cheating borrowers out of their properties with false promises of foreclosure avoidance, or using the identity of a real person to fraudulently purchase one or more properties. The graphic to the right categorizes the different motives and methods of mortgage fraud. “Much of the growth in mortgage fraud has been due to the ever-increasing sophistication of fraudsters’ schemes to fabricate the values of mortgaged property,” said David Hamermesh, senior analyst at TowerGroup. “Fraud prevention is best done proactively, before the loan closes. Lenders must invest in analytical tools to identify loans at a high risk for fraud, while technology vendors must do more to improve the predictive power of the analytical tools they provide.” According to statistics from the Federal Bureau of Investigation, the growth rate in filings of Suspicious Activity Reports (SARs) related to mortgage fraud rose to 56 percent annually between 2002 and 2007 from its previous average of 26 percent annually from 1996 to 2002. “Technology companies that offer fraud detection solutions will need to develop professional services capabilities to provide lenders with file reviewers who are trained in assessing possible fraud,” suggested Hamermesh. “This service can supplement a lender’s own underwriters and be an efficient way to evaluate those loans flagged as most risky by automated scoring tools.” We see plenty of tech vendors’ press releases here at HW — and most are for some very cool new high-tech solution designed to weed out fraud. I can’t recall ever seeing one vendor step in and say they’d provide begin bundling consulting with their various tech platforms. If Hamermesh is right, that may be where fraud management is headed next. For more information, visit http://www.towergroup.com.