Mortgage fraud reports plunged last year for the first time in several years, according to a new report, which suggests that either tightened standards and the state of the housing industry are making it tougher to perpetrate fraud – or that scammers are getting more sophisticated and going undetected.
In all, the number of reported fraud incidents dropped 41 percent between 2009 and 2010, according to a new report from the LexisNexis Mortgage Asset Research Institute.
Nevertheless, fraud still cost the housing industry more than $1.5 billion last year, the Treasury Department estimates. And the Mortgage Asset Research Institute's report concludes that losses are probably much, much higher than the Treasury's estimate. "The industry is plagued with vulnerabilities within the origination process that expose lenders to risk."
Florida remains the top state for mortgage fraud. It has topped the fraud index of the Mortgage Asset Research Institute for each of the past five years, and it has three times the expected rate of fraud for the number of loans it originates.
But like the nation as a whole, the Sunshine State has seen fraud decline by nearly a third since its 2008 peak.
Only two other states in the Top 10 – No. 6 Michigan and No. 10 Illinois – registered declines. New York saw fraud increase for the third year in a row and now sits in the No. 2 spot, not far below Florida's level. California, which had seen fraud and its ranking drop in 2009, surged back to take the No. 3 spot last year.
The biggest source of fraud involves the mortgage application, where borrowers misrepresent their financial situation or their identity. But the institute notes as significant that the share of fraud involving the application has fallen from a high of 68 percent in 2006 to 39 percent in 2010.
The second most common area of fraud is in the appraisal or valuation of the property itself.
One form of this kind of fraud is called "flopping." Instead of inflating the value of homes in some of the "flipping" schemes popular a few years back, now a real estate agent or broker values a property far below its real value. Then the lender acquires the property at that low value from a homeowner who is "underwater" and owes more on the property than it's worth.
This involves taking a loss on the value of the loan. But a short sale is often cheaper than going through the lengthy foreclosure process. The broker then sells the property to the real estate agent, again at a loss. But the agent has already lined up a buyer, who purchases it at a much higher price (because it no longer has the stigma of being a short sale), and the lender and agent split the profit.
Appraisal fraud, including flopping, has been steadily climbing and represented a third of all mortgage fraud detected last year.
But overall, reported fraud has plummeted, which could be a result of the industry's concerted efforts to try to head off fraud.
"Lenders are stepping up their efforts to learn from their mistakes, identify incidents that made them vulnerable to fraud, and develop programs that help to protect their organizations from further adverse activities," the report says. But "fraud is and will always be a crime of opportunity, especially in times of desperation."