http://www.seattlepi.com/local/407953_fraud09.html Mortgage fraud up nationwide, down in Washington, FBI says

Last updated July 8, 2009 11:00 p.m. PT

By AUBREY COHEN SEATTLEPI.COM STAFF

Washington is one of the few states where mortgage fraud reports declined last year, according to a new report.

"Mortgage fraud continued to be an escalating problem in the United States during 2008," the FBI said in a report released Wednesday. "Although no central repository exists for collecting mortgage fraud complaints, virtually all law enforcement and industry statistics indicated an upswing in mortgage fraud activity."

One major source -- suspicious activity reports that lenders file with the Financial Crimes Enforcement Network -- rose 36 percent, to 63,713 during the 2008 fiscal year.

These reports showed losses of more than $1.4 billion, up 83.4 percent from the previous fiscal year. And losses for the first six months of the 2009 fiscal year were $208 million higher than the same period in 2008.

For states, the report cited data from Interthinx, a provider of risk mitigation and regulatory compliance tools to the financial services industry.

Washington had 1.17 percent fewer reports of fraud-related activity in 2008 than in 2007, the report said. That was the ninth-largest drop, with the biggest decline, 7.8 percent, in Connecticut. The biggest increases were in Nebraska (up 14.3 percent), South Dakota (12.5 percent), North Dakota (12.1 percent) and Wyoming (12 percent).

Looking at information from nine sources, including its own investigations, the FBI said the top mortgage fraud states in 2008 were California, Florida, Georgia, Illinois, Michigan, Arizona, Texas, Maryland and Missouri.

"Industry experts concur that there is a strong correlation between increased fraud and distressed real estate markets," the report said. "The 2008 current housing market, suffering from an increase in inventory, lack of sales, and a high foreclosure rate, provided an attractive environment for mortgage fraud perpetrators who discovered methods to circumvent loopholes and gaps in the mortgage lending market."

Most analysts expect the depressed economy to persist at least through the end of this year, providing "a favorable environment for expanded mortgage fraud activity," the report said.

"Industry personnel will feel pressure to find alternative methods to match the income they enjoyed during the real estate boom years," it said. "Many will be willing to conduct criminal activities to achieve this goal. Increasing numbers of individuals will be willing to consider and participate in illicit deals to avoid foreclosure."

Actions taken to fight the mortgage crisis also create new fraud opportunities, such as scams directed at people looking to buy foreclosed properties and federal funds earmarked for the mortgage industry, the FBI said.

The report noted that the rise in Federal Housing Administration loans from 3 percent of the nation's mortgages in 2006 to more than 30 percent this year also has increased FHA fraud. Last year, 9,278 FHA loans defaulted without borrowers making a single payment -- nearly three times the 2007 total.

Three major types of fraud are builder-bailout, short-sale and foreclosure-rescue schemes.

Builder-bailout schemes are where builders offer excessive buyer incentives that they do not disclose on the mortgage loan documents, meaning the reported purchase price does not accurately represent what the buyer paid.

In short-sale schemes, fraudsters get straw buyers to purchase a home and then go into default. The scammers then offer to buy the home in a short sale, where the lender agrees to accept less than the amount owed.

Foreclosure rescue schemes involve scammers offering to save owners from foreclosure for a fee. In some cases, the scammers have the owners sign over the home and collect rent while letting the home go into default or steal equity by taking out a second mortgage or selling the home.

Here are some fraud types the FBI cited as "emerging schemes."

• Reverse mortgages: Fraudsters get straw buyers to buy foreclosed, distressed or abandoned homes and then transfer title to seniors they recruit. The seniors then take out lump-sum reverse mortgages based on inflated appraisals.

• Credit enhancement schemes: Loan officers and builders encourage borrowers to have their names added to the bank accounts of friends or family members temporarily to falsely show that they have sufficient deposits on hand to afford a mortgage. Some even deposit money into applicants' accounts until they qualify for a mortgage, then withdraw the funds and use them for the next buyer.

• Bankruptcy foreclosure rescue: Scammers tell owners to start sending monthly payments to them while filing for bankruptcy in the owners' names, but often without their knowledge. The bankruptcy filing automatically stays foreclosure,

making the owners think the rescue is working. The owners never show up at the bankruptcy hearing, so the foreclosure process starts again.

Earlier this year, Congress approved a plan to hire hundreds more FBI agents and prosecutors to investigate mortgage fraud.

This came two years after then P-I reporters Paul Shukovsky and Daniel Lathrop documented how the FBI dramatically cut its number of white-collar crime investigations, including mortgage fraud, after shifting about 2,400 agents from traditional crime-fighting squads to counterterrorism units in the wake of the 2001 terrorist attacks.

Shukovsky subsequently reported last October that the Bush administration was rejecting FBI pleas for more agents to investigate mortgage fraud and in January that FBI agents knew about a widespread and growing mortgage fraud problem as early as 2002, but did not act definitively to stop it because transfers to counterterrorism prevented them from understanding how lenders were packaging bad mortgages into bad securities, spreading the impact further out into the wider economy.

In the new report, the FBI said it created the National Mortgage Fraud Team in December, fostered partnerships within the mortgage industry and law enforcement and developed innovative new methods to detect and combat mortgage fraud.

The FBI said it supports 18 mortgage fraud task forces and 53 working groups, while participating in the National Mortgage Fraud, National Bank Fraud and National Securities and Commodities Fraud working groups, and the President's Corporate Fraud Task Force.

Aubrey Cohen can be reached at 206-448-8362 or aubreycohen@seattlepi.com.

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