This week, the Mortgage Bankers Association (MBA) released a paper called Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts. The paper is part of a series crafted by the MBA to raise awareness on important issues related to real estate lending.
Billions of dollars have been lost in mortgage lending because of fraud, and industry experts expect the incidence of mortgage fraud to continue to rise. Mortgage fraud in 2006 cost lenders an estimated $4.2 billion, according to the Federal Bureau of Investigation (FBI). The Financial Crimes Enforcement Network (FinCEN) also reports that the number of mortgage-related Suspicious Activity Reports (SARs) filed has been increasing by 60% per year over the last several years. It’s clear that mortgage fraud is an important financial issue.
In an attempt to better address mortgage fraud issues, the FBI has consolidated all mortgage fraud programs into the Financial Institution Fraud Unit. This unit is able to investigate allegations of mortgage fraud, even when a lender victim is not a federally chartered financial institution.
Mortgage fraud, which most often harms the lender, can be committed in a number of ways, including:
- Falsified income
- Inflated appraisals
- Misrepresenting assets
- Misrepresenting liabilities
If the truth behind these items waw known by the mortgage lender, the loan would most likely not be written.
Mortgage fraud is contrasted with predatory lending, which is the term applied to improper practices by lenders, which ultimately hurt the borrowers. Predatory lending can include:
- Equity stripping
- Lending based upon foreclosure value
Predatory lending practices are not necessarily fraudulent, but they most often harm the borrower.
While the direct victim of mortgage fraud is the lender, it is recognized that honest consumers ultimately pay the price for this crime via higher fees and rates, and through greater hurdles to home ownership.
The MBA report indicates that there has been little progress in the fight against mortgage fraud. Current federal laws give law enforcement the authority to fight mortgage fraud if so inclined. Current mail fraud and wire fraud statutes could be applied to mortgage fraud, as the laws are broadly defined to cover a wide variety of acts and schemes. Federally regulated or insured financial institutions that are defrauded during the mortgage process may also have laws on their side.
The focus of the MBA is not on creating more federal laws to fight mortgage fraud. Instead, the organization advocates a stronger and better approach to enforcing the current laws. Specifically, the MBA is advocating “…providing the structure and resources needed by law enforcement officials to combat mortgage fraud. While law enforcement has all the legal tools it needs at its disposal, it requires more resources and a more efficient framework to use those tools effectively.”
The paper suggests that better enforcement of laws can be accomplished by:
- Providing more funding for mortgage fraud prevention and prosecution efforts
- Assuring that investigative and prosecutorial resources are committed to mortgage fraud prevention
- Placing responsibility for enforcement in a dedicated office within the Department of Justice
- Providing for intergovernmental cooperation in prosecuting mortgage fraud