I came across these articles today that discuss the increase of white collar crimes in the mortgage industry. The first article states the following:

"Another rapidly-growing threat the FBI investigates is mortgage fraud. Nearly 22,000 mortgage-related suspicious activity reports have been filed this year. Losses have increased from $429 million in 2004 to over $1 billion in 2005. Like corporate fraud, mortgage lending and the housing market have a significant impact on our nation's economy. Many people want to believe their homes are worth more than they are, and the recent housing booms across the U.S. have attracted criminals who want to exploit the situation to make a quick profit.
The FBI investigates mortgage fraud in two distinct areas: fraud for housing and fraud for profit. Fraud for housing represents illegal action perpetrated solely by the borrower, the motive being to acquire and maintain ownership of a house under false pretenses, such as misrepresenting income or employment history, or using a stolen identity for the transaction.
The FBI focuses the majority of its mortgage fraud efforts on fraud for profit. This is commonly referred to as "Industry Insider Fraud," which speaks for itself. We estimate that 80 percent of all reported fraud losses involve collaboration or collusion by industry leaders. Typically, their M.O. is revolving equity, falsely inflating property values, or issuing loans based on fictitious properties.

One current mortgage fraud trend is property flipping, which is best described as buying properties and then artificially inflating their value through false appraisals. Then, the properties are repurchased several times at a higher price by associates of the "flipper." Often, flipped properties are repurchased for 50 percent to 100 percent of their original value.
Another trend is equity skimming, which happens when corrupt insiders persuade unsophisticated borrowers to refinance their mortgages every few months. Corrupt employees target people with high mortgage interest rates and convince them to refinance at slightly lower rates. A few months later, they repeat the scheme with a slightly lower rate, but a higher loan amount is generated each time to pay the origination fees. In essence, the perpetrators strip the remaining equity from the properties and line their pockets with origination fees. Eventually the loans become too large for the borrowers, who are forced to default." http://www.fbi.gov/pressrel/speeches/ashley112105.htm


The most disturbing part for me is the last paragraph. The average home owner is falling victim to these crimes unknowingly. Home owners should be cautious of repeated refinancing of their properties. A press release described a 19% rise in foreclosure rates in October, with New Jersey having the highest foreclosure rate in the country. http://www.realtytrac.com/RNshared/News/PressRelease/67.pdf

Could the combination of over-leveraged buyers and mortgage fraud be the cause? Over the past couple of years we have seen a dramatic increase in "No-Doc" and "Stated Income" loans. Home buyers need to be cautious when applying for these types of loans. Your credit score may enable your purchasing power to increase dramatically, however the payment is what you should be considering. Mortgage companies will sometimes qualify you for a purchase price that leads to a payment that will leave you strapped every month. Take the time with your mortgage officer to go over payment amounts for a range of purchase prices and make sure the mortgage payment fits comfortably into your budget.

The second FBI press release states:

"Mortgage Fraud is one of the fastest growing white collar crimes in the United States. Mortgage Fraud is defined as a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan. There are two types of Mortgage Fraud: fraud for property and fraud for profit. Fraud for Property, also known as Fraud for Housing, usually involves the borrower as the perpetrator on a single loan. The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value, or there are down payment problems. The borrower wants the property and intends to repay the loan. Sometimes industry professionals are involved in coaching the borrower so that they qualify. Fraud for Property/Housing accounts for 20 percent of all fraud.

Fraud for Profit involves industry professionals. There are generally multiple loan transactions with several financial institutions involved. These frauds include numerous gross misrepresentations including: income is overstated, assets are overstated, collateral is overstated, the length of employment is overstated or fictitious employment is reported, and employment is backstopped by co-conspirators. The borrower's debts are not fully disclosed, nor is the borrower's credit history, which is often altered. Often, the borrower assumes the identity of another person (straw buyer). The borrower states he intends to use the property for occupancy when he/she intends to use the property for rental income, or is purchasing the property for another party (nominee). Appraisals almost always list the property as owner-occupied. Down payments do not exist or are borrowed and disguised with a fraudulent gift letter. The property value is inflated (faulty appraisal) to increase the sales value to make up for no down payment and to generate cash proceeds in fraud for profit." http://www.fbi.gov/pressrel/pressrel05/quickflip121405.htm

With the team of investigators they now have researching these fraudulent acts we can probably expect to see a very large amount of mortgage brokers, appraisers, and investors under investigation over the next couple of years.