FinCEN Says Old Mortgage Fraud Continues to Materialize

When it comes to mortgage fraud, the chickens are still coming home to roost from the housing boom of the last decade.  The Financial Crimes Enforcement Network (FinCen) reported Wednesday that 81 percent of the 29,558 mortgage loan fraud suspicious activity reports (MLF SARS) it received in the second quarter of 2011 involved activities that occurred prior to 2008 and 63 percent involved activities that happened more than four years ago. 

Reports filed in the second quarter were nearly double the 15,727 MLF SARs filed by financial institutions during the second quarter of 2010.  The report tied that spike to mortgage repurchase demands and special filings generated by several institutions.

"We're continuing to see a large number of SARs filed on activity that occurred more than two years ago, an indication that financial institutions are uncovering fraud as they sift through defaulted mortgages," said FinCEN Director James H. Freis, Jr. "But we also continue to see indications of ongoing mortgage fraud activities. FinCEN's report released today raises awareness of the common scams that homeowners and lenders may encounter when arranging or modifying home financing."

MLF SARs represented 15 percent of all SARS filings made by financial institutions during the quarter, an increase from a 9 percent share one year ago.  Total SARS filings increased to 203,468, a 16 percent increase from the second quarter of 2010.

Eighty percent of MLF SARs filings reported suspicious activity amounts under $500,000.  Only 12 percent of filings in the second quarter reported loss amounts but those were also generally under $500,000.

California and Florida ranked first and second among the states by volume of mortgage loan fraud subjects and also on a per capital basis.  Nevada and Illinois ranked third and fourth on a per capita basis and New York and Illinois were in those positions when ranked by volume.

Filings for MLF activities that occurred within the previous year represented 11 percent of MLF SARs filings and more than half of those (6 percent) were for activities occurring less than 90 days prior to the reporting date.  The most common reported activity was misrepresentation of borrower income, occupancy status, debts, or income, accounting for 30 percent of the most recent reported activity.  Nineteen percent of reports involved debt elimination scams, 11 percent fraud through misuse of Social Security numbers.  Identity theft, short sale fraud, and appraisal fraud each accounted for 4 to 6 percent of the reports.

Debt elimination scams involved numerous bogus documents and payment methods that customers and third parties submitted to financial institutions in attempts to have their mortgage obligations eliminated.  Report filers described several "payment methods" for mortgage debt elimination not seen previously including fraudulent bank checks, falsely purported deposits from a Federal Reserve Bank, and "international Bills of Exchange."

False statements and documents involved misrepresentations of income, employment, occupancy, assets, and/or liabilities.  Some SARS described scams in which the subjects made multiple loan applications for the same property even though there had been numerous denials because of previous misrepresentations.

While short sale fraud represented only six percent of reports, there were many methods employed.   There were frequent attempts to short sell between related parties and short sale flips (in one case for less than half the appraised value.)  In one scam a third party claiming to work with the bank contacted the borrower to say the sale was being pulled then extracted over $50,000 from the borrower to continue the sale.  Other attempted or actual short sale scams used fraudulent letters of credit, suspicious broker price opinions, and fraudulent short sale approval letters.