In this tough economic climate with the housing market the catalyst of the current downturn, its times like these that sadly brings out all kinds of scams. Many scams too. With foreclosures high on the list and mortgage modifications all the buzz in the news today, late last month Congress decided to put forth a strong campaign against scammers; a so-called "declaration of war" against mortgage fraud.
Known as the Fraud Enforcement and Recovery Act of 2009, which President Obama signed into legislation on May 20th, the FERA will fund teams of scam-busters. Their targets range from individuals who lied about their stated incomes on their mortgage applications up to the highly organized networks of "foreclosure relief" scammers who have stolen countless thousands of dollars from homeowners seeking mortgage modifications.
The FERA also put together a Financial Crisis Inquiry Commission with wide ranging powers that allows them to investigate just how and what created the housing market downturn in the first place with the subprime situation their first area of interest.
The Treasury Department is interested in just how bad the current mortgage fraud crisis really is. They've estimate that it has caused an astounding 15 to 25 billion dollars a year in losses to consumers and the mortgage industry.
Over 65,000 reports of potential fraud were filed with the Financial Crimes Enforcement Network in 2008 which is up from 25,000 in 2005 followed by just under 5,500 in 2002. It's been stated by officials that the recession and the foreclosure crisis have actually spurred on more fraud rather than ever before.
Like most of us, they want to know where these frauds are happening and what are they? In a recent study conducted by The Mortgage Asset Research Institute their findings included:
- Almost two-thirds of all frauds involve deceit at the mortgage application level, including potential borrowers indicating to the lender they planned to live at the property and to use it as their main residence while their real plan was to use it as a rental property. Most of the time the applicant will get a lower rate on the loan if they use the property as their main residence and by not doing so is a violation of federal law.
- Close to 30% of all frauds in 2008 involved falsifying information on their financial statements and their tax returns.
- Appraisals were also ranked very high which accounted for almost 23% of fraud cases last year. Appraisal fraud includes overvaluations which are intended to get more mortgage money from the lender. Unfortunately most overvaluations are small enough to avoid being seen or detected, but if they were enough to get the loan closed, they would increase the risk of loss to the lender.
- Other frauds included faked employment authentications, incorrect information on escrow and closing documents, as well as manipulated credit reports and/or credit scores to get unlikely unqualified borrowers approved and/or possibly lower interest rates, and at times both.
According to the 2009 report, California came in as the 8th worst state on the list. Close to 40% of California's fraudulent applications had incorrect bank statements or verifications of deposits.
Now with new federal agencies devoted primarily to detecting and fighting mortgage fraud, there is a much greater chance that more people may find themselves before a grand jury having to pay big fines and may even go to prison.