FBI boosts mortgage fraud caseload

The FBI had more than 1,200 mortgage fraud investigations open at the end of fiscal year 2007, a 47 percent increase from the previous year but still a small fraction of suspected cases.

The number of suspicious activity reports (SARs) filed by banks detailing suspected mortgage fraud incidents grew 31 percent during the same period, to 46,717.

Although federally chartered banks are required to file SARs with the Treasury Department's Financial Crimes Enforcement Network (FinCEN), many other mortgage lenders are exempt, suggesting that the FBI is investigating only a small fraction of mortgage fraud cases.

In a report last year, the bureau said it investigated 818 mortgage fraud cases in 2006, winning 204 convictions and collecting $389 million in restitution and $231 million in fines (see story).The bureau did not release information on 2007 convictions, restitution and fines in its latest report.

The FBI said the top 10 hot spots for mortgage fraud were Florida, Georgia, Michigan, California, Illinois, Ohio, Texas, New York, Colorado and Minnesota. Other states "significantly affected" by mortgage fraud included Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey and Connecticut.

"The downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes," the FBI said in a press release announcing the release of the report. "Emerging and re-emerging schemes in 2007 included builder-bailouts, seller assistance, short sales, foreclosure rescue, and identity theft exploiting home equity lines of credit."

According to the report, builder-bailout schemes may involve incentives to buyers that are not disclosed on mortgage loan documents. A builder who is having trouble selling a property may agree to return a buyer's down payment, for example, inflating the value of the home to conceal the fact that the homeowner has no equity.

While 93 percent of SARs filed with FinCEN did not quantify specific losses, the 7 percent of reports that included loss estimates totaled more than $813 million.

Those losses are "just the tip of the iceberg, reflecting only a small percentage of financial damage suffered by victims of mortgage fraud," said Kenneth W. Kaiser, assistant director of the FBI's Criminal Investigative Division.

The report relied on numbers from a number of public and private sources, including FinCEN, the Mortgage Bankers Association, the Mortgage Asset Research Institute, HUD's Office of the Inspector General, BasePoint Analytics, Interthinx, Fannie Mae, Radian Guaranty Inc. and RealtyTrac Inc.

In its own analysis of FinCEN reports, the industry-backed Mortgage Asset Research Institute concluded that it could take three to five years before many instances of fraud and misrepresentation in loans made in 2007 are discovered. Many adjustable-rate mortgage (ARM) loans will be refinanced, "potentially blocking discovery of some of these issues," MARI concluded (see story).

In the past, the FBI's mortgage fraud investigations have typically involved fraudulent attempts to obtain money from lenders by inflating the value of multiple properties. Often such schemes involve straw buyers and collusion by real estate professionals including appraisers, title and real estate agents and mortgage brokers.

The FBI is also engaged in a broader investigation of how mortgages were originated and bundled into securities during the housing boom. In January, the bureau briefed reporters on an investigation involving 14 financial services companies, mortgage lenders and investment banks.

The FBI did not identify the companies under investigation, but Goldman Sachs, Bear Stearns and Morgan Stanley have all disclosed to investors that they are responding to subpoenas from regulators.

Countrywide Financial Corp. has also been identified in news reports as a subject of that investigation. The FBI is reportedly looking at Countrywide's underwriting practices on stated-income loans, and whether Countrywide misrepresented its financial condition and the quality of its loans in regulatory filings with the Securities and Exchange Commission (see story).

In a regulatory filing this week, company officials said they have been informed by the Department of Justice "that the FBI cannot confirm or deny whether it is conducting an investigation" of Countrywide.

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