Foreclosure filings were reported on 2.3 million U.S. properties in 2008, an increase of 81% from 2007 and up 225% from 2006, according to the RealtyTrac U.S. Foreclosure Market Report released today.

The steep annual increase came despite a quarterly decrease in the fourth quarter after nine consecutive quarterly increases. And the fourth quarter decrease came despite a surge in foreclosure activity in December. The conflicting trends come largely as a result of artificial pressures on the foreclosure market.

Foreclosure prevention programs implemented to-date have not had any real success in slowing down the foreclosure tsunami. And the recent California law (SB 1137, which went into effect Sept. 15, 2008, and required lenders to contact distressed homeowners about their intent to foreclosure 30 days before filing a Notice of Default), much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners.

That law had a noticeable impact on Notice of Default(NOD) filings in California, with those filings decreasing from around 44,000 in August to around the 20,000 level in September, October and November. But then NOD filings spiked back up to more than 40,000 in December. A similar trend occurred in Massachusetts over the past few months, after foreclosure-extending legislation was enacted there in May of 2008.

Nevada, Florida, Arizona post top state foreclosure rates in 2008

More than 7 percent of Nevada housing units (one in 14) received at least one foreclosure notice in 2008, giving it the nation’s highest state foreclosure rate for the year. A total of 77,693 Nevada properties received a foreclosure filing during the year, an increase of nearly 126 percent from 2007 and an increase of nearly 530 percent from 2006.

Florida registered the nation’s second highest state foreclosure rate in 2008, with 4.52 percent of its housing units (one in 22) receiving at least one foreclosure filing during the year, and Arizona registered the nation’s third highest state foreclosure rate, with 4.49 percent of its housing units (one in 22) receiving at least one foreclosure filing during the year.

Other states with Top 10 foreclosure rates for 2008 were California, Colorado, Michigan, Ohio, Georgia, Illinois and New Jersey.

A total of 523,624 California properties received a foreclosure filing in 2008, the nation’s highest state total. Foreclosure activity in the state increased nearly 110 percent from 2007 and nearly 498 percent from 2006.

With 385,309 properties receiving a foreclosure filing in 2008, Florida documented the second highest state total. Florida foreclosure activity increased 133 percent from 2007 and nearly 412 percent from 2006.

Arizona’s 2008 total of 116,911 properties receiving a foreclosure filing was third highest among the states. Foreclosure activity in Arizona increased 203 percent from 2007 and 655 percent from 2006.

Other states with Top 10 totals for 2008 were Ohio, Michigan, Illinois, Texas, Georgia, Nevada and New Jersey.

Sunbelt cities plus Detroit land on top 10 metro foreclosure rates list

With 9.46 percent of its housing units (one in 11) receiving a foreclosure filing during the year, Stockton, Calif., registered the highest foreclosure rate among the nation’s 100 largest metropolitan areas in 2008. Other California cities in the top 10 were Riverside-San Bernardino at No. 3 (8.02 percent, or one in 12 housing units); Bakersfield and No. 4 (6.17 percent, or one in 16 housing units); and Sacramento at No. 9 (5.20 percent, or one in 19 housing units).

Las Vegas documented the second highest metro foreclosure rate in 2008, with 8.89 percent of its housing units (one in 11) receiving a foreclosure filing during the year.

More than 6 percent of Phoenix housing units (one in 17) received a foreclosure filing during the year, giving the city the fifth highest metro foreclosure rate in 2008.

The foreclosure rate in Fort Lauderdale, Fla., ranked No. 6, with 5.95 percent of the metro area’s housing units (one in 17) receiving a foreclosure filing in 2008. Other Florida cities in the top 10 were Orlando at No. 7 (5.48 percent, or one in 18 housing units) and Miami at No. 8 (5.21 percent, or one in 19 housing units).

With 4.52 percent of its housing units (one in 22) receiving a foreclosure filing during the year, Detroit registered the tenth highest metro foreclosure rate in 2008.

Reported incidents of real estate and mortgage fraud in the U.S. increased by 45% on fewer loan applications in the second quarter of 2008 from a year ago, according to a report released today by the Mortgage Asset Research Institute (MARI). The MARI Quarterly Fraud Report is based on data submitted by MARI subscribers on loans originated in the second quarter of this year that have since been classified as fraudulent.

Key findings from the report include:

• Fraud most often occurs at the beginning of the loan process. More than 65% of fraud incidents are attributed to “General Application Misrepresentation,” a trend that has continued over the past two quarters. General Application Misrepresentation occurs when information such as a name, occupancy or assets is incorrectly stated during the application process.
• Income misrepresentation on loan applications rose 5% during the second quarter of 2008 versus the first quarter of 2008.
• Asset and debt misrepresentation on the loan application rose 7% during the second quarter of 2008 versus the first quarter of 2008.
• Tax return and financial statement misrepresentation rose 4% during the second quarter of 2008 versus the first quarter of 2008.
• Verification of deposit and bank statement misrepresentation rose 3% during the second quarter of 2008 versus the first quarter of 2008.
• Appraisal misrepresentation climbed to 21% for an overall increase of 6% during the second quarter of 2008 versus the first quarter of 2008.
• Florida, California, and Illinois compose the top three states for reported incidents of fraud. Florida saw a 5% increase in General Application Misrepresentation in the second quarter, while California saw a 20% decrease. Illinois recorded the highest percentages of income and employment misrepresentation on loan applications.

As was the case for the first quarter of 2008, Florida tops the list with the most reported loans with misrepresentation in the second quarter. Twenty-one percent (21%) of reports for loans originated during this time period were for properties in Florida. California ranks second, with 15% of loans reported; and Illinois rounds out the top three with 12% of all loans reported.

According to the Federal Bureau of Investigation (FBI), which earlier today issued yet another Mortgage Fraud Advisory, here are the latest Real Estate Fraud statistics:

• Estimated Annual Losses: $4 billion to $6 billion
• Total Mortgage Fraud Suspicious Activity Reports in Fiscal Year 2007: 46,717, with $813 million in losses
• Total FBI Mortgage Fraud Task Forces/Working Groups (June 2008): 42
• Pending FBI Mortgage Fraud Investigations (May 2008): 1,380
• Cases opened in Fiscal Year 2007: 462 (compared to 295 in Fiscal Year 2003)
• Successes in Fiscal Year 2007: 321 indictments/informations; 260 convictions
• States with Significant Mortgage Fraud problems in 2008:

1. Florida
2. Nevada
3. Michigan
4. California
5. Utah
6. Georgia
7. Virginia
8. Illinois
9. New York
10. Minnesota

Earlier today, the FBI released another new report detailing fraud in financial markets, including those related to real estate. The Financial Crimes Report for Fiscal Year 2007 covers corporate fraud, securities and commodities fraud, health care fraud, mortgage fraud, insurance fraud, mass marketing fraud, and asset forfeiture/money laundering.

As we know, financial crimes affect the economic security of all Americans, regardless of whether we feel safe and secure in our homes or not. Key findings presented in the new report include:

1. By of the end of Fiscal Year 2007, 529 corporate fraud cases were being pursued by the FBI, several of which involve losses to public investors that individually exceed $1 billion.
2. FBI securities and commodities fraud cases increased from 937 in 2003 to 1,217 in 2007, and resulted in $24 million in recoveries, $1.7 billion in restitution orders, and $202.7 million in fines in 2007.
3. Through 2007, the 2,493 health care fraud cases investigated by the FBI resulted in 839 indictments and 635 convictions of health care fraud criminals.
4. The 1,204 pending real estate and mortgage fraud cases in 2007 resulted in 321 indictments, 206 convictions, $595.9 million in restitution orders, and $21.8 million in recoveries.
5. The FBI investigated 548 money laundering cases in FY 2007, resulting in 141 indictments, 112 convictions, $66.9 million in restitution orders, $2.2 million in recoveries, and $11.4 million in fines.

Although there are many mortgage fraud schemes, the FBI says it is focusing the majority of its efforts on those perpetrated by real estate industry insiders. In the report, the FBI says it is engaged with the mortgage industry primarily in identifying fraud trends and educating the public. Some of the upwardly trending real estate and mortgage fraud schemes include:

• Equity skimming
• Property flipping
• Mortgage-related identity theft

Equity skimming is a tried and true method of committing real estate fraud. Today’s common equity skimming schemes involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors. Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers, shell companies, along with a slew of industry insiders, to conceal their methods and override lender controls.

The FBI just released a comprehensive new report on real estate and mortgage fraud, and, as you might expect given everything we talk about here on Flipping Frenzy, it isn’t a pretty picture. The information contained in the report can get quite technical, with plenty of charts, graphs, and hard numbers. Regardless, it’s worth the read–see “The 2007 Mortgage Fraud Report.” Among the Report’s key findings:

1. Real Estate and Mortgage Fraud is clearly on the rise. Although there is no central way to track the total extent of the problem, the FBI received 46,717 Suspicious Activity Reports related to real estate and mortgage fraud last year—compared to 35,617 in 2006 and just 6,936 in 2003. Only 7% of these reports documented an exact dollar amount in terms of losses, but even so, the total loss from this 7% was $813 million. The FBI’s caseload has also escalated. By the end of fiscal year 2007, the Bureau was handling just over 1,200 real estate and mortgage fraud investigations—a 47% increase from 2006 and a whopping 176% increase from 2003.
2. The downward trend in the housing market will continue (see forecasts provided by the Mortgage Bankers Association in the report), providing further incentive for shady real estate industry insiders to look for dishonest ways to turn a profit and growing opportunities for scam artists to prey on vulnerable homeowners.
3. The subprime lending crisis is a contributing factor to real estate mortgage fraud, both directly and indirectly. Subprime loans, designed for people with poor or limited credit histories, now represent more than 13% of all outstanding loans–double the percentage of five years ago. These high-interest, high-risk loans contributed to the 2.2 million foreclosures filed during 2007, up 75% from 2006. The trouble actually began when home prices were rising a few years ago, leading to relaxed lending practices throughout the industry and the exaggeration of assets by industry insiders and borrowers under their charge anxious to qualify for loans, both of which contributed to fraud.
4. The top 10 hotspots nationwide for mortgage fraud in 2007, carefully mapped from multiple public and private sources, were:
   
   1. Florida
   2. Georgia
   3. Michigan
   4. California
   5. Illinois
   6. Ohio
   7. Texas
   8. New York
   9. Colorado
   10. Minnesota

   Other states significantly affected include: Arizona, Maryland, Utah, Nevada, Missouri, Indiana, Tennessee, Virginia, New Jersey, and Connecticut. The north-central region of the United States had the largest share of fraud, followed by the west and southeast regions.



5. The latest mortgage scams run the gamut: from builder-bailout schemes where developers unload excess inventory through financial trickery, to foreclosure rescue schemes that trick homeowners into signing over the deed to their house; from seller-assistance scams that use false appraisals to sell homes, to identity theft that leads to home equity credit lines being opened and drained.

The FBI’s report also briefly recounts the agency’s own response to the problem, including the Bureau’s participation in the Department of Justice’s Mortgage Fraud Working Group, through which the agency says it is helping to identify large-scale real estate industry insiders and criminal enterprises conducting systemic real estate fraud

The purpose of the The 2007 Mortgage Fraud Report is to provide insight into the breadth and depth of real estate and mortgage fraud crimes in the United States. The report updates the 2006 Mortgage Fraud Report and addresses current fraud projections, issues, and hot spots (as noted above). The objective of the report, according to the FBI, is to provide FBI program managers with relative data to justify real estate and mortgage fraud investigative and preventive resources and for investigators to identify real estate and mortgage fraud activity.

The Financial Crimes Enforcement Network (FinCEN)–which safeguards the U.S. financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity–last week released “Suspected Money Laundering in the Residential Real Estate Industry: An Assessment Based Upon Suspicious Activity Report Filing Analysis,” a new report that identifies several transactional typologies and associated illicit activities that may be perpetrated by individuals or groups seeking to launder funds via residential property transactions.

The study appears to confirm an increase in the number of suspicious activity reports (SARs), indicating suspected money laundering in the real estate industry which tracks closely with the past expansion of the real estate market, especially in 2004 and 2005. Previous FinCEN studies concerning mortgage loan fraud and money laundering in the commercial real estate industry confirmed similar trends. However, in contrast to criminals seeking to profit by committing mortgage fraud, those who seek to launder money through residential real estate generally intend to make timely payments and seek to make their transactions appear as unremarkable as possible in order to disguise the source of their funds.

Laundering money through residential real estate involves turning the proceeds of crime into the use or ownership of real property assets. For example, a criminal may use illicit funds to outright purchase or to make monthly rental payments on real property. Internationally, these laundering techniques are well known. FinCEN’s report shows that U.S. financial institutions have been able to identify some possible instances of money laundering through residential real estate. The report is intended to help raise awareness of the vulnerability and assist financial institutions to better recognize risk and thus provide better information to law enforcement in order to combat criminal activity.

In some cases, according to the new report, laundering money through residential real estate was found to support tax evasion, fraud and identity theft.

Though SAR narratives reporting suspicious activity associated with the residential real estate industry are relatively common, only about 20% of such filings reportedly describe suspected structuring and/or money
laundering, and of those, only about 11% described any other suspected illicit activity including tax evasion, fraud, or identity theft. Specifically, illicit activity related to tax evasion included:

• cashing checks payable to businesses and the diversion of cash business receipts in a manner possibly designed to evade taxes.
• misusing the tax exempt status of organizations to conduct real estate-related businesses and disguise the profits as contributions.

Various types of fraud and identity theft were reported, including:

• check kiting on real estate investment accounts
• real estate investment accounts used to promote a potential pyramid scheme
• fraudulently acquired state and federal tax refunds laundered through mortgage trust accounts
• mortgage loans granted on the basis of fraudulent appraisals
• identity theft employed to drain the balances of home equity line of credit accounts and to layer illicit proceeds from money laundering activities

Over 75% of the entities suspected to be involved in residential real estate-related money laundering were identified as individuals unaffiliated with residential real estate-related businesses. For example, launderers may use multiple nominees or straw buyers to secure numerous mortgages on various residential properties, thereby creating a means for the conversion of illicit cash into real property while projecting the appearance of many unrelated mortgages paid on a regular and timely basis.

The latest foreclosure statistics from RealtyTrac are out, and the news isn’t very good. According to the Q1 2008 U.S. Foreclosure Market Report, which tracks foreclosure filings (including default notices, auction sale notices and bank repossessions), 649,917 properties were foreclosed upon during the first quarter of the year, a 23% increase from the previous quarter and a 112% increase from the first quarter of 2007. The report also shows that one (1) in every 194 U.S. households received a foreclosure filing during the quarter.

Foreclosure activity in the quarter increased on a year-over-year basis in 46 out of the 50 states and in 90 of the nation’s 100 largest metro areas, demonstrating that most regions of the country are seeing more foreclosures. In some areas there are also some unusual, non-market factors impacting the foreclosure numbers. For example, the city of Philadelphia in late March issued a temporary moratorium on all foreclosure auctions for April, and the city has since adopted a program that will delay foreclosure proceedings on owner-occupied properties until the owners have met face-to-face with lenders to attempt a loan workout plan that would prevent foreclosure.

While programs like those in Philadelphia are certain to have a positive long-term impact, they could be simply deferring another flood of foreclosures, and that could extend the length of time it takes the market to recover from the current downward cycle, in which we’ve already seen seven consecutive quarters of increasing foreclosure activity.

Click on the map to the left for a close up view of exactly where foreclosure-related activity is playing out across the United States. As you’ll see, one (1) in every 54 Nevada households received a foreclosure filing during the first quarter, the highest foreclosure rate in the nation and 3.6 times the national average. Foreclosure filings were reported on 19,595 Nevada properties during the quarter, up 3% from the previous quarter and up 137% from the first quarter of 2007.

Foreclosure filings were reported on 169,831 California properties during the first quarter, the highest total in the nation at a rate of one (1) in every 78 households — the nation’s second highest foreclosure rate. Foreclosure activity in California increased 32% from the previous quarter and was up nearly 213% from the first quarter of 2007.

Arizona documented the nation’s third highest state foreclosure rate, with one (1) in every 95 households receiving a foreclosure filing during the quarter. Foreclosure filings were reported on 27,404 Arizona properties during the quarter, up 45% from the previous quarter and up nearly 245% from the first quarter of 2007.

Foreclosure filings were reported on 87,893 Florida properties during the first quarter, the second highest state total and giving Florida the nation’s 4th highest foreclosure rate — one (1) in every 97 households received a foreclosure filing during the quarter. Foreclosure activity in the state was up 17% from the previous quarter and up 178% from the first quarter of 2007.

Colorado foreclosure activity increased 33% from the previous quarter and 78% from the first quarter of 2007, and the state’s foreclosure rate ranked No. 5 among the states. Foreclosure filings were reported on 18,996 Colorado properties during the quarter, a rate of one in every 110 households.

Other states with foreclosure rates among the top 10 were Georgia, Michigan, Ohio, Massachusetts and Connecticut.

Falling home prices and inappropriate mortgage underwriting have grabbed the headlines and much of the blame for mortgage credit woes in recent months. But the significant rise in mortgage fraud over the past 10 years is another important trend. New research from TowerGroup predicts that losses from real estate and mortgage fraud will reach $2.5 billion in 2008 and that comparable losses will continue for several years thereafter. The new research, titled “US Mortgage Fraud: Types, Trends, and Detection Tools,” examines the different types of fraud, characterizes the tools available to combat fraud schemes, and assesses likely future directions of mortgage fraud prevention services and products.

Related: FBI spokesperson, Stephen Kodak, tells New York Times News Service that 2008 is turning out to be a record-breaking year for real estate and mortgage fraud. Kodak says the FBI received nearly 30,000 suspicious activity reports so far for FY08. The 2007 fiscal year, Kodak reports, ended with 46,000 reports and 260 FBI-involved convictions.

The Mortgage Bankers Association (MBA) yesterday announced that the Mortgage Asset Research Institute (MARI) has completed its 10th Periodic Mortgage Fraud Case Report to MBA. The report examines the current state of residential mortgage fraud and misrepresentation in the U.S. based on participating subscribers’ reports to MARI.

The report, which sites Florida as topping the MARI Fraud Index list for the second consecutive year and Nevada climbing to the No. 2 ranking, was released during MBA’s annual National Fraud Issues Conference in Chicago.

Clearly, the current market conditions, compounded by mortgage fraud, are having a detrimental impact on our entire national economy. The MARI report provides critical insight for those in the real estate finance industry to better understand the factors contributing to these circumstances so that our communities are better protected.

According to the Mortgage Fraud Case Report, “The conditions in the mortgage industry for the last half of 2007 made the year one for the record books.” Overall, 2007 marked the lowest volume of mortgage loan originations since 2002, the highest number of delinquencies and foreclosures, rapid and near complete shutdown of the non-conforming secondary market and hundreds of announced closures of mortgage originators.

Highlights in the Mortgage Fraud Case Report include:

• In addition to Florida and Nevada, the remainder of this year’s top ten (in order): Michigan, California, Utah, Georgia, Virginia, Illinois, New York and Minnesota
• Colorado showed the greatest improvement from prior years’ rankings, dropping out of the top ten for the first time in five years
• The most common types of fraud found in 2007 originations continue to be in the areas of employment history and claimed income
• The continuing unsettled state of the mortgage market as a whole does not bode well for any improvement in avoiding fraud in the coming year

The complete Mortgage Fraud Case Report is available both on the MBA Website, and MARI’s Web site.

I’m not sure how this factoid slipped past us but the Financial Crimes Enforcement Network (FinCEN) last month issued a report stating that Suspicious Activity Reports (SARs) filed through the first six months of 2007 related to Mortgage Loan Fraud increased 35% from the corresponding six-month period in 2006. FinCEN, which is housed in the U.S. Department of the Treasury, is preparing a more comprehensive analysis of real estate and mortgage fraud to be released in the near future.

Structuring/Money Laundering continues to be the predominant characterization of SARs filed by depository institutions, at 48%. However, Check Fraud (10.5%), Counterfeit Check (4.9%), Credit Card Fraud (4.8%), Mortgage Loan Fraud (3.9%), Check Kiting (3.3%), Identity Theft (2.4%) and other types of fraud are consistently represented.

Since the inception of SAR filing requirements for money services businesses in 2002, along with the addition of requirements for other covered industries, SAR filings by non-depository institutions have grown to represent approximately 42% of all SARs filed.

In addition to use by FinCEN analysts, SARs are made available to federal, state and local law enforcement agencies and regulators. Law enforcement uses SARs both reactively to support existing investigations of fraud and money laundering, and proactively to initiate new investigations. There are over 80 SAR review teams located across the United States which consist of experts trained to conduct complex criminal financial investigations.

• Officials Falling Behind on Mortgage Fraud Cases (The New York Times): The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said. Reports of suspected mortgage fraud have doubled since 2005 and increased eightfold since 2002. Banks filed 47,717 reports this year, up from 21,994 two years ago, according to statistics from the Federal Bureau of Investigation and the Financial Crimes Enforcement Network of the Treasury Department. In 2002, banks filed 5,623 reports.
• Legislature must place legal curbs on ‘rescue’ practice: The bank was threatening to foreclose on Lonnie Davis’ El Cerrito home. One day, the 76-year-old retired school custodian got a postcard in the mail from someone offering 11th-hour help. But what seemed like a life preserver would drag Davis and his wife, Dorothy, to rock bottom faster than a pair of cement boots. Lonnie Davis not only lost the home where he had lived more than half of his life, the person he trusted to help him wound up being the new owner. The Davises were victims of a legal but deceptive mortgage lending practice euphemistically referred to as a “foreclosure rescue.” The “rescuer” takes advantage of a person’s desperation and financial naivete to convince him to sign over his deed. The “rescuer” offers to pay the distressed homeowner’s delinquent payments, which allow him to stay in his house, then gives him a new loan. A lot of people don’t realize that they will no longer own the property. Once the title has been transferred, the rescuer takes money out of the house by refinancing. Real estate fraud investigators call that “equity stripping.”
• When Receiving Cash Back at Closing is Legal: As real estate brokers, we are often told that “As long as the information is presented on the HUD statement, the transaction is legal.” What happens in almost all situations such as the scenario presented here, is that the professionals involved create two HUD statements-one for the closing and another that is sent to the bank or they camouflage the $80,000 junior lien or a recently created obligation of the seller. In other words, all is not being fully disclosed.
• Parent Company of Mercantile Bank takes Real Estate Fraud-related hit in Florida: The holding company of Mercantile Bank in Florida expects a $32 million provision for credit losses in the current fourth quarter, in part because of loan problems in Florida. That’s up substantially from the $10.5 million provision in the third quarter of 2007 and $8.8 million provision in the fourth quarter of 2006. The company also said it has revised downward its expected recovery of loans in a real estate fraud scheme in North Carolina.
• Minnesota man sentenced in mortgage-fraud scheme: The crime of mortgage fraud continues to be a priority with the United State’s Attorney’s Office as the first defendant in the LHS mortgage fraud case–involving a Prior Lake woman, a Credit River Township man and a Minneapolis man–was sentenced in federal court today in Minneapolis. Mario Augustin Lewis, 37, of Minneapolis was sentenced to serve four-and-a-half years in prison and ordered to pay $437,814.41 in restitution.
• Long Beach Mortgage Rep Faces Five Years in Prison: John Ngo, 27, of Dublin, California, pleaded guilty before United States District Judge William B. Shubb to lying under oath before a federal Grand Jury in connection with an on-going mortgage fraud investigation. The case is the product of an extensive investigation by the Federal Bureau of Investigation and Internal Revenue Service-Criminal Investigation. Several other individuals have been indicted in connection with this investigation and those charges remain pending.
• New Year, New Consumer Scams: It has been a tough year for consumers. With housing prices falling and the subprime-mortgage mess raging on, we won’t blame you if you’re looking forward to a fresh start in 2008. Better watch out: The financial woes and natural disasters of 2007 have armed scammers with plenty of new tricks — or resourceful spins on old ones — aimed at separating you from your cash. Here the five most treacherous scams to watch out for in 2008.

The Mortgage Bankers Association (MBA) today released “Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts,” a new report designed to inform and shape the debate surrounding important issues affecting the real estate finance industry. This paper takes a comprehensive look at the policy discussion surrounding fraud against lenders, a critical issue in today’s mortgage market.

As Flipping Frenzy reported last month, President Bush recently went on record with a statement that his administration would pursue fraud and wrongdoing throughout the mortgage lending industry. Whether it’s fraud for housing or the more serious fraud for profit, scammers and fraudsters are deceiving lenders at an alarming rate, and more must be done to combat the problem.

The FBI has estimated that fraud cost mortgage lenders as much as $4.2 billion in 2006 alone. This growing trend is troubling for many reasons, but most significantly because fraud-related costs and losses incurred by lenders are ultimately passed on to their customers, increasing the cost of homeownership for all borrowers. The Financial Crimes Enforcement Network (FinCEN), a bureau under the U.S. Department of the Treasury has reported that the number of mortgage-related Suspicious Activity Reports (SARs) filed has increased an average of nearly 60 percent per year over the past four years.

“Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts” seeks to separate the issue of mortgage fraud from predatory lending and to provide policymakers with a roadmap to effectively combat the growing incidence of mortgage fraud. In the paper, the MBA discourages adding to or modifying the already comprehensive list of federal fraud statutes and instead recommends that Congress increase resources available to law enforcement and help facilitate the coordination of federal and state law enforcement of financial crimes.

The Mortgage Bankers Association argues that we do not need more federal laws to combat fraud. Instead, says the MBA, what is needed is a coordinated effort and more resources to investigate and prosecute. Good point, but we also need more resources for educating Real Estate industry insiders and consumers. In addition to being illegal and costly, we know that fraud has also contributed to the recent rise in delinquencies and foreclosures, and the industry and government must step up the anti-fraud effort, which includes education and awareness, to help curtail these related problems.

A PDF version of “Mortgage Fraud: Strengthening Federal and State Mortgage Fraud Prevention Efforts” can be downloaded by clicking here.

A leading online marketplace for foreclosure properties, yesterday released its August 2007 U.S. Foreclosure Market Report, which shows that a total of 243,947 foreclosure filings–default notices, auction sale notices and bank repossessions–were reported during the month, up 36 percent from the previous month and up 115 percent from August of last year. This is the highest number of foreclosure filings in a single month that RealtyTrac has reported since it began issuing the monthly report in January 2005.

The national foreclosure rate of one foreclosure filing for every 510 households for the month is also the highest figure ever issued in the report.

The jump in foreclosure filings may just be the beginning of the next wave of increased activity for house flippers, as a large number of subprime adjustable rate loans are now beginning to reset. A significant factor in the increased level of foreclosure activity is that the number of REO filings (bank repossessions) is increasing dramatically, which means that a greater percentage of homes entering foreclosure are going back to the banks.

Nevada, California, Florida post top state foreclosure rates

Nevada continued to register the nation’s highest state foreclosure rate, one foreclosure filing for every 165 households–more than three times the national average. The state reported 6,197 foreclosure filings during the month, a 21 percent increase from the previous month and more than triple the number reported in August 2006.

California’s foreclosure rate jumped to second highest among the states thanks to a 48 percent month-over-month spike in foreclosure activity. The state reported 57,875 foreclosure filings during the month, a foreclosure rate of one foreclosure filing for every 224 households–more than twice the national average.

Florida foreclosure activity jumped 77 percent from the previous month, boosting the state’s foreclosure rate from seventh highest to third highest among the states. The state reported 33,932 foreclosure filings, a foreclosure rate of one foreclosure filing for every 243 households.

Other states with foreclosure rates ranking among the nation’s 10 highest were Georgia, Ohio, Michigan, Arizona, Colorado, Texas and Indiana.

Sun Belt, Rust Belt states dominate top foreclosure totals

Seven of the top 10 states in terms of total foreclosure filings in August were located in the Sun Belt, and three of the top 10 states were in the Rust Belt. After California and Florida, Ohio registered the third highest state total, with 17,793 foreclosure filings during the month. The state documented a foreclosure rate of one foreclosure filing for every 281 households, fifth highest in the nation.

Texas, Michigan and Georgia all reported more than 10,000 foreclosure filings for the month, documenting the fourth, fifth and sixth highest state foreclosure totals respectively, followed by Arizona, Colorado, Illinois and Nevada.

Top Metro foreclosure rates in California, Michigan, Florida, Nevada and Ohio

California cities once again accounted for six of the top 10 metro foreclosure rates in August, with the top three spots all taken by California cities. Modesto documented the nation’s highest metro foreclosure rate, one foreclosure filing for every 79 households, followed by Stockton and Merced. Other California cities in the top 10 included Vallejo-Fairfield at No. 5, Riverside-San Bernardino at No. 6 and Sacramento at No. 7.

Detroit posted a foreclosure rate of one foreclosure filing for every 87 households, the nation’s fourth highest metro foreclosure rate and more than five times the national average. Fort Lauderdale, Las Vegas and Cleveland, ranked Nos. 8, 9 and 10.

Here is an update to a story Flipping Frenzy first covered in July of 2006. At that time, we reported the following:

An Orlando-based title insurance fund recently polled more than 1,000 homeowners in Florida, and despite the fact that the FBI singles out that state as one of the nation’s top 10 hot spots for real estate and mortgage fraud, only one percent (1%) of the state’s homeowners say becoming the victim of a real estate scam is their biggest concern.

Now, one year and one month later, the Attorneys’ Title Insurance Fund is back with an updated version of last year’s survey, and like the 2006 version, the 2007 survey shows a similar attitude among Floridians to the ever-present threat of Real Estate and Mortgage Fraud. Despite increasing levels of Real Estate fraud and Florida being ranked as the second highest state for mortgage fraud (according to the Mortgage Asset Research Institute, which used data from the nation’s biggest lenders to compile its annual survey, released in March 2007), homeowners listed being the victim of Real Estate fraud as last on their list of biggest concerns with only 2 percent.

Last month, Florida’s governor signed into law legislation ensuring that all Floridians who participate in the American dream of home ownership receive more consumer protections, especially with regard to Real Estate and Mortgage Fraud. The new law, which goes into effect later this year, creates a comprehensive consumer protection package relating to mortgages, and makes mortgage fraud a third-degree felony in the state of Florida. Provisions of the new law also provide that mortgage brokers and lenders supply to borrowers detailed disclosures for various loan products, and that in every mortgage loan transaction, mortgage brokers and lenders notify a borrower of any material changes in the terms of a mortgage loan that was previously offered to a borrower.

The Mortgage Bankers Association (MBA) and the Mortgage Asset Research Institute (MARI) have combined efforts to compile and release the Ninth Periodic Mortgage Fraud Case Report. The report examines the current state of residential real estate and mortgage fraud and misrepresentation in the United States based on participating lenders’ reports to MARI.

Highlights from the report include:

• The number of reports in MARI’s Mortgage Data Industry Exchange database pertaining to 2006 originations is approximately 30 percent higher than the number of reports for 2005.
• Mortgage fraud is now more evenly distributed across nearly all states whereas, in prior years, reports tended to be concentrated in relatively few states.
• The current unsettled state of the subprime segment of the industry does not bode well for fraud in the coming year.
• There are changes in the rankings of the states in terms of their mortgage fraud experience, with Florida taking over the top spot and Georgia showing the greatest improvement from prior years’ rankings. Florida had more than twice as many incidences of fraud reported, and has gradually climbed to the top spot over several years, after ranking fourth in the nation in 2005, fifth in 2004, seventh in 2003 and 12th in 2002.
• The most common types of fraud found to date in 2006 originations are in the areas of employment history and claimed income.
• California’s reported fraud had been quite low in the past few years, and some industry experts have suggested that its problems were masked by high real estate appreciation. The recent slowdown in its housing market may explain California’s return to high ranking in this year’s report.
• The early payment default data for prime loans from First American LoanPerformance is highly influenced by tragic weather events on the Gulf Coast, and few valid conclusions can be drawn from the most recent results. However, this is not the case for subprime loans.

One bright note: After leading the nation for the past four years in overall mortgage fraud and subprime incidents, Georgia has dropped in the top 10 states for 2006 fraud reported to date. This dramatic development appears to be due, in large part, to the strong, coordinated stance against mortgage fraud that has been taken by a number of different groups in Georgia–industry members, mortgage and banking regulators, legislators and state law enforcement officials, coupled with the FBI and the United States Department of Justice.

Earlier this month I wrote about First American Real Estate Solutions’ strategic alliance with CoreLogic Systems. Another company strategically aligned with First American is BasePoint Analytics, a provider of scientific fraud analytics and consulting services. Yesterday, BasePoint released the results of a new study that shows that up to 70 percent of early mortgage payment defaults can be linked to significant misrepresentations on loan applications.

According to BasePoint, loans that contain significant misrepresentations are up to five times more likely to default in the first six months than loans that do not. In all, BasePoint analyzed over 16,000 loans that were confirmed to contain serious misrepresentations and that later led to a default. These misrepresentations included inflated income, overvalued property appraisals, fictitious employer referrals, and falsified tax returns. As one might expect, the study concludes that misrepresentations grossly affect the risk of a real estate loan.

A report released yesterday by RealtyTrac shows more than 1.2 million foreclosure filings were recorded nationwide in 2006, up 42 percent from 2005. The 2006 RealtyTrac Foreclosure Market Report also revealed that there is one foreclosure filing for every 92 U.S. households. While foreclosures are not at historically high levels, a 42 percent year-over-year increase is certainly noteworthy and cause for concern. When foreclosure rates rise, con artists crawl out from the rocks they were hiding under to prey on the vulnerable homeowners. To protect yourself, you should know your options and know your rights.

According to the report, the total number of foreclosure filings rose from a little over 885,000 in 2005 to 1,259,118 in 2006. Colorado documented the nation’s highest state foreclosure rate for the year, one foreclosure filing for every 33 households or 3 percent of the state’s households. The state reported 54,747 foreclosure filings during the year, an 85 percent increase from 2005 and the eighth highest total among all states.

Georgia and Nevada both reported one foreclosure filing for every 41 households in 2006, but Georgia edged out Nevada with a slightly higher percentage of households in foreclosure, 2.5 percent compared to 2.4 percent in Nevada. Georgia reported 75,975 foreclosure filings during the year, the sixth most of any state and a 67 percent year-over-year increase. Nevada foreclosures surged in fourth quarter, pushing the state’s total for the year to 21,045, nearly three times the number reported in 2005.

Other states with foreclosure rates among the nation’s 10 highest included Texas, Michigan, Indiana, Florida, Ohio, Utah and Tennessee. Texas reported 156,876 foreclosure filings for the year, the most of any state, and nearly 13 percent of the national total. The state consistently reported big foreclosure numbers throughout 2006, documenting the highest monthly total eight times, and foreclosures for the year were up more than 14 percent from 2005. Texas’ foreclosure total represented nearly 2 percent of the state’s households, or one foreclosure filing for every 51 households, giving the Lone Star state the nation’s fourth highest state foreclosure rate.

Rising foreclosure activity in the fourth quarter pushed California’s 2006 foreclosure total to second highest among all U.S. states. California reported 142,429 foreclosure filings during the year, more than twice the number reported in 2005, and accounting for more than 11 percent of the national total. California’s 2006 foreclosure rate of one filing for every 86 households ranked 14th in the U.S.

Florida’s foreclosure activity remained relatively flat in 2006, up just 2 percent from 2005, but the state’s foreclosure total still placed third highest among all the states. Florida reported 124,721 foreclosure filings during the year, a foreclosure rate of one foreclosure filing for every 59 households. The state’s foreclosure rate dropped to seventh highest in 2006 after claiming the top spot in 2005.

With an average of more than 10,000 foreclosure filings in each quarter, Detroit, Michigan, documented the highest annual foreclosure rate among the nation’s 100 largest metropolitan areas. Atlanta, Georgia’s 2006 foreclosure total of 63,737 represented 4.4 percent of the city’s households, ranking it second in the nation. Indianapolis, Indiana’s foreclosures decreased in the second, third and fourth quarters of 2006, but the city still documented the nation’s third highest metro foreclosure rate: 4.3 percent of all households.

Other cities with foreclosure rates among the nation’s 10 highest include Denver, Dallas, Fort Worth, Las Vegas, Memphis, Fort Lauderdale, and Miami.

Earlier this month, Robert S. Mueller, III, Director of Federal Bureau of Investigation (FBI) appeared before the United States Senate Judiciary Committee to discuss the progress of what he called the FBI’s transformation efforts. From the Director’s December 6, 2006 testimony:

Good morning, Mr. Chairman, Senator Leahy, and members of the committee. I am pleased to be here today to discuss the progress of the FBI’s transformation efforts.

When I was sworn-in as the sixth Director of the FBI on September 4, 2001, I was aware of the need to address a number of management and administrative challenges facing the Bureau at that time. However, the terrorist attacks of September 11, 2001, the emerging threats brought on by globalization and advances in technology, and the continued traditional criminal threats, required far more changes than we could have ever expected. Indeed, the last five years have been a time of unprecedented change for the FBI.

While there have been some setbacks along the way, there has also been remarkable progress. Today, the FBI is a stronger organization, combining greater capabilities with the longstanding commitment to the security of the United States.

Buried among the Director’s 9,400+ words of testimony was the following, which those of you who are concerned about real estate and mortgage fraud in this country might find interesting (if not disappointing):

Since October 2001, the FBI’s Financial Institution Fraud (FIF) Program has targeted the most egregious financial institution offenders, both insiders and outsiders.

The FBI’s Mortgage Fraud Program, for example, consists of our working with approximately 200 contacts in law enforcement and industry at the national level, and task forces and contacts at the field office level, in order to address this over $1 billion crime problem. The Mortgage Fraud Program focuses our resources on those engaging in mortgage fraud for profit, as opposed to property, typically involving rings of professional insiders. In December of 2005, the FBI participated in Operation Quick Flip, a national takedown that resulted in 156 indictments, 81 arrests and 89 convictions. The losses associated with these cases alone cost the mortgage industry $607 million.

Since October 2001, the Financial Institution Fraud Program has made more than 6,000 arrests, obtained more than 13,000 indictments and informations, and secured more than 12,000 convictions. These investigations have resulted in more than $131 million in recoveries, $159 million in seizures and forfeitures, $14 billion in restitution payments, and $632 million in fines.

Anyone care to comment on what Director Mueller categorizes as “remarkable progress”?

Amy Ning of The Orange County Register shares some interesting data in an article published in yesterday’s online edition. From ocregister.com:

• Banks pass the cost of fraud to consumers, says Mike Ela, president of San Juan Capistrano-based HomeSmartReports.com. Ela says fraud could push up mortgage rates one-eighth to one-quarter of a percentage point. That would cost a borrower about $600 a year extra on a loan of 80 percent of the cost of a median-price home, he said.
• Peter Norell, who leads a Santa Ana-based white-collar crime unit of the FBI, said fraud is being fueled by the volatile housing market, an increase in loans available to consumers and the widespread use of automated lending systems.
• Nationwide, more fraud cases each year involve straw buyers, which often means a criminal has stolen someone’s identity, according to a fraud report released last month by the Financial Crimes Enforcement Network and experts.
• Irvine, CA-based New Century Financial, which makes loans to borrowers with risky credit profiles, has spent about 18 months working with Carlsbad-based BasePoint Analytics on a computer system to detect potential fraud. The system, now in place, looks for suspicious patterns, such as appraisers who tend to overstate the value of property. A senior vice president with New Century say the system has helped the company avoid making nearly $1 billion in suspect loans so far this year.

For more information, read Masked Mortgages.

A couple of days ago I mentioned that the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) reported that mortgage loan fraud in the United States rose 35 percent in the past year. For anyone interested, here are some additional items of note from the FinCEN’s November 2006 report:

• Between 1997 and 2005, Suspicious Activity Reports (SARs) pertaining to mortgage loan fraud increased by 1,411 percent between. This report-filing trend continues apace in 2006, with 7,093 reports filed on suspected mortgage loan fraud during the first quarter, an increase of 35 percent over the SAR filings in the first quarter of 2005. One explanation for the increase in SARs reporting mortgage loan fraud is increased awareness of the potential for fraud in a dynamic real estate market. Many areas in the United States saw double-digit growth in real estate values during 2003 and 2004. At the same time, mortgage loan interest rates were at a historic low. Although growth in the housing industry appears to be slowing in the first quarter of 2006, opportunities for fraud are still present.
• Reports of mortgage loan fraud rose significantly in 2003. The Federal Financial Institutions Examination Council reported an increase in the number of mortgage loans beginning in 2003: “The 2003 data include a total of 42 million reported loans and applications, which is an increase of about 33 percent from 2002, primarily due to a significant increase in refinancing activity (approximately 41 percent).” SARs on mortgage loan fraud increased over 92 percent between 2003 and 2004. The increase in filings may be attributed to an increase in overall mortgage lending concurrent with the decline in interest rates in the 2002 – 2005 timeframe and a broader awareness of this fraudulent activity.
• Mortgage loan fraud represents a growing percentage of total depository institution SARs. In 1997, reports of mortgage loan fraud comprised 2.12 percent of total depository institution SAR filings. In 2005, reports of mortgage loan fraud had increased to 4.94 percent of total depository institution filings.
• Identity theft was frequently reported in conjunction with the commission of suspected mortgage loan fraud. Reports of identity theft increased nearly 102 percent between 2004 and 2005.
• The National Association of Mortgage Brokers reports that as many as two-thirds of mortgage loans are now originated by mortgage brokers. Currently there are no national standards for licensing and oversight of mortgage brokers. Some states license mortgage brokerage offices, but not individuals; 24 states have no specific educational or experience requirements for mortgage brokers; and only a few states require criminal background checks on mortgage brokers making it possible for unethical individuals to move from one mortgage brokerage firm to another.
• The top 10 geographical areas for fraud are California, Florida, Illinois, Texas, Georgia, Michigan, New York, Ohio, Washington, and North Carolina.
• High home prices coupled with rising mortgage rates result in a reduction in housing affordability. In response to this trend, the housing industry is expecting a slow down in mortgage loan originations, a decrease in housing sales, and a slowing in housing price gains. The slow down in the growth of housing prices could result in the housing industry becoming less attractive to investors, which in turn could result in a reduction in the reports of fraud for profit. The current housing trend could also lead to an increase in fraud for housing as the increased costs of housing decreases the number of persons who qualify for mortgage loans. The current trend of rising interest rates and slowing housing equity growth could result in an increase in debt elimination fraud schemes, especially for homeowners with adjustable rate mortgages and interest only loans.