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.

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.

According this morning’s edition of The Wall Street Journal, tensions are rising between federal and state authorities as the number of agencies–including the FBI, SEC, Justice Department, Office of Federal Housing Enterprise Oversight, and New York Attorney General Andrew Cuomo’s office–investigating mortgage fraud expands.

Cuomo, the Journal reports, “is in a tussle with the Office of Federal Housing Enterprise Oversight (OFHEO), the federal regulator that oversees mortgage giants Fannie Mae and Freddie Mac… Their dispute is over who should be the investigating allegations of fraudulent appraisals and mortgage fraud.”

From Kara Scannell at The Wall Street Journal:

The interaction of state and federal oversight has long been a political hot potato. Friction is expected to increase as rising number of participants — including the Justice Department and Securities and Exchange Commission — probe the mortgage area.

Mr. Cuomo’s office is precluded by law from investigating federally chartered banks, where federal oversight pre-empts state interest.

With complaints about real estate and mortgage fraud at an all-time high, the FBI on Tuesday announced it has launched a criminal investigation into the dealings of 14 major corporations servicing the real estate industry. FBI officials told reporters yesterday afternoon that the probes involved potential violations, including accounting fraud and insider trading, but they would not identify the specific companies under investigation. Neil Power, who heads the FBI’s economic crimes unit, did say the probe reaches across the real estate industry to include developers, subprime lenders, companies that reviewed loans and the investment banks that held them.

“On insider trading, we’re looking in some cases at whether executives were aware that the value of their holdings would be going down and the executives traded on that information,” said Power, according to CNN. “On accounting fraud, we’re looking at housing developers who may have reported cash reserve accounts to reflect falsely inflated values.”

Power and other senior officials told CNN that the number of suspicious activity reports related to real estate and mortgage fraud they review for potential investigation skyrocketed from 3,000 in 2003 to about 35,000 in 2006, to 48,000 in 2007. In the first quarter of this fiscal year, Power told CNN, officials have already received 15,000 such reports, putting us on pace to receive 60,000 complaints this year.

“We anticipate in the next year that another wave of adjustable rate mortgages will reset and with that we anticipate that the mortgage corporate fraud potential cases to increase,” said Sharon Ormsby, head of the FBI’s financial crimes section, according to Reuters.

The FBI’s investigation is being run in parallel with the SEC (Securities and Exchange Commission), which has opened more than 30 civil investigations into the subprime market collapse. Some of the probes overlap, an official told Reuters. Targets of the SEC probe include Morgan Stanley, Merrill Lynch, Bear Stearns, as well as bond insurer MBIA.

One interesting figure being reported: According to CNN, the FBI says it investigates only cases involving losses of $500,000 or more, and that last year 56 percent of all cases had losses of more than $1 million.

“Subprime loans are decreasing but … suspicions of mortgage fraud are increasing,” the FBI’s Sharon Ormsby is quoted as saying.

As we scramble here in the United States to pick up the pieces from the latest credit crisis and housing market crash, we often overlook the fact that U.S. lenders did not simply sell risky mortgages to homeowners. No, once they were done fleecing homeowners, lenders decided to sell those risky mortgages to overseas investors. After all, why hold onto mortgages that you know homeowners are going to be unable to pay? The U.S. mortgage lending industry essentially pulled off a Ponzi scheme of global proportions, and now the United States stands to pay the price.

Here’s how the scam went down. Back in 2000, the American economy was floundering. Some sort of correction needed to happen, but Alan Greenspan, the Federal Reserve Chairman at the time, decided that we could give the economy a bit of a boost by cutting interest rates.

Mortgage interest rates dropped, more Americans could afford to buy homes, housing prices rose, and suddenly, Americans were rich with equity. Housing values were climbing like there was no tomorrow, and with loans being so cheap, people started cashing out that inflated equity in their homes to finance their enjoyment of the good life.

Unfortunately, housing prices hit a critical tipping point. Fewer and fewer Americans could afford these overpriced abodes. Again, a market correction was in order, but the banks didn’t want that. Instead of letting the housing bubble naturally burst, which would have resulted in more affordable houses, they decided to offer more affordable mortgages–adjustable rate mortgages (ARMs) with low introductory interest rates. This enabled more people to continue buying homes, and home prices to continue to rise.

Everyone was happy. Interest rates were low, so more people could afford to buy houses, lenders and mortgage brokers were processing more loans, Real Estate agents were earning higher commissions, builders were selling more newly constructed homes, and state and local governments were raking in higher property taxes. Life was good.

The only trouble was that the banks failed to account for the fact that eventually the housing market would tank and the teaser rates on the adjustable rate mortgages were scheduled to skyrocket. The banks failed to think ahead… or did they?

Based on what you read in the mainstream press, you might tend to believe that the banks did not know what was going to happen. After all, many mortgage lenders had to fold up shop. Others were brutally punished in the stock market when their share price took a nose dive. The thought the banks were clueless, however, is simply not true. The banks were fully aware of the looming sub-prime mortgage crisis. In fact, they were well prepared to quite literally pass the buck… to foreign investors.

Passing the buck

To get these risky sub-prime mortgages off their books, the banks diversified and then bundled their mortgages, repackaged them, and peddled them to the international community as safe investments. Through financial sleight of hand, the banks tricked investment-rating agencies including Moody’s and Standard & Poor’s to assign these mortgage securities higher ratings and valuations than subprime mortgages would generally receive.

Trusting the U.S. banks and America’s well-known investment-rating agencies, foreign investors bought these securities hook, line, and sinker.

As long as the party was in high gear and housing prices were soaring, foreign investors were completely unaware of what was about to happen on the other side of the ocean (their investments were performing quite nicely, thank you very much). Unseen to them, however, interest rates on many sub-prime mortgages were scheduled to rise, making mortgage payments unaffordable for millions of Americans. When what was fated actually started to happen, foreclosure rates skyrocketed, and foreign investors were left holding the bag.

Now, the U.S. is in quite a financial pickle. Deep in debt and stripped of equity, the U.S. relied on consumer confidence and foreign investment to fuel its economy. Now that both of those assets have been shredded by the mortgage lending industry and rampant real estate fraud, what can we rely on to fuel our economy in years to come?

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.

According to the survey, which is conducted annually by Attorneys’ Title Insurance Fund, more than two-thirds of those polled said their number one concern with homeownership is affordability. Other concerns include:

• 47 percent say they are concerned about being hit by a storm such as a hurricane
• 16 percent cite the impact of a housing bubble as their biggest concern
• 13 percent say rising mortgage interest rates is their number one concern
• 5 percent indicate depreciating home values tops their list of concerns

While I can certainly understand Hurricanes topping the list of Floridians’ concerns, the fact that only one percent consider real estate fraud a top concern is concerning in and of itself, and the CEO of the company who commissioned the survey feels the exact same way. Charles Kovaleski, CEO of Attorneys’ Title Insurance Fund had this to say about his company’s findings:

Surprisingly, the survey illustrates that Florida homeowners do not rank being the victim of real estate fraud as a higher concern, especially since Florida was recently named the top state in the nation for mortgage fraud. However, we are pleased to see that homeowners are increasingly turning to real estate attorneys to protect their real estate interests, which is significant given that understanding real estate laws is cited as most the confusing part of the home-buying process.“

As with nearly every other state’s efforts in the fight against real estate and mortgage fraud, mandatory fraud reporting is absent in Florida, and while the FBI is doing more now than ever before to help local authorities track reported acts of real estate and mortgage fraud, the system is almost entirely based on reacting to what happens, as opposed to being proactive in an attempt to stop it from happening in the first place.

As I have said many times before, the scammers and bad guys always seem to find ways to navigate around the system to prey on unsuspecting homeowners. We need education, more education, and even more education than that. With one percent of Floridians’ citing fraud as a top concern, will it be any surprise when Florida once again tops the FBI’s list of real estate and mortgage fraud hot spots?

According to BankNet360.com, the FBI recently reported that pending mortgage fraud cases increased by nearly 92 percent between 2003 and the end of the first quarter of 2006.

BankNet360.com also reports that FBI Special Agent Ronda Heilig told a gathering of American Bankers Association members that there are currently 835 pending mortgage fraud cases that involve her agency, and that losses from fraud among federally regulated banks topped $1 billion in 2005, up from roughly $200 million in 2003.

Is mortgage fraud on the rise, or is there a perceived increase as a result of media attention, lender awareness, and the ever-changing real estate market? That’s what Rachel Dollar over at Mortgage Fraud Blog was polling on earlier this week, and just before the poll expired (earlier today) sixty-six percent (66%) of her readers say mortgage fraud is “Definitely on the Rise!,” while six percent (6%) say it’s not climbing as fast as the media reports, and another seventeen percent (17%) say no, the perceived increase results from media attention, lender awareness and the changing real estate market. The other six percent (6%) responded to the poll with text responses that were not available for reporting purposes.

Count me among the 66% who say it’s definitely on the rise!

With the FBI reporting that in 2005 it had 721 pending mortgage fraud cases (up from 534 in 2004), mortgage fraud IS one of the fastest growing white-collar crimes in the United States, and as evidence of this, you need to look no further than today’s headlines (headlines are my own, by the way, but the information comes directly from the source):

Mortgage Bankers Association Announces First Annual National Fraud Issues Conference

With the heightened attention being paid to mortgage fraud, protecting both companies and consumers from being victimized means moving beyond learning about schemes and red flags and looking at issues that cut across departments and industries. MBA’s National Fraud Issues Conference will bring together a cross-section of the real estate industry, along with state and Federal regulators and law enforcement officials, to discuss new initiatives and identify emerging trends. Whether you’re in real estate sales, mortgage lending, quality assurance, fraud investigations, production, senior management, or the general counsel’s office, this conference will help equip you with the contacts and knowledge to protect your customers and company from the threats associated wit mortgage fraud. Registration fees start at $795.00 for the two-day event, which is being held in Chicago on May 16 & 17, 2006, at The Palmer House Hilton. Click here for more information and registration.

Florida Men Sentenced in Real Estate Fraud Case

South Florida’s Sun-Sentinel newspaper is reporting that a Florida man pleaded guilty yesterday in a West Palm Beach courtroom to three counts of real estate-related theft and one count of money laundering. In addition to being sentenced to six months in jail and 8 & 1/2 years probation, 39-year-old Jonathan Bornstein was ordered by the judge–along with co-defendant David Willer–to repay $107,000.00 in restitution to two lenders. Bornstein’s case drew significant attention in Broward and Palm Beach counties. According to the South Florida Sun-Sentinel, beginning in June of 2000, Bornstein, Willer, and two others bilked several lending institutions by obtaining seven home loans in seven months based on dramatically inflated appraisals, then defaulted on the loans and kept the money for themselves. Palm Beach County prosecutor Caroline Shepherd tells the Sun-Sentinel that limited resources “drove prosecutors to focus on the people who were most culpable,” meaning that a mortgage broker and appraiser associated with the schemes were not charged. Circuit Court Judge Krista Marx also ordered Willer, 44, to repay $143,000.00 and serve 10 years probation.

Federal Trade Commission Warns TV Stations About Ads for Real Estate Schemes

According to The San Diego Union-Tribune, the FTC is now warning television stations across the United States about deceptive advertising linked to real estate and mortgage fraud. At a gathering of law enforcement officials at the University of San Diego yesterday, FTC Assistant Director Tom Syta announced that his agency recently sent a letter to 40 television stations around the country that target Hispanic communities, warning that “language difficulties, newfound wealth with increasing real estate values, and desperation over legal status can make Latinos vulnerable to a variety of scams,” including those linked to real estate and mortgage fraud. Mortgage vendors talk up a loan in Spanish, but then pressure customers to sign documents in English with different terms, the San Diego Union-Tribune reports. “It’s much easier to stop the fraud… before money gets lost,” Syta told the Union-Tribune, and television stations can help by taking a closer look at the advertisements they choose to run. Click here for the complete San Diego Union-Tribune article.

So, back to Rachel Dollar’s poll, Is Mortgage Fraud REALLY Increasing?… you tell me. I definitely think it is!