After the sharp drop in interest rates since August, mortgage lending volume is expected to surge-and so is mortgage fraud.
"Anytime markets are frothy, we are concerned," said D. James Croft, executive director at Mortgage Asset Research Institute Inc. of Reston, Va., which tracks potential fraud for lenders.
Large volumes of business cause "an overload on the system," Mr. Croft said. Overworked underwriting and processing staff may cut corners, and "a number of new people get hired who are inexperienced and don't even know what to look for.
"The most egregious forms of misrepresentation we see come through in high-volume periods," Mr. Croft added. "People who are normally more experienced and alert miss some very obvious problems."
Professional deceivers know this. "The more designing types understand that the system is overloaded and this is the time they can slip in marginal applicants," Mr. Croft said.
Mortgage fraud is now much more sophisticated and organized than it was during the last refinance boom, in the early 1990s, said Richard Ward, president of Affinity Corp. of West Hills, Calif.
Fraud involving borrowers who intended to inhabit the homes but could not qualify for loans is always a factor. But "More and more we're seeing sophisticated fraud-for-profit where there's no intent by the borrower to occupy the property," Mr. Ward said.
Scam artists who previously focused on credit card and insurance fraud are moving into mortgages, where flimflam is more lucrative, he added. Mr. Ward said his firm recently uncovered a Nigerian fraud ring operating in southern California, expert in forging identification, which had graduated from credit card schemes to mortgages. The ring had placed "moles" in lenders' offices to assist in its schemes.
Technology such as image scanners make it a "no-brainer" to falsify the documents needed to obtain a mortgage, Mr. Ward said. "They can make the documents look better than the original."
In another recent case, in St. Paul, it was discovered that more than 200 different properties were "flipped" by the same gang, Mr. Ward said. In flipping schemes, borrowers buy and then re-sell a house quickly several times to inflate its value.
Some argue that the time to be most concerned about an uptick in fraud is not during a refinance boom, but rather just as it ebbs. Brokers and others who are compensated for volume are more likely to push fraudulent loans then, because legitimate ones are harder to find.
"You didn't have to push the edge of the envelope in 1992 and 1993," the years of the previous refinance explosion, said Patrick McEnerney, president of BNY Mortgage Co., a division of the Bank of New York.
Though many mortgage professionals have a vested interest in maximizing volume, "the time when they're making the most money is not when they're pushing the most," he said.
He said mortgage loans originated in 1995-just after the last refi craze ended-have performed considerably worse than loans made during its height.
According to Mortgage Information Corp., San Francisco, the delinquency rate after 18 months for loans originated in 1995 was 0.28%, compared with 0.10% for loans made in 1993.
