WASHINGTON - As problems in the subprime mortgage market have continued to surface, so has a significant spike in mortgage fraud.
The number of suspicious activity reports filed last year by banks, thrifts, and credit unions on suspected mortgage fraud rose 43% from a year earlier, to a record 37,313, according to figures from the Financial Crimes Enforcement Network provided to American Banker.
The subject is a hot topic among industry representatives, who warn that the fraud extends beyond small-time crooks trying to get rich during the housing boom.
"Law enforcement is finding increasingly … [mortgage fraud] involves drug cartels, organized crime, and is even being used for terrorist finance purposes," Andrew Sandler, a partner at Skadden, Arps, Slate, Meagher & Flom LLP, said at an anti-laundering conference last week. "For a mortgage lender, the risk is not only the economic risk … but there is also substantial reputational risk here, because all over the country there is enforcement activity going on."
Georgia's largest-ever mortgage fraud case was prosecuted two weeks ago. The U.S. District Court for the Northern District of Georgia in Atlanta ruled March 15 that Phillip Hill Sr. was guilty of 168 counts of conspiracy, money laundering, and loan, mail, and wire fraud related to a mortgage "flipping" scheme. He and nine others were convicted of bilking lenders out of more than $41 million.
The true level of mortgage fraud is largely unknown, but law enforcement officers, regulators, and lenders agree that it has spiked with the mortgage market. A report Fincen issued late last year said that of the 61,278 SARs filed on mortgage fraud from 1996 to June 30, 2006, 48% were filed in 2004 and 2005.
The figures for 2006 dwarf all previous years, equaling more than all filings on the topic from 1996 to 2003 combined. While overall SAR filing by institutions increased only 7% last year, reports citing mortgage fraud grew 43%.
The Federal Bureau of Investigation estimated that 10% to 15% of the home mortgages generated in 2005 had some form of fraud. An FBI study found that 26 states have significant mortgage fraud, with highest number of cases in the South and the West.
The number of cases initiated by the Internal Revenue Service's Criminal Investigation Division doubled from 2001 to 2003.
The FBI estimates that mortgage fraud has cost lenders between $946 million and $4.2 billion.
Industry representatives said even those numbers may be low.
"As the mortgage market has grown, we've seen a growing market for mortgage fraud and fraud for profit by industry insiders," said Kurt Pfotenhauer, senior vice president of government affairs and public policy at the Mortgage Bankers Association. "We think the FBI-reported numbers still underestimate the problem. One problem is there is not a precise way to size the problem."
The number of FBI mortgage fraud investigations has more than doubled in less than five years, according to the bureau. Currently, it has more than 1,036 such cases; in 2002 it had 436.
Last week at a Hollywood, Fla., conference sponsored by Money Laundering Alert, Phillip Hull, a special agent for the IRS Criminal Division in Mississippi, said his state has charged about 40 people with mortgage fraud.
"Mortgage fraud could take me to retirement. There's just that much going on," he said.
Lenders are also warning that more could surface as delinquencies rise in the subprime market.
Patricia Hayhurst, the president of a Florida mortgage banking firm, Hayhurst Mortgage Inc., said fraud is facilitated by products for which a borrower with a high credit score is not required to provide income verification and may provide little or no down payment.
Hayhurst Mortgage recently was hit with $3 million of fraudulent mortgage loans. Ms. Hayhurst said a lot of these loans have been defaulting.
"If you buy securities full of collateral that's full of fraud, and that collateral begins to default, you're going to have some problems," she said at the conference. "It's going to drive the market crazy, which it is starting to do."
The situation has left industry representatives pushing for new rules. To date the real estate industry has not had to file SARs itself - a process that could take some pressure off banks. In 2003, Fincen issued an advanced notice of proposed rulemaking that would require people involved in real estate closings and settlements to establish anti-laundering programs, but the agency has not finalized the rule.
Mr. Sandler said that with a new director joining the agency in April, he doubts the rule will be finalized this year.
Meanwhile, local law enforcement officials are pushing for more resources to prosecute fraud.
Cynthia Eldridge, an assistant U.S. attorney for the U.S. Attorney's Office for the Southern District of Mississippi, cited a lack of resources to investigate the crimes, and she blamed the FBI for shifting its focus to terrorism and away from white-collar crime such as mortgage fraud.
The FBI did not return calls seeking comment.
Ms. Eldridge, who led the prosecution of AmSouth Bancorp. three years ago that resulted in a $50 million fine, said at the conference that prosecutors are targeting industry insiders.
Mississippi recently prosecuted a bank employee for taking money and agreeing not to file a currency transaction report on a transaction that involved drug money used to build a house, she said.
The industry also is pushing for more resources to investigate the issue.
"One of our big advocacy … [efforts] is to get dedicated funding … for the FBI to investigate mortgage fraud," Cory Carlisle, the MBA's senior director of government affairs, said in an interview. "They don't have the resources to go after all the cases of mortgage fraud. There's often talk about an investigation threshold."
The FBI has resources to investigate only the most high-profile mortgage fraud cases, he said, and as a result, local law enforcement officials and lenders are forced to go after mortgage fraud on their own.
The MBA has pushed for an additional $6.25 million of annual funding for five years for the FBI to investigate mortgage fraud. The trade group did not get that provision included in the 2006 fiscal budget, but it is trying again with the fiscal 2007 budget.
A survey by the Mortgage Asset Research Institution found that Utah was the worst state for mortgage fraud. Georgia had topped the list since 2002, but it fell to eighth place after it passed a law making mortgage fraud a crime.
There is no federal law making mortgage fraud itself a crime. Instead, perpetrators typically are charged with related offenses, including mail fraud, wire fraud, making false bank entries, and money laundering.
Sen. Barack Obama, D-Ill., is expected to reintroduce a bill this year that would make mortgage fraud a federal crime, expand the SAR-reporting requirement to the real estate industry, establish a database of censured and debarred mortgage professionals, and provide additional funding for enforcement.
