Today's hot mortgage market could be a breeding ground for fraud, speakers warned at last week's annual conference of regional mortgage bankers associations.

Rising home prices give cover to crooks who arrange sham sales, hoping to profit by refinancing as property prices rise, they said. But these schemes tend to unravel when the market turns downward, as it inevitably does.

"The market will change," said Arthur Prieston, a Los Angeles attorney who specializes in the resolution of fraud cases for lenders. "The day of reckoning is coming."

The extent of mortgage fraud is unclear, and only a handful of the several dozen lenders at the presentation said they had been victimized. The Federal Bureau of Investigation, which has been tracking various kinds of bank fraud since April 1996, counted 2,992 mortgage-related "suspicious activity" reports to banking regulators by the end of last year.

By the FBI's tally, which lists 18 categories of suspicious activity, mortgage fraud is dwarfed by other forms of fraud, including check kiting (29,148) and suspicious credit card activity (8,490).

But FBI investigator Robert M. Cunnane said the reports are limited to federally insured institutions. In the mortgage sector, he noted, federally insured savings and loans, which were badly hurt by mortgage fraud when markets soured in the 1980s and early 1990s, have been displaced by mortgage banks, which are not federally insured.

And with potential losses averaging about $50,000 per loan, mortgage fraud could be a significant problem again, especially when many lenders are delving into lower-credit-quality loans, Mr. Prieston said.

The lawyer said he is working on a Staten Island, N.Y., case in which investors told the lender to take back 27 loans that had been placed in a security pool, citing irregularities in the paperwork.

Three of the 27 loans have gone into default, and more are likely to follow, Mr. Prieston said. A review of the documents showed that the loans were all arranged by the same broker and supported by the same two or three appraisers, a common sign of abuse, he said.

Mr. Prieston said that the Staten Island case appears to be an example of the most common form of fraud, which involves "straw borrowers." These are people with good credit who are paid by an unscrupulous broker to apply for loans to buy homes they have no intention of buying or occupying.

The speakers said such scams can often be spotted early by tracking the source of funds used for down payments. Typically, Mr. Prieston said, the money had been recently deposited in the borrowers account in the form of a cashier's check.

Lenders were advised not to grow careless in underwriting just because the market is hot. Insisting on a photo identification can help weed out fraudulent applications, the speakers said.

One practice that can leave lenders liable if problems crop up is trying to save time in the approval process by signing blank forms which are later filled out by the broker, Mr. Prieston said.

If signs of possible fraud do turn up-usually when investors review the documents-Mr. Prieston said it is best not to level any accusations. Instead, lenders should press the broker to "refinance" or buy back the loans, because of "discrepancies" in the paperwork.

"Zero blame" is the best course, Mr. Prieston said. "Push the loan out of the system."

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