According to the FBI 2007 Mortgage Fraud Report, more than 46,000 cases of suspected mortgage fraud were reported last year.  This led to bank losses exceeding $813 million.

If you’re looking for reasons why mortgage underwriting is measurably more difficult in 2008 — add “mortgage fraud” to the list.  Lenders now perform extra scrutiny on each home loan application to protect against additional losses on all levels.

Mortgage fraud is a federal crime and exists in two basic varieties:

1. Fraud for Housing — Misrepresentation by a mortgage applicant for purposes of buying a home, usually related to income, assets, or debts.  The applicant intends to repay the loan as agreed.
2. Fraud for Profit — Coordinated misrepresentations by a group of people related to applicants, appraisals, loan documents and relationships between buyer and seller.  The applicant does not intend to repay the loan as agreed.

Although both are illegal, Fraud for Profit is most concerning to law enforcement officials and mortgage lenders.  That’s because Fraud for Profit tends to incorporate multiple loans for multiple homes in a single neighborhood. 

In other words, the bank’s potential loss is larger with Fraud for Profit schemes.

The photo above (from the FBI report) is from a Fraud for Profit home appraisal.  It indicated that the “recently renovated condominium” included Brazilian hardwood, granite countertops, and a value of $275,000. 

Clearly, this is untrue.

Despite increasing 31 percent, mortgage fraud growth slowed in 2007 as law enforcement agencies and mortgage lenders increased their efforts to identify and arrest perpetrators.

(Image courtesy: Federal Bureau of Investigation)