Fraud and Prevention

Mortgage Fraud Trends: Suspicious Activity Up But Fraud Ratios Down

Perspectives by Terry King
November 4, 2009

Every facet of the mortgage industry has undergone tremors and territorial shifts over the last few years. Mortgage lending fraud and the required Suspicious Activity Reports that often provide the trigger to detection are no exception. As a matter of fact, these two areas appear to contradict each other until you carefully examine the statistics and the actions that generated them.

SARs filed with the Internal Revenue Service are one of the government's primary tools for detecting illegal financial activities, and are required of depository institutions. From July 2003 through June 2004 depository institutions filed 14,484 SARs. For the timeframe July 2007 through June 2008, the filings were more than 62,000. This represents a significant increase of 442% in SARs.

During the same timeframes, however, mortgage loan fraud within Suspicious Activity Reports seemed to take a different direction.

In 2003, the percentage of fraud cases found within depository institution's SARs increased dramatically by 77% over the previous year. (These findings were not available for review until the third quarter of 2004 due to analysis and reporting time lags.) The percentages decreased to 52% in 2004 and 2005, 34% in 2006 and 44% in 2007. So clearly the ratio of mortgage loan frauds slowed significantly. (As a percentage of total SAR filings, mortgage fraud cases reflected a slower but steady growth pattern of 4% in 2003 up to 9% in 2007.)

The following statistics give a clear synopsis by percentage indexing of the primary areas of MLF findings in 2007 and 2008.

AREA 2007 2008

Income 30% 30%

Liabilities 28% 29%

Occupancy 15% 14%

Assets 1% 6%

Value 8% 6%

Credit 4% 3%

SSN (ID) 3% 3%

Clearly, mortgage fraud was on the increase from 2003 to 2006. The question is why, and what contributed to the decline in MLF SAR filings while the total SAR filings increased by 442%?

The answers are changes in the structure of financial institutions, ownership of mortgage loans, and policy changes by lending and regulatory institutions. The liberal availability of mortgage loans significantly contributed to widespread fraud activities. Not only has there been an increase in fraud awareness, but also multiple tools to detect fraud have been developed and are being utilized while regulatory requirements addressing fraud have significantly increased.

There are several contributors to the decline of mortgage loan fraud, even while the total number of SAR filings have increased. Some of these include structural changes in mortgage lending such as the decline of subprime and alt-A loan products, as well as an overall reduction in mortgage loan originations. At the same time there has been an increase in law enforcement actions against mortgage loan fraud and an increase in public awareness.

Most significantly, however, has been major improvement in the detection of mortgage lending fraud by lenders prior to loan funding. Multiple outsourcing companies have been built and established primarily to aid in the detection and identification of mortgage loan fraud. Their efforts are apparently succeeding.

Terry King is national director of marketing and sales at the StoneHill Group, a national due diligence firm. Mr. King has been in the mortgage industry since 1975 and has a background in mortgage lending and related vendor relationship management and support processes. Prior to his position at StoneHill, Mr. King was marketing director and group chairman with MRG Document Technologies. For more information, visit http://www.stonehillgroup.com.