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Loan Fraud Becomes More Creative as Market Slows

Despite being in a down market, the real estate industry is seeing quite a bit of activity these days - illegal activity, that is.

The number of active mortgage fraud cases investigated by the Federal Bureau of Investigations has grew to 818 last year, compared to just 436 three years ago.

"Fraud is an epidemic and increasing," said Ann Fulmer, founder of the Georgia Real Estate Fraud Prevention Awareness Coalition and a vice president of Interthinx, a company specializing in fraud prevention.

Ms. Fulmer expects that with the refinancing boom ending - along with home appreciation - fraud will only become more evident. "Frauds that were committed one to three years ago will eventually resurface," she said.

Today, fraudsters are using a variety of schemes to bring in the big bucks.

"Two of the major mortgage scams are property flipping and chunking," said Rachel Dollar, an attorney in Santa Rosa, Calif., and proprietor of the blog, MortgageFraudBlog.com.

In a property-flipping scheme, a scam artist will purchase a home at a low price, have the house falsely appraised at a higher value, and then quickly resell the property at a huge profit.

In a chunking scheme, a con artist organizes a seminar to show potential buyers how they can invest in property and get rich quickly with no money down.

The scammer convinces buyers to invest in overvalued homes, takes their personal financial information, submits it to multiple lenders and then pockets the proceeds. The scammer neglects to get renters for the homes, and leaves buyers to deal with mortgages that eventually fall into foreclosure.

Other common mortgage fraud schemes include "silent seconds," where the property buyer borrows the downpayment from the seller with a non-disclosed second mortgage, allowing the primary lender to believe the borrower invested his own money in the downpayment; "builder bailout," where the builder or developer manufacturers a sale to sell property quickly, or in a slow/depressed real estate market to make a construction loan; "equity skimming," where a homeowner's equity is taken with or without their knowledge; and foreclosure bailout where homeowners who are in financial distress sell their property to a spouse using false information in order to get out of an impending foreclosure.

There are two types of mortgage fraud: fraud for profit and fraud for housing, explained Ms. Fulmer. Fraud for housing typically involves the borrower misrepresenting information on an application in order to qualify for a loan.

The FBI describes fraud for profit as the "industry insider fraud," which involves various professionals within the mortgage industry, such as the broker and appraiser, being in on the scam. "FBI statistics say that 80% (of mortgage frauds) involve industry participants," said Ms. Fulmer.

To avoid being a victim of mortgage fraud, it's important to know who you're doing business with, said Ms. Fulmer.

"It's important that lenders pay attention to professionals on the transaction," she said. "There are a lot of groups out there giving information about how easy it is to make money. They tell people that they can get rich doing very little work. This false information lures people, making them easy prey for perpetrators," said Ms. Fulmer.

Lenders need to screen loans upfront, explained Ms. Fulmer. Interthinx provides products for fraud detection, such as DISSCO, a program that reduces consumers' risk of mortgage fraud.

"The best way to deal with fraud is to prevent it," she said. "Prevention is the most effective solution, and we will not stem the tie of fraud until the industry decides that prevention is its highest priority." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com