Mortgage Fraud Said To Hit $100B a Year

WESTON, FL-Rejecting the popular notion that 80% of all mortgage fraud is committed by swindlers looking to make a profit, a recognized legal expert in the field said here last week that lenders are probably being hoodwinked to the tune of more than $100 billion a year.

Santa Rosa, Calif., attorney Rachel Dollar said that because only a third of all lenders are required to file Suspicious Activity Reports, and because 93% are filed so early in the process that they show no loss, there's simply "no way to know" for certain how much fraud is costing the industry.

But using what she called "simple math," Dollar told the American Bankers Association's Real Estate Lending Conference that the bill for fraud could easily run into twelve figures annually.

For the first six months of the 2009 fiscal year, according to the FBI's most current figures, lenders have filed SARs with a total bill of $1.17 billion. Double that, Dollar said, and the tab based on SARs alone would be $2.34 billion for the entire year.

But because just a third of the mortgage market is required to report their suspicions, the attorney/mortgage banker/author would not stop there. Rather, she would triple that reported figure to nearly $7.04 billion.

And since more than nine in 10 reports are filed too soon in the lending process to include any losses, she would take the equation even further by dividing the larger number by 0.07, coming up with a total cost of $100.5 billion a year.

That's nearly 100 times the $1.5 billion price tag estimate for fiscal 2008.

The reason for the huge difference? The lion's share of the fraud is for property, Dollar told the conference, not for profit. And as a result, most of the liars and cheats are never uncovered.

"In reality," the editor of the public service website Mortgage Fraud Blog and co-author of "Protect Yourself from Real Estate and Mortgage Fraud" said, "80% of all fraud is committed by borrowers who intended to make their house payments all along" but got themselves into trouble along the way.

Instead of being reported as fraudulent loans, she told the meeting, the delinquent mortgages simply "go through the foreclosure process and are never discovered."

As if that wasn't sobering enough, Dollar, a partner in the law firm of Smith Dollar PC who chairs the firm's mortgage banking group and leads fraud litigation for lenders and secondary market investors on a national basis, also said most fraud "probably can't be stopped."

The best defense, she said, is to have strong closing instructions that define everyone's obligations. That way, if fraud is committed somewhere along the line, lenders and investors have an easier avenue to recovery.

For example, she said, closing agents should be told to disburse only to entities listed on the preliminary HUD-1 statement, not to pay liens that were not recorded prior to a certain number before closing, and to suspend settlement if it becomes known that the borrower does not intend to occupy the property.

Reinforcing Dollar's emphasis on fraud, an FBI agent recently detailed an epidemic of condominium fraud going on in southern New Jersey during the Regional Conference of Mortgage Bankers Association's annual meeting in Atlantic City.

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