Mortgage fraud is a large and growing blight on the mortgage industry. The Federal Bureau of Investigation (FBI) has reported that mortgage fraud cost the mortgage lending industry between $946 million and $4.2 billion in 2006 alone.4 Additionally, the federal Financial Crimes Enforcement Network (FinCEN) has reported that the number of mortgage-related Suspicious Activity Reports (SARs) filed of 2006 rose 44 percent over the same period in 2005.5 This follows a 29 percent increase from 2004 to 2005, and an almost 100 percent increase from 2003 to 2004.6
Mortgage fraud is receiving increased attention not only because of its prevalence, but because of the pervasive harm it causes. While mortgage lenders and investors are most proximately and frequently affected, losing billions of dollars annually as a result of mortgage fraud, the harm is not limited to the mortgage lending industry. “[B]ecause mortgage lending and the housing market have a significant overall effect on the nation’s economy,”7 the substantial harm caused to the mortgage lending industry impacts the national economy generally. Mortgage fraud often results in early payment defaults, a factor that likely is contributing to higher numbers of delinquencies and foreclosures and fueling the alarm over these statistics. Furthermore, because mortgage lenders and investors must recoup their losses in order to remain in business, the costs of mortgage fraud are passed on to consumers in the form of higher mortgage prices, decreased availability of mortgage credit and decreased loan values.
The increased interest in mortgage fraud prevention has taken a variety of forms. The FBI recently consolidated all mortgage fraud programs within the Financial Institution Fraud Unit, even when the targeted or victimized lender is not a federally
Federal Bureau of Investigation, Mortgage Fraud: New Partnership to Combat Problem, available at http: /www.fbi.gov/page2/march0 / mortgage030907.htm (Mar. 9, 2007).
FinCEN, The SAR Activity Review — By the Numbers, Issue 8 (June 2007), available at http: /www.fincen.gov/sar_review_by_the_ numbers_issue8.pdf.
See Mortgage Asset Research Institute, Eighth Periodic Mortgage Fraud Case Report to Mortgage Bankers Association, at 1 (Apr. 2006), available at http: /www.mari-inc.com/pdfs/mba/ MBA8thCaseRpt.pdf.
Federal Bureau of Investigations, Financial Crimes Report to the Public, at 20 (Mar. 2007), available at http: /www.fbi.gov/ publications/financial/fcs_report2006/publicrpt06.pdf.
chartered financial institution.8 One state has enacted a statutory regime directed at preventing and punishing mortgage fraud,9 and bills have been introduced in other states.10 Legislation also has been introduced at the federal level.11
While increased focus on mortgage fraud is both necessary and appropriate, MBA recommends law and policy makers apply that focus in ways that are targeted at mortgage fraud and that do not duplicate (or possibly even limit) current statutes and mechanisms. MBA has prepared this white paper to assist law and policy makers in understanding existing laws that address mortgage fraud, as well as important issues and concerns implicated by additional measures intended to address mortgage fraud.
Additionally, MBA urges law and policy makers to keep in mind that mortgage lenders are the principal victims of mortgage fraud, along with, in many cases, communities and honest homeowners. Any steps taken to prevent or punish mortgage fraud must not expose mortgage lenders to additional (and possibly greater) risks of loss.
WHAT IS MORTGAGE FRAUD? Mortgage fraud is a “material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase or insure a loan.”12 Stated differently, mortgage fraud is the intentional enticement of a financial entity to make, buy or insure a mortgage loan when it would not otherwise have done so, had it possessed correct information.
Mortgage fraud generally takes two forms: “fraud for profit” and “fraud for housing.” Fraud for profit, also referred to as industry insider fraud, is fraud where the “motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties.”13 The FBI reports that,
Georgia Residential Mortgage Fraud Act, Ga. Code §§ 16-8-100, et seq.
See, e.g., Arizona S.B. 1221; Florida S.B. 240 & H.B. 349; Minnesota S.F. 797 & H.F. 851; Texas H.B. 716.
11 12 13
See, e.g., S.1222. Federal Bureau of Investigation, supra note 7, at 20. Federal Bureau of Investigation, supra note 7, at 20.
Mortgage Bankers Association
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