Each Mortgage Fraud scheme contains some type of "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." The Mortgage Bankers Association projects $2.37 trillion in mortgage loans will be made during 2006. The FBI compiles data on Mortgage Fraud through Suspicious Activity Reports (SARs) filed by federally-insured financial institutions and Department of Housing and Urban Development Office of Inspector General (HUD-OIG) reports. The FBI also receives complaints from the mortgage industry at large.

A significant portion of the mortgage industry is void of any mandatory fraud reporting. In addition, as initial mortgage products are repackaged and sold on secondary markets, the sale of the mortgages, in many cases conceal or distort the fraud, causing it not to be reported. Therefore, the true level of Mortgage Fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. However, based on various industry reports and FBI analysis, Mortgage Fraud is pervasive and growing.

The FBI investigates Mortgage Fraud in two distinct areas: Fraud for Profit and Fraud for Housing. Fraud for Profit is sometimes referred to as "Industry Insider Fraud" and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and Mortgage Fraud reporting, 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.

Fraud for Housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan.

The defrauding of mortgage lenders should not be compared to predatory lending practices which primarily affect borrowers. Predatory lending typically effects senior citizens, lower income and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, sub-prime or higher interest rates and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on his mortgage payment and undergoing foreclosure or forced refinancing.

Although there are many Mortgage Fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders. The FBI is engaged with the mortgage industry primarily in identifying fraud trends and educating the public. Some of the current rising Mortgage Fraud trends include: equity skimming, property flipping, and mortgage related identity theft. Equity skimming is a tried and true method of committing Mortgage Fraud. Today's common equity skimming schemes involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors. Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers and shell companies, along with industry insiders to conceal their methods and override lender controls.

Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially valued properties are then repurchased several times for a higher price by associates of the "flipper." After three or four sham sales, the properties are foreclosed on by victim lenders. Often flipped properties are ultimately repurchased for 50 to 100 percent of their original value.

Since 1999, the FBI has been actively investigating Mortgage Fraud in various cities across the U.S. The FBI also focuses on fostering relationships and partnerships with the mortgage industry to promote Mortgage Fraud awareness. To raise awareness of this issue and provide easy accessibility to investigative personnel, the FBI has provided points-of-contact to relevant groups including the Mortgage Bankers Association (MBA), the Mortgage Asset Research Institute, the Mortgage Insurance Companies of America, Fannie Mae, Freddie Mac, and others.

The FBI has also been working to establish broader SAR reporting requirements for mortgage lenders who do have adequate protection under the current safe harbor provisions. The FBI is collaborating with the mortgage industry and Financial Crimes Enforcement Network (FinCEN) to create a more productive reporting requirement for Mortgage Fraud. The FBI has also been working with the FinCEN to promote an efficient and effective method of identifying and reporting fraudulent mortgage activity affecting non-federally insured mortgage institutions.

The FBI works closely with individual lenders, as well as national associations such as the MBA, the Appraisal Institute, the National Association of Mortgage Brokers, and the National Notary Association, to define and combat the Mortgage Fraud problem.

In addition, on a case-by-case basis, the FBI receives close cooperation from lenders. An example of this is the usage of Real Estate Owned properties from lender inventories to facilitate Mortgage Fraud undercover operations (UCO). In December 2003, the FBI initiated an UCO to address the massive amount of Mortgage Fraud in the Jacksonville area. On September 16, 2004, as a result of this investigation, seven search warrants were executed and two arrests were made. Mortgage broker J.R. Parker and closing attorney Dale Beardsley, were arrested, charging them with bank fraud for their role in this scheme. On or about October 2005, Parker and Beardsley were convicted of conspiracy, mail fraud, and wire fraud. In addition, seizures in the case included two homes valued at over $1million each, six luxury cars and a money judgment in the amount of $14 million. This UCO was made possible by the close cooperation of a local financial institution. This type of cooperation happens around the country and is a key component in the FBI's approach to this growing crime problem.

Regional analysis of suspicious activity reports (SARS) indicating Mortgage Fraud violations indicates the West region of the U.S. led the nation with 35.9 percent of Mortgage Fraud-related SARs filed during FY 2006. The Central, Southeast, and Northeast regions had 24.7, 22.6 and 16.9 percent respectively of Mortgage Fraud related SAR filings. However, FBI pending cases indicated that the Central region had the majority of Mortgage Fraud cases with 33.3 percent during 2006. The West, Southeast, and Northeast had 26.7, 27.2 and 12.8 percentages respectively. FBI pending cases by region are consistent with Mortgage Asset Research Institute (MARI) reporting which indicated that five of the top ten Mortgage Fraud affected states in 2006 were located in the Central region. The chart below is reflective of the Number of Violations of Mortgage Related Fraud SARs (Number of SARs received)

Mortgage Fraud:
Fiscal Year 2002 - 5,623
Fiscal Year 2003 - 6,936
Fiscal Year 2004 - 17,127
Fiscal Year 2005 - 21,994
Fiscal Year 2006 - 35,617

Commercial Loan Fraud:
Fiscal Year 2002 - 1,764
Fiscal Year 2003 - 1,850
Fiscal Year 2004 - 1,724
Fiscal Year 2005 - 2,126
Fiscal Year 2006 - 2,409

False Statement:
Fiscal Year 2002 - 3,711
Fiscal Year 2003 - 4,569
Fiscal Year 2004 - 6,784
Fiscal Year 2005 - 11,611
Fiscal Year 2006 - 21,203

SEE CHART 1 (In Left Side Bar Area)

The chart below is reflective of Dollar Losses Reported in Mortgage Related Fraud SARs (Dollar Losses Reported in Millions)

In Mortgage Fraud:
Fiscal Year 2002 - $293
Fiscal Year 2003 - $225
Fiscal Year 2004 - $429
Fiscal Year 2005 - $1,014
Fiscal Year 2006 - $946

In Commercial Loan Fraud:
Fiscal Year 2002 - $1,010
Fiscal Year 2003 - $1,060
Fiscal Year 2004 - $1,163
Fiscal Year 2005 - $711
Fiscal Year 2006 - $540

In False Statement:
Fiscal Year 2002 - $469
Fiscal Year 2003 - $388
Fiscal Year 2004 - $458
Fiscal Year 2005 - $998
Fiscal Year 2006 - $1,402

SEE CHART 2 (In Left Side Bar Area)

Mapping data from FY 2005 SARs, FBI pending Mortgage Fraud cases, Federal Housing Authority (FHA)-insured loans defaulting between October 1, 2003 and September 30, 2001 and 2005 MARI data, reveals the top 16 states for Mortgage Fraud activity. The map below shows states documented by three or four sources include California, Colorado, Florida, Georgia, Illinois, Michigan, and Texas. The map below shows states documented by two sources include North Carolina, Ohio, Utah, and Missouri, and states documented by one source include: Arizona, Indiana, Louisiana, New York, and South Carolina.