Mortgage meltdown discussions are peppered with discussions of the "liar loan," or the infamous streamline "no doc" mortgage. These mortgages filled the portfolios of most of the recently failed lending institutions. However, increased scrutiny on all types of lending should have closed off this risk. Or has it?

Mortgage Fraud Increasing

According to the recently released Mortgage Asset Research Institute (MARI) quarterly report, mortgage fraud is actually on the rise. MARI is an organization that maintains an aggregated data exchange database of reported incidents of fraud and verified misrepresentation as reported by mortgage industry participants.

The report revealed that "MARI experienced a 42 percent increase in received incident reports over the same period [first quarter] in 2007."

Although you might expect the decline in the mortgage market and trend toward more conservative lending might bring the sort of scrutiny that curtails fraud, quite the contrary seems to be true. According to a similar report issued by the FBI in 2007, "the downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes."

Misrepresentation on Mortgage Applications

As you might expect most of the fraud occurs in misrepresentations on the mortgage application itself.

Often the loan originator or borrower manipulates pre-qualification information to increase the likelihood of pre-verification loan approval. In these circumstances it is typical for a mortgage lender, having invested time and money in processing the application to attempt to cure the application into an accepted mortgage program.

Closing following application misrepresentations are income and employment fraud. In each case documents and often even verification processes are forged or circumvented.

The obvious result is a broad range of financial loss from mortgage lender to mortgage securities investors as these loans quickly and unexpectedly go bad.

Top Mortgage Fraud States

As one might imagine the trends fall within the large metropolitan service areas (MSA) and housing markets that are being hit the hardest by declining housing prices--Florida, California, Illinois, Maryland, Michigan.

The type of misrepresentations seem to vary by state, but misrepresentations on the application tend to uniformly trend high.

Mortgage Fraud Prevention

These types of revelations continue to build uncertainty in resolving the rising rates of default and foreclosure that continue to accelerate in most financial institutions mortgage portfolios. Additional concern also mounts among taxpayers as government sponsored entities (GSEs), like Fannie and Freddie as well as government agencies like HUD/FHA begin to finance or insure larger percentage of this risk.

MARI and other fraud experts are encouraging increasing controls and verification at the point of origination--to discourage and frustrate potential fraudsters early in the mortgage process.