More mortgage loan applicants are committing mortgage fraud by lying on their applications. Experts say a tight lending environment is to blame.
In the 1958 film Auntie Mame, the title character says, "Life is a banquet, and most poor suckers are starving to death!" Maybe that's why so many borrowers are trying to get away with lying on their mortgage loan applications.
The second quarter 2008 mortgage fraud report of the Mortgage Asset Research Institute (MARI) shows an increase in criminal activity related to mortgage loan originations. Specifically, this year's second quarter showed a 45 percent increase in the number of reported mortgage fraud incidents relative to the same period in the prior year. This follows a first quarter increase of 42 percent.
Desperate times, desperate acts
Industry experts believe that the increase is just another outcome of the tight lending environment. Currently, mortgage underwriting standards are conservative and prudish relative to just three years ago. Under these stringent credit requirements, some borrowers are feeling pressured to overstate or misstate their qualifications. Lenders, on the other hand, have progressively become more conscientious about verifying the information that borrowers provide. That higher level of scrutiny naturally reveals more inconsistencies and inaccuracies on loan applications.
The MARI report segments fraudulent mortgage practices into categories; in the second quarter, the most prevalent type of mortgage fraud involved general misrepresentation by the borrower on the mortgage application. This includes the use of an incorrect name or Social Security number; misstatement of income, debts, assets, or employment; or the appearance of two different signatures for the same name on the application. More than 65 percent of the second quarter mortgage fraud incidents fell into this category.
Misrepresentation of tax return and/or financial statements was also popular with fraud perpetuators, as was appraisal misrepresentation. Borrowers could misrepresent these documents by providing altered or homemade paperwork. Notably, only a very small percentage of mortgage fraud cases involved identity theft.
California, Florida, Illinois top the charts
Geographically, California, Florida, and Illinois reported the highest levels of mortgage fraud activity in the quarter. Within those states, this activity was more concentrated in the Miami Metropolitan Statistical Areas (MMSAs) of Tampa, Los Angeles, San Francisco, Chicago, and Rockford.
Relative to other states, Florida showed a higher incidence of asset and debt misrepresentation, verification of employment fraud, appraisal misstatements, and escrow and closing document lies. California borrowers also practiced high rates of asset and debt misrepresentation and verification of employment fraud, as well as bank statement fraud, and tax return/financial statement misrepresentation. Illinois mortgage applicants predominantly tried to lie about their income and employment data.
Many of the poor "suckers" who are lying on their mortgage applications may not have malicious intentions. But the action is fraud, nonetheless. The saddest part is that when a borrower successfully commits mortgage fraud, all she gets out of it is a mortgage she can't afford.