The authorities have cracked down hard on appraisal fraud and subprime liar loan products that encourage mortgage dishonesty through overstated income. But mortgage fraud is still alive and well and living in America.

Earlier this year, Congress and various state and federal government agencies issued stern warnings to those intent on mortgage fraud, legislating an entirely new slate of stiff mortgage broker regulations and possible penalties. So it comes to many as a startling surprise that the rate of mortgage fraud during the second quarter of 2008 jumped nearly 50 percent compared to the same time last year, according to data from the Mortgage Asset Research Institute. No longer do borrowers have liar loans that let them use overstated income to qualify; but new scams with unique twists are effectively fooling authorities and underwriters.

Most popular mortgage fraud

Here are three of the most popular scams:

1. Reverse appraisal mortgage fraud: By using lower than normal valuations to convince banks holding mortgages that the property is worth less than it actually is, some appraisal artists are able to talk these financial institutions into authorizing a cheap short sale. That allows the homeowner to sell the property, while the lender agrees to accept that bargain price and forgive the difference owed.

2. Full documentation liar loans: By using the same kinds of technology to create forged documents that currency or passport counterfeiters use, schemers create false income statements, pay stubs, and tax returns. Then, with overstated income and assets, they get loans that even the most careful and seasoned underwriters don't realize are based on outright mortgage fraud.

3. Buy and then bail: One of the most difficult ploys to detect-especially now that mortgage companies are overwhelmed with paperwork and underwriting as they try to help law abiding homeowners rework loans to avoid foreclosure-is the so-called "buy and bail" strategy of mortgage fraud. Homeowners behind on payments, and upside down in a mortgage, tell the lender that they have a renter who's going to move into their house to provide them with enough monthly income to cover the mortgage payment. They provide a copy of the lease agreement to prove that it's legitimate; but the whole thing is a mortgage fraud scam with no renter and no real lease contract. Then, they buy a cheaper home down the street-using a new mortgage that they would not otherwise get-and default on the one they were trying to get out from under. The borrower winds up with a house that he can afford, and the bank gets stuck with another foreclosure property.

Mortgage fraud by any other name

Last year, subprimes allowed borrowers to state income without verification. That led to the development of the nickname "liar loan." Mortgage companies sometimes pressured appraisers in their brand of appraisal cons, pushing the housing bubble to dizzying heights. Perpetrators of those ploys may have gone away, but a new breed of mortgage fraud slickster has cropped up to replace them.

Published on November 13, 2008