Mortgage fraud -- from bogus appraisals to consumer lies about employment and income -- is booming, up by 30 percent in the last year, according to a comprehensive new study prepared for the Mortgage Bankers Association of America using FBI and private mortgage industry data.

Home loan fraud is also on the move geographically, with Florida and California now the two markets in the country reporting the highest numbers of cases. In 2002, by contrast, California ranked 30th among states in terms of reported fraud and Florida ranked number 12. Mortgage fraud in Florida jumped by 143 percent from 2005 to 2006, while California reported an increase of 214 percent.

On the other hand, Georgia, which had topped the national fraud rankings for most of the decade, has now dropped to fourth, thanks to state legislative and federal enforcement efforts to combat the problem.

The study was conducted by the Mortgage Asset Research Institute (MARI), which collects and compiles information on fraud every year that is then shared with the home loan industry.

The most commonplace type of fraud, according to the study, continues to be connected with applications for new loans. Two-thirds of all subprime mortgages that were reported fraudulent contained intentionally false information in the application itself. Fifty-five percent of prime loans deemed fraudulent had misstatements in their applications. The most common ingredients of application hanky-panky: Lies about financial assets, income, employment status, taxes and inflated appraisals.

Besides statewide rankings for incidences of fraud, the MARI study identifies metropolitan areas where "early payment defaults" -- nonpayments by home buyers almost immediately -- are running far above average. Early payment defaults are often associated with fraud schemes, and typically end in a foreclosure, short sale or deed-in-lieu of foreclosure.

Among early defaults on prime mortgages, Buffalo topped the list for 2006, followed by Enid, Oklahoma; Alexandria, Louisiana; Corpus Christi, Texas; Danville, Virginia; Elkhart, Indiana; Flint, Michigan; and Jackson, Michigan. Among subprime early defaults, Jackson, Michigan and Enid, Oklahoma top the list, followed by Kankakee, Illinois, Oakland, California and Detroit, Michigan.

The study predicts even higher fraud reports in the subprime arena in the coming year because the tightening of underwriting standards will mean "more (real estate and mortgage) professionals chasing a smaller pool of business" and "general pressure on all loan originators to generate volumes" and "get loans approved for borrowers with marginal credit" now locked out of the market.

That's highly likely, in turn, to provide a fertile breeding environment for dishonest mortgage borrowers and loan originators to cut corners and submit greater numbers of applications designed to rip off lenders and Wall Street investors. The FBI has made combating mortgage fraud a major priority, say the study authors, but Congress needs to appropriate more money for investigative resources if the real estate and mortgage industries are going be able to stem the rising tide.

Published: June 25, 2007

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.