Mortgage Fraud on the Rise

(MoneyWatch)  Home sales and home values may be down. But mortgage fraud continues to grow.

According to a just-released report from the Mortgage Asset Research Institute (MARI), reported incidents of mortgage fraud are at an all time high, increasing 26 percent between 2007 and 2008.

According to the 11th Periodic Mortgage Fraud Case Report to the Mortgage Banker's Association, Rhode Island shot to the top of the list of states with the highest numbers of mortgage fraud activity. Rounding out the Top 10: Florida, Illinois, Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.

Why the creep in mortgage creeps? "With fewer loan originations, the economic downturn may have created more desperation, causing more people than ever to try to commit mortgage fraud," said Denise James, LexisNexis Risk & Information Analytics Group director of Residential Mortgage Solutions.

More troubling: fraudsters have become more creative, inventing new ways of cheating. In addition to application fraud (where the borrow or loan officer knowingly misrepresents the borrower's income or assets), MARI sees rises in fraud related to tax returns and financial statements, appraisals or valuations, verifications of deposit (how much money you have in the bank), verifications of employment, escrow or closing costs, and credit reports.

According to the FBI, mortgage fraud accounts for $4 billion to $6 billion in losses every year. There were more than 66,000 mortgage fraud suspicious activity reports filed in 2008 and over 40 FBI mortgage fraud task forces working to stop the problem. In 2008, the FBI brought 560 indictments, with 338 convictions. Not bad, but small beer considering the size of the problem.

Here's why you should care: A property purchased by mortgage fraud often ends up as a foreclosure or as one of those "toxic" assets we keep reading about. And that just makes the housing crisis worse.