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Mortgage fraud wanes, but looser lending raises risks

(MoneyWatch) Although the incidence of mortgage fraud fell significantly in 2012, changes in lending rules could mean a resurgence of problems in the next few years, a new study concludes.

According to the FBI and U.S. Treasury, roughly 69,000 "suspicious activity reports," or SARS, related to mortgage fraud were filed in 2012. That number is down 25 percent from 2011, when 92,000 such cases were tallied, LexisNexis found.

The drop in reported mortgage fraud came in a year when non-bank residential mortgage lenders and originators started to submit SARs for the first time. In other words, far more lenders and originators, including mortgage brokers, were submitting these incidents, but the number of fraud reports still dropped substantially.

According to Tim Coyle, one of the authors of the study, the housing crisis prompted a number of new lending restrictions and limitations on borrowers and lenders. Many of these took effect over the last two years.

The rules have  helped bring down the level of mortgage fraud, Coyle said. "Appraisal management companies, third-party reviews, eliminating stated income and zero down loans -- fraud is down because all of these policies have been put into place."

"When is the last time anyone did a subprime loan?" he added. "We know in the business that subprime loans don't perform like prime loans. Ninety-nine percent of the [mortgage lender] population is lending to borrowers with Grade A credit, 620 to 640 and above. No one is doing loans to borrowers with a 580 [credit score]."

The top five metropolitan areas for mortgage fraud around the U.S. accounted for nearly half of all reported cases: San Francisco (12.1 percent of all reports), Philadelphia and Los Angeles (6.4 percent), New York-Northern New Jersey-Long Island (5.7 percent) and Miami (4.3 percent).

The most common type of mortgage fraud last year involved prospective borrowers or lenders forging or otherwise misrepresenting information on a loan application. Nearly 70 percent of all SARs included application fraud.

Application fraud might include making false statements or fabricating tax returns, financial statements, escrow/closing documents and/or credit documentation; a fraudulent appraisal/property valuation; and the fraudulent verification of financial accounts or employment verifications. It might also include using a fake Social Security number, incorrectly stating the occupancy status, misrepresenting the citizen status and using an incorrect address.

The top state for mortgage fraud collusion over the past five years is Vermont. Seven other states that rank highly in both surveys include Alabama, New York, Kentucky, Pennsylvania, Iowa, Louisiana, and Delaware.

While mortgage fraud is down, concerns remain as home prices rise and lenders begin to widen the spigot to attract more borrowers. "We're now seeing properties being flipped and lenders relaxing mortgage restrictions for those who went through foreclosures and bankruptcies," Coyle said.

 "We're concerned that history will repeat itself," he added.