Mortgage Fraud is Up

Well, I suppose you have to expect it, when the real estate market is so "hot" and so many people are getting into "house flipping" and other risky investment strategies.

I saw a report just yesterday in my local newspaper that said the number of fraud cases being investigated by the FBI, as of September 30th, is 721. This is up from last year's same time total of 534. And this only counts the investigations that the FBI is involved in.

The thing with real estate and mortgage fraud is that a number of people have to be involved to pull it off. You're looking at a likely group which includes a real estate professional of some kind (either an agent or an appraiser, at a minimum), and then potentially others, like lawyers or brokers. Unfortunately, our new technology for loan approval is both good and bad: our ability to apply for loans with less documentation about our savings and income (so called "low doc" or "no doc" loans) also inadvertently helps fraud artists.And when most things can be done by Internet or fax, there's no chance for that "face-to-face" encounter, which sometimes can tip off a seasoned loan officer.

In many cases, the fraud doesn't actually become evident until the loan is defaulted. By then, the perpetrator has already made off with the cash and someone is left holding the bag.

Some of this fraud is actually done with derelict homes or properties. This is why a real estate professional -- often an appraiser -- is needed. Since an appraiser has an official "seal", sometimes a stolen seal becomes a tool to fool lenders.

An interesting fact is that more mortgage fraud is occurring in California, Utah, Nevada, Colorado, Missouri, Illinois, Michigan, South Carolina, Georgia and Florida. In many cases, the fraud happens more in "hot" real estate markets, where the fast turnover of a property will not draw the attention of lenders or lawyers.

In most cases this won't affect you. However, if mortgage fraud gets widespread and serious enough, it could begin to affect mortgage-backed securities in the stock market. If investors are impacted, they may demand a higher yield from such securities, to offset loses. If this happens, it could affect the interest rate we all pay on our mortgages.

Michael

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