Two categories

To win your personal battle against fraud, you should know that at its most basic level any act of mortgage fraud falls into one of two categories:

1. Fraud for profit
2. Fraud for property

Reflecting high unemployment nationwide and borrowers' desperate efforts to refinance out of toxic loans, the risk of employment, income and identity fraud increased more than 20 percent in the year ending this past third quarter, Interthinx reported.

"Given the economic conditions, a lot of people don't qualify [for loans] anymore, so it's not surprising that you would see [this] shift," Fulmer said.

Thinking critically about market trends and forecasting fraud's evolution can keep you from falling into the same traps as others.

Traditionally considered less dangerous than fraud for profit, fraud for property is increasing and is inflicting measurable damage on the mortgage markets.

"In the past, lenders viewed fraud for property as a more benign type of crime than fraud for profit, but when those loans defaulted, everyone learned how dangerous this type of fraud truly is," Kevin Coop, president of Interthinx, said upon release of the company's third-quarter 2010 mortgage-fraud risk report.

Coop said fraud for property "almost always" includes an inside party. As early as 2004, Chris Swecker, former assistant director of the FBI's Criminal Investigative Division, testified before the House Financial Services Subcommittee on Housing and Community Opportunity that 80 percent of all reported mortgage-fraud losses involved "collaboration or collusion by industry insiders."

When you consider the commission checks made by insiders perpetrating for-property schemes, all fraud is "fraud for profit."

FinCEN rulemaking

Although some of us might like to hope that there is less mortgage fraud than five or 10 years ago, such thinking is little more than naivety. In reality, the economic downturn created a new batch of fraud and many more risks. In addition to a variety of foreclosure-rescue scams -- along with increased employment, income and identity fraud -- another scheme appears to be gaining traction: In many cases, elderly reverse-mortgage applicants are lying about their primary residence to help adult children with ruined credit.

Any attempt to list the newest fraud trends, however, would inherently fall short. By the time they're written down, they often already have changed.

Help might be on the way. In 2009, the U.S. Department of the Treasury Financial Crimes Enforcement network (FinCEN) began planning a potential rule to require mortgage brokers to file suspicious-activity reports (SARs) when they suspect fraudulent activity. Depository institutions already must do this. In early 2010, FinCEN Director James H. Freis Jr. said that neglecting to hold brokers to the same requirement created an opening for fraud.

"Criminals are indifferent to whom they're scamming against," he said. "They're going to try to use any weakness in the system."

This past December, FinCEN finally published a notice of proposed rulemaking that intends to require mortgage brokers and other nonbank residential mortgage originators to submit SARs.

What the impact will be is anyone's guess. On the contrary, we know what will happen if mortgage fraud continues unabated. For many of us, all we have to do is look next door.

Darrick Meneken is an associate editor at Scotsman Guide. Reach him at (800) 297-6061 or darrickm@scotsmanguide.com.

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