Mortgage Frauds Are Going Up, and the FBI is Powerless

By Kat Aaron and Nick Schwellenbach, The Center for Public Integrity. Posted July 18, 2009.

Reports of suspected mortgage fraud — fueled by the current economic crisis — are up in 2008, according to two new reports by the FBI and the Financial Crimes Enforcement Network, or FinCEN, an arm of the Treasury Department.

Those who are allegedly committing the fraud may be some of the same folks who helped create the crisis in the first place, according to the FBI’s 2008 Mortgage Fraud Report. But the bureau and FinCEN might have trouble catching them because non-bank mortgage lenders, responsible for almost half of all subprime loans, don’t have to report suspicious activity to the feds, as other financial institutions do.

Even so, the totals on suspected fraud are alarming. In its twice-yearly SAR Activity Review – By the Numbers, FinCEN tallies all the so-called Suspicious Activity Report forms, or SARs, filed by financial institutions, casinos, money services businesses, and the securities and futures industries. SARs are far from a guarantee that a crime has taken place, but their numbers are considered important indicators of trends; they are filed when a financial institution sees suspicious behavior or patterns of suspicious transactions.

In 2008, banks and other depository institutions filed almost 65,000 SARs reporting suspicions of mortgage fraud, up from nearly 53,000 the previous year. As PaperTrail reported in December, mortgage fraud reports have been on the rise for years: In 2000, just 3,515 SARs on mortgage fraud were filed.

The increase in SARs may be translating into more FBI mortgage fraud investigations. The bureau conducted 1,644 such investigations in fiscal year 2008, a 100 percent increase from fiscal year 2006. Sixty-three percent of the 2008 investigations involved dollar losses of more than $1 million.

The bureau relies “a lot” on SARs to identify mortgage fraud, said FBI spokesman Bill Carter. “In many instances that’s how we are alerted to the fact that there may be criminal activity taking place,” he said. Subprime loans, Alt-A, and option-ARM loans are commonly used in mortgage fraud schemes, according to the FBI report. Alt-A loans typically have less documentation of income or employment than prime loans, and option-ARMs are adjustable rate mortgages that give borrowers the option to choose very low initial payments.

FinCEN spokesman William Grassano cautioned that the rise in suspected fraud reports may reflect a lag in the data; fraud that took place in 2006 or 2007 may be reported in 2008 or later. And, he said, “people are more aware” of mortgage fraud, which may translate into more reports.

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