After the housing market crashed, reports of suspected mortgage fraud soared.
As lenders, homeowners and brokers rushed to close deals, the process during the boom years was tainted by fakery, according to reports later submitted to the Financial Crimes Enforcement Network, an agency of the Treasury Department. The number of reports of suspected mortgage fraud rose to its highest level on record last year, as 70,472 reports were submitted to the government agency, according to a new release from the LexisNexis Mortgage Asset Research Institute.
That's nearly double the number of cases reported in 2006 when the market was at its peak, and it's nearly 22 times the number of cases reported in 2000. From the LexisNexis release:
Fraudsters thrive on inadequacies within lengthy loan-related processes and a lack of consistency across organizations and/or industries that help them hide their true motives. Technology has enabled faster loan production through automation, ease of processing, and analytics. Industry professionals have keen knowledge of those processes, which makes it much easier to manipulate protocols in place to thwart adverse activities.
The number of verified cases of mortgage fraud declined from 2009 to 2010, but that's partially attributable to a decline in the number of new loans, the LexisNexis report says. Reports of suspected fraud increased nearly 5 percent during that period.
Homeowners and investors have filed numerous lawsuits against mortgage companies, claiming that crucial mortgage documents were misplaced or even forged. Some of these suits have been successful, bolstered by testimony from bank employees. In a widely cited example, an employee of the lender now owned by Bank of America testified in a New Jersey court in 2009 that her company regularly held onto mortgage notes even as the loans were sold to investors, contradicting what contracts usually require.
Without a note, a bank cannot prove it has a right to foreclose on a home; homeowners have used the absence of a note to contest foreclosures. Likewise, a missing note compromises the legal rights of an investor in a mortgage security, a situation that has prompted some investors to sue the banks that sold them the securities.
But it's not just the banks who have been accused of fraud. The Wall Street Journal describes a practice some brokers allegedly used, in which they would get artificially low valuations of distressed homes, and then help a buyer sell those homes for a profit.
Homeowners, too, have been accused of misstating their income on mortgage documents. One borrower is now serving a 21-month prison sentence for mortgage fraud, the New York Times reported.
The chiefs of the lenders that helped fuel this boom, meanwhile, have largely escaped punishment.
Examples of alleged fraud extend to the foreclosure process as well. When it came out last fall that employees at foreclosure processing companies would sign thousands of foreclosure documents daily without even reading them, some of the county's biggest lenders temporarily halted their foreclosures.
The nation's five biggest mortgage lenders -- Bank of America, Wells Fargo, Citigroup, JPMorgan Chase and Ally Financial -- have been accused of wrongfully foreclosing on homeowners and improperly handling mortgages. All 50 state attorneys general along with the Obama administration are working to reach a settlement deal. Fines could reach $30 billion, The Huffington Post reported.