Mortgage Fraud Facts

• A study of more than 3 million mortgage loans found that between 30 and 70 percent of early payment defaults are directly linked to misrepresentations in mortgage loan applications
• Defaults are largely concentrated in ARM loans, but are present in nearly every lending sector.
• Of the 10 states with the highest concentration of mortgage fraud, 7 of them rank in the top 10 states with the highest default rates.

Source: FBI 2006 Mortgage Fraud Report

Rising foreclosure rates have sparked a debate as to whether or not people facing foreclosure deserve a mortgage bailout. Those who are for a bailout claim that many borrowers were victims of predatory lending towards the end of the housing boom (2005-2006).

Critics of proposed bailouts say the majority of people who borrowed during that time were motivated by greed and stupidity, and either lied on their mortgage application or signed up for a loan they knew they couldn't afford.

Who's right and who's wrong?

It's hard to say for sure. Reports of predatory lending have surfaced, but so have reports of mortgage fraud perpetrated by borrowers.

The latest FBI mortgage fraud report--details of which were mentioned above--indicates a direct correlation between falsified mortgage applications and early payment defaults. The report cites a BasePoint Analytics study that shows 30 to 70 percent of defaults can be linked to misrepresented mortgage applications.

In other words, if borrowers would not have lied and committed fraud, as many as 70 percent of them may not be facing foreclosure right now.

The Top 10 States for Mortgage Fraud and Foreclosures

Source: FBI / RealtyTrac

The FBI report also unveiled an unsettling correlation between states with high rates of mortgage fraud and high rates of foreclosures. Seven of the states with the highest occurrences of mortgage fraud also appear on the list of the top ten states with the highest foreclosure rates.

Combating Mortgage Fraud

There are currently plenty of state and federal laws in place which prohibit mortgage fraud. The main problem, according to the Mortgage Banker's Association (MBA), is the lack of money and resources available to investigate and prosecute mortgage fraud perpetrators.

The MBA says only a small fraction of cases are reported, and an even smaller fraction is investigated. This is due in part to a shift in priorities within the Federal Bureau of Investigations. After 9/11, nearly 3,000 agents were transferred out of the white collar crime unit and never replaced.

'We do not need more federal laws to combat fraud. Instead, we need a more coordinated effort and more resources to investigate and prosecute,' said Jonathan L. Kempner, president and chief executive officer of the MBA. 'In addition to being illegal and costly, we know that fraud has also contributed to the recent rise in delinquencies and foreclosures, and the industry and government must step up our anti-fraud efforts to help curtail these related problems.'

Mortgage fraud is certainly costly--according to MBA estimates fraud costs lenders more than $4 billion annually. If the FBI report is to be trusted, and mortgage bailouts play out as proposed, mortgage fraud could end up costing taxpayers nearly as much.