Quantifying Mortgage Fraud

The numbers are hard to come by, so in trying to put the size of mortgage fraud in 2007 into perspective, the F.B.I. relies on this statement in a new report:

The total dollar loss attributed to mortgage fraud is unknown. However, 7 percent of [Suspicious Activity Reports] filed during FY 2007 indicated a specific dollar loss, which totaled more than $813 million.

And this "is just the tip of the iceberg, reflecting only a small percentage of financial damage suffered by victims of mortgage fraud," the FBI said in a statement. (Echoing a very similar statement by the Mortgage Bankers Association in December.)

Cases of fraud are definitely on the rise. The suspicious activity reports filed by banks rose 31 percent in the 2007 fiscal year ending last October. And various sources have pegged the total potential loss anywhere between a couple of billion dollars to over $10 billion. Still, it's not that easy to tell if the dollar loss is also on the rise.

The reason is that if you go by the F.B.I.'s metric, then there is an argument for a stabilization, if not slight decline, in the dollar damage from mortgage fraud. Assuming roughly the same percentage of suspicious activity reports listed a dollar value, the losses listed on SARs in 2005 and 2006 were actually higher than the '07 figure. ($1,014 million and $946 million, respectively.)

This from the F.B.I.:

"The fact that only 7 percent of SARs from financial institutions documented a loss may be attributed to the fact that losses were unknown at the time of reporting, or fraud was discovered before loan funding, and therefore a loss was not incurred." (emphasis mine)

The Financial Crimes Enforcement Network (FinCEN), part of the Treasury Department, suggested the latter in a report issued this month. In fact, there was a big jump in dollar values reported on SARs -- 134% -- between 2004 and 2005. Awareness may also be increasing, explaining some of the rise in the number of SARs filed. Fraud is also more likely to happen when house prices are going up, according to this report from FinCEN. We haven't been in that territory in nearly two years. So, mortgage fraud is definitely above historical levels, but to say that it's accelerating doesn't seem to ring true.

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