The Financial Crimes Enforcement Network released its full year 2011 update (.pdf) of mortgage loan fraud reported suspicious activity reports. It reveals a 31% increase in submission.It also shows some of the trends that lead to the 2008 financial crisis.
Financial institutions submitted 92,028 MLF SARs in 2011, compared to 70,472 submitted in 2010. Financial institutions submitted 17,050 MLF SARs in the 2011 fourth quarter, a 9 percent decrease in filings over the same period in 2010 when financial institutions filed 18,759 MLF SARs. While too soon to call a trend, the fourth quarter of 2011 was the first time since the fourth quarter of 2010 when filings of MLF SARs had fallen from the previous year.
Since 2001, the number of mortgage loan fraud SARs has grown each year.
The report pins the sharp increase in 2011 on mortgage repurchase demands. Those demands prompted a review of mortgage loan origination files where filers discovered fraud. In 2011 a majority of the SAR filings related to fraud that was more than 4 years old. So this is the fraud leading up to the bubble now being detected.
Simply redo the chart by focusing on the year of the fraudulent activity instead of the date of filing.
You can see the rise in fraud tracking the heights of the real estate bubble in 2005 through 2008.
Going back to the 2011 reports:
- 21% involved occupancy fraud, when borrowers claim a property is their primary residence instead of a second home or investment property
- 18% involved income fraud, either overstating income to qualify for a larger mortgage or understating to qualify for hardship concessions.
- 12% involved employment fraud
The up and coming frauds are related to the repercussions of the housing bubble.
Short sales are a source of fraud. SAR filers noted red flags in short sale contracts, such as language indicating that the property could be resold promptly, or “common flip verbiage” in the sales contract, or discovered that the “buyer’s
agent” was not a licensed realtor.
Several SAR filers described borrowers who “stripped” or removed valuable items from their foreclosed homes before vacating the premises. In one SAR, borrowers removed $33,000 worth of fixtures from the home, including major appliances and fixtures.