Reports of mortgage fraud reached record highs in Maryland and the United States last year as more loan originators and borrowers resorted to falsifying documents and the home lending industry worked harder to detect problems, a study released yesterday showed.
Maryland jumped to fifth place in reported incidents of fraud, after ranking 15th in 2007, the Mortgage Asset Research Institute said in its 11th annual fraud case report, based on data submitted by mortgage lenders, bankers, insurers and others. The number of cases nationally rose 26 percent, researchers said.
More than half of the reported incidents in Maryland had to do with loan applications, which could include falsifying or misrepresenting information about income, employment, assets, debt or credit history, the research showed. The state had the highest percentage of tax return and financial statement fraud incidents in the nation, according to the report, which tracks cases in which a mortgage professional - lender, appraiser, title attorney or others - played a role.
Increased reports of fraud are another sign of the housing and real estate meltdown that in part led the nation into recession. As home values skyrocketed at the height of the housing boom, mortgage loans with loose lending standards were readily available to meet growing demand from consumers and investors. The recent credit crunch has forced lenders to tighten standards, making it more difficult to get a loan.
"With fewer loan originations today, the data suggests that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud," said Denise James, director of Residential Mortgage Solutions for LexisNexis Risk & Information Analytics Group, which owns the group that did the study.
Rhode Island ranked first in the country for incidents of mortgage fraud, followed by Florida, Illinois and Georgia, according to the group's index. Last year marked the first time Maryland has appeared among the top 10 states for mortgage fraud.
"It's understandable the fraud would be exposed in periods of declining real estate prices," Maryland U.S. Attorney Rod J. Rosenstein said yesterday. "People got away with this when prices were rising."
Rosenstein said the increases are consistent with what his office is seeing. The U.S. attorney has several investigations under way that involve a "substantial number of properties" and "hundreds of millions in mortgage loans that were initiated as a result of fraud," perpetrated either in applications or in settlement documents, he said.
Some of the cases, he said, center on "corrupt mortgage broker operations ... that help borrowers create fraudulent loan applications, and direct business to appraisers willing to put whatever value they need on the property." Often, the borrower has no real ability to repay, he said.
Last month, city, state and federal leaders from 17 agencies set up a Maryland mortgage fraud task force to prosecute scam artists.
The research institute said yesterday that reported mortgage fraud has become more prevalent now than in the heyday of the loan origination boom.
That could be because of better detection at the front end of the origination process and better reporting of fraud by members of the lending industry, researchers said. And some of the fraud has been detected and reported as more borrowers default on loans, said Jennifer Butts, a co-author of the fraud report.
One mortgage broker said lenders are more vigilant than ever in checking loan information.
"Lenders and brokers get a lot of blame," said Neil Sweren, president of Allymac Mortgage Services in Owings Mills, who has been in the business for 20 years. "It's an uphill battle we fight because you're dealing with borrowers who are increasingly creative, and we have to keep getting better and better at trying to figure out and decipher the information."
Thomas Shaner, executive director of the Maryland Association of Mortgage Brokers, said he was surprised to see Maryland jump from 15th place to fifth in fraud incidents given that loan originators in the state are now required to be licensed and can face loss of license or even jail time for committing fraud.
"It is a desperate time out there," Shaner said. "And as you get nearer to foreclosure, you might have a tendency to embellish, trying to make the numbers work to save yourself."
Opportunities have too often existed for unscrupulous professionals, said Eric Schwartz, a past president of the Maryland chapter of the Appraisal Institute. Fraud can occur in appraisals when the value of a home is misrepresented, either valued at well over its market value or compared with homes that are well out of a similar price range or if problems inside a home are not reported.
"As an appraiser, you can get pressure ... to push the envelope on valuation," he said. "That's so common."
Nationally, application fraud was the most common type reported last year at 61 percent. In second place was fraud related to tax returns and financial statements.
Researchers said the problem is being made worse by newer scams, such as "foreclosure assistance" programs.
In December, the head of the Lanham-based Metropolitan Money Store Corp., which promised to help people facing foreclosure, pleaded guilty in U.S. District Court to conspiracy to commit mail and wire fraud as part of a series of mortgage fraud schemes.
The report was presented yesterday during the Mortgage Bankers Association's annual National Fraud Issues Conference in Las Vegas. MARI's state rankings come from its Mortgage Industry Data Exchange database, an aggregation of reported incidents of fraud and verified misrepresentation submitted by mortgage industry participants.
Baltimore Sun reporter Hanah Cho contributed to this article.