Based on the Federal Bureau of Investigation's (FBI) report released July 7, 2009, suspicions of mortgage fraud increased significantly in 2008.
During 2008, financial institutions reported losses of at least $1.4 billion, up by 83.4% over the 2007 level, and suspicions of fraud increased approximately 36.0% to 63,713 over the same time period. Interestingly, nearly two-thirds of all pending FBI mortgage fraud investigations during 2008 involved dollar losses totaling more than $1 million (basically McMansions; please see our "The Looming McMansion Attack"). The negative trend in the housing markets around the country have created an favorable environment for mortgage fraud schemes.
There typically two types of mortgage fraud. The first, fraud for property focuses on applicants making misstatements to obtain a loan (embellishing income and concealing debt), and the second fraud for profit focuses on elaborate schemes to focus on falsifying appraisals and loan documents, which include identity theft and shell companies.
Reports of fraud have not moderated during the 1H09 as losses are $208 million higher compared to the year ago level. The FBI believes attempts have the potential to spread as expectations for the current economic downward trend is expected to continue into 2009 and perhaps into 2010.
The top 10 mortgage fraud states were California, Illinois, Texas, Georgia, Ohio, Colorado, Maryland, Florida, Missouri and New York. Therefore it's extremely probable that financial institutions such as but not limited to Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), US Bancorp (USB) and Wells Fargo (WFC) will continue to experience negative credit quality trends during the coming quarters.