By Thomas Brown

Homeownership is one of the great American Dreams. It provides a sense of accomplishment, safety and family pride. And in most cases, it is also a good financial investment. In fact, and in certain markets throughout the country, many homeowners have realized healthy returns on their investment as a result of a sizzling real estate cycle. Unfortunately, this has not gone unnoticed by fraudsters who thrive on bilking lending institutions out of billions.

Mortgage fraud can be as simple as a loan applicant lying about income or employment and as complex as a ring of conspirators using identity theft, fake appraisals and straw buyers to manipulate lenders into approving false mortgages. Additionally, the highly competitive mortgage environment has placed significant pressure on underwriting practices fueling explosive home values, making it an even more lucrative opportunity for fraudsters. This process forces lenders to drive up rates to cover additional costs, increasingly threatening the ability of homeowners to receive available mortgage funding for the “American Dream.”

According to the FBI, mortgage fraud is steadily rising, and brokers and lending institutions are all at risk of losing substantial amounts of money. These statistics show that reports of mortgage fraud have tripled to 21,994 in the last two years, and the dollar value of these alleged crimes has quadrupled to $1.01 billion.

Naturally this amount of fraud costs both businesses and consumers alike. Fraud increases the price of mortgages for all buyers as lenders pass on their higher costs. Even worse, the FBI indicates that the amount of deceit is undoubtedly much greater than the reports state.

So what exactly has caused a spike in fraudulent activity? The plunge in interest rates caused an increase in mortgage volume beginning in the mid 1990’s and again in 2002 when the federal government provided incentives to borrowing. To handle this demand, lenders quickly beefed up staff that often included inexperienced people who cut corners on the due diligence that could have prevented much of the fraud. What’s more, the willingness of buyers to pay ever increasing prices, often on an accelerated timeframe contributed to the amount of volume in the market making fraud even more difficult to detect.

The growing problem many banks and other lenders face is that fraudulent people and entities are increasingly finding new ways to mask themselves as credit-worthy mortgage customers. And the problem could get worse for many lenders. Before many real estate markets began to cool, banks could often curb their losses by reselling defaulted properties back into the rising market. This “window of opportunity” for banks will shut as the real estate market slows down.

Fortunately, there are technologies available to financial institutions to help reduce the risks associated with fraudulent mortgage applications.

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