WASHINGTON — The mortgage industry, applying far more scrutiny after a tidal wave of defaults, reported a record number of mortgage fraud incidents last year, with Rhode Island making its first appearance as the nation’s top fraud hot spot.
The number of mortgage fraud reports among loans made last year grew 26 percent from a year earlier, according to a study released Monday by the Mortgage Asset Research Institute.
The increase came as lenders dramatically tightened their standards, making it more difficult for borrowers to qualify for home loans without large down payments, solid credit and proof of their incomes. With credit far tighter, about $1.4 trillion in home loans were made last year, down about a third from a year earlier, according to trade publication Inside Mortgage Finance.
The recession has also increased pressure on shady mortgage lenders and brokers — as well as borrowers — to lie on loan applications, according to the fraud report. “There’s a lot more desperation, with the economy being what it is,” said co-author Jennifer Butts, one of its co-authors.
More than 60 percent of mortgage fraud cases last year stemmed from falsified applications, while 28 percent came from tax returns or financial statements, and 22 percent came from appraisals, the study said.
During the long housing boom, fraud was easy to conceal as long as home prices kept rising. But with prices sinking, the industry has every incentive to make sure loans are legitimate. Lenders are getting somewhat better at detecting fraud before loans are made, but “clearly there’s still a huge issue out there,” said Denise James, director of residential mortgage solutions for LexisNexis, which owns the mortgage research institute.
The information collected in the 11th annual report comes from about 600 mortgage companies, including small community banks, mortgage insurers and mortgage finance giants Fannie Mae and Freddie Mac.
Rhode Island’s place at the top of the report was a puzzle to its authors. The most prevalent type of fraud in that state was inflated home appraisals, while fraud on mortgage applications was the most common in the other states.
While reports of mortgage fraud in Rhode Island have been growing somewhat, the jump hasn’t been extreme, said Steven Cayouete, Rhode Island’s chief bank examiner. The state’s No.1 ranking “just doesn’t make sense,” he said.
Florida, which had been No. 1 for two straight years, dropped to No. 2. Illinois ranked third, followed by Georgia, Maryland, New York, Michigan, California, Missouri and Colorado.
The report does not detail the exact number of fraud cases nationally or by state.
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