Fraudulent activity on FHA-backed loans declines

Fraud was a major factor that contributed to the real estate bubble burst, but in the wake of the housing market collapse, this activity declined significantly.

Fraud was a major factor that contributed to the real estate bubble burst, but in the wake of the housing market collapse, this activity declined significantly.

Mortgage records indicate that incidents of misrepresentation on home loan applications backed by the Federal Housing Administration plummeted 40 percent during the course of 2011 from a year earlier, according to a report from Quality Mortgage Services.

Additionally, during the first quarter this year, fraudulent activity declined 31 percent to an estimated 17,651 alleged cases, down from 25,485 a year earlier, a report from the Financial Crimes Enforcement Network said.

"In 2011, there was more direct prefunding, tighter underwriting requirements and lender templates were a little stronger than FHA requirements, so it was harder to get a loan," said QMS president Tommy Duncan. "Much more documentation to support the data in the underwriting decision, along with a number of prefunding fraud prevention tools."

A lack of confrontation from lenders was a major issue that fueled mortgage fraud during the past decade, Duncan added.

Specifically, the omission of important information from prospective borrowers was one significant problem that a number of financial institutions failed to address. In certain cases this activity was detected but ignored by some lenders, as it could have negatively impacted their books of business. However, new efforts to eliminate this practice have been successful, the report said.

During recent years, the FHA also made notable changes to its streamlined refinance process, which increased indemnification demand on borrowers. Since homeowners are now required to provide more comprehensive documentation on income, employment data, assets and debt, this has made it more difficult to submit false information.

Agencies taking charge

The Department of Housing and Urban Development has also increased efforts to crack down on mortgage fraud, and is expected to continue these initiatives in the near future. Although the agency has numerous provisions in place to hinder this activity, it made few claims leading up to the housing crisis. 

Now that regulatory groups, such as the Consumer Financial Protection Bureau, have put new initiatives in place to prevent lending fraud and make the mortgage industry a safer place for Americans, questionable activity could decline further, bolstering the housing market recovery.



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