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The best way to characterize the mortgage industry's battle against fraud is that as an industry it must fight the good fight. Mortgage fraud against lenders is growing faster than it has in the past, and they must be vigilant in protecting not only themselves as an industry, but also in protecting their clients and partners. The challenge in dealing with mortgage fraud goes beyond financial measures. As such, it is incumbent upon all industry participants that they take concrete steps toward reducing fraud and pushing those who commit fraud out of the business forever. For any company, long-term victory in the battle against fraud requires not only a spectrum of policies, processes, tools and techniques, but also their tenacious and consistent application. Thus effective and ongoing fraud prevention must be kept at the center of any company's radar screen -- because, by all indications, the crooks do not seem to be going away.

The best way to characterize the mortgage industry's battle against fraud is that we as an industry must fight the good fight. Mortgage fraud against lenders is growing faster than it has in the past, and we must be vigilant in protecting not only ourselves as an industry, but also in protecting our clients and partners.

We are developing new ways to defend ourselves against a rapidly changing adversary whose resourcefulness and damaging impact has grown. At the same time, this adversary is not an easy one to identify or protect against. The more I think about this issue, the more I feel that mortgage fraud, which impacts the U.S. economy, strikes even harder at the American dream of homeownersliip. The mortgage industry is an American institution built upon trust, optimism and opportunity. Losing the battle against mortgage fraud undermines this foundation and puts all of us at risk, both as consumers and industry leaders.

The issue with fraud in our industry is important enough that the Federal Bureau of Investigation (FBI), joined by the Department of Housing and Urban Development (HUD) Office of the Inspector General (OIG), the U.S. Postal Inspection Service, the Internal Revenue Service(IRS) and the Department of Justice (DO)) joined forces to launch Operation Quick Flip. It is designed to convey the message that federal law enforcement recognizes the fact that mortgage fraud is a threat to our nation. According to the FBI, "the federal agencies involved are targeting mortgage-fraud groups in order to disrupt and dismantle them permanently."

Our challenge in dealing with mortgage fraud goes beyond financial measures. As such, it is incumbent upon all industry participants that we take concrete steps toward reducing-and, hopefully, someday eliminating-fraud and pushing those who commit fraud out of our business forever.

A 'perfect storm' for fraud

While fraud has been an issue for many years in our business, the problems remained largely on an individual-loan level until the early 2000s. Then, at about the same time, came the historic low interest refinance boom as well as the catastrophic events of Sept. 11, 2001.

The unprecedented refi boom and 9/11 created an ideal cover, unfortunately, for illegal mortgage-related activities. For criminals, the refi boom meant that the mortgage industry was "where the money was." On the mortgage industry side, the huge increases in volume flooding through the system, coupled with the short supply of underwriters to meet the demand, made it much more possible to mask fraudulent activities. And on the law-enforcement side, any initial hints of a growing mortgagefraud problem came at a time when the FBI and other agencies were understandably focused on the more immediate issues surrounding 9/11. Those attacks drew the attention and resources of law enforcement at a time when their direct involvement might have slowed the sudden growth of mortgage fraud.

The mortgage industry, meanwhile, was so busy satisfying consumer demand that unscrupulous characters-and organized rings-were able to orchestrate widespread scams including flipping, straw buying and collaborative value inflation on a much more broad, systematic basis. Property flips now became organized schemes, with groups of properties being acquired from foreclosure or distress sales, overappraised, and loans obtained for much more than the value of the properties. Generally requiring the involvement of some parties from within the extended mortgage industry, property flips are the leading cause of the large losses the industry has seen in recent years.

The problem is not going away

The refi boom may be over, but mortgage fraud has not gone away with it. Quite the contrary: Mortgage fraud remains a central and critical issue.

The increase in fraud is well-documented in various statistics, including those from the FBI. According to the FBI, the reported loss due to mortgage fraud during fiscal year 2005 topped $1 billion, up from $429 million in 2004. At an FBI news conference, law-enforcement officials reported they had received 21,994 reports of "suspicious" real estate activity in fiscal year 2005, up from 17,127 in 2004. In addition, the number of pending mortgage-fraud cases being investigated by the FBI was growing, up to 721 in 2005 from 534 the previous year. While the rosters of arrests, indictments, convictions and-yes-prison terms, show that progress is being made, mortgage fraud is proving to be a persistent and widespread adversary.

And though the refi boom may have played out, new areas of mortgage industry growth can create new opportunities for the unprincipled to exploit. More subprime lending not only inherently equals more actuarial risk, but also can provide new and different vulnerabilities through which lenders can be defrauded, as subprime lending guidelines and activities provide unique opportunities for manipulation by resourceful criminals.

Also not to be overlooked is the fraud perpetrated by originators taking advantage of consumers (such as with premium skimming. Proactive lenders with a focus on fraud management watch for this, but it's one more example of the complexity of the challenge that faces the industry.

Where are you on fraud prevention?

Fraud is a critical issue on every lender's agenda today, though we're all at different stages of dealing with it.

Some lenders discovered the fraud problem early on. They may have taken some losses, but have rebounded by identifying techniques to manage these issues effectively and with minimum disruption to a good experience for the borrower. Automated tools, for example, have come into the marketplace to help lenders identify potentially fraudulent loans. These have brought about a big step forward for proactive lenders in their fraud-management efforts.

Some lenders continue to discover fraud, but only after "the horse is out of the barn." Once a lender uncovers a vein of fraud, immediate controls can only stop future violationsbut not the financial repercussions of the fraudulent loans already out there. For example, it can take 12 months or more before the loan defaults and the extent of the scheme is known, as perpetrators have become more sophisticated by maintaining loan payments for months to mask the scheme. By that lime, of course, the loans may be in the hands of secondary-market investors.

Best-in-class lenders are preventing fraud by having sophisticated, multilayered and continuously improving techniques in place for managing fraud risk. ABN AMRO Mortgage Group employs state-of-the-art technology, available within the industry as a part of an ongoing process to protect against fraud and to protect our consumers. Some of the latest fraud-detection technology available has components to better identify potential loan issues before they become a significant risk.

Some lenders may believe they have not experienced fraud-but the reality is, they may have and just don't know it yet. It's possible that they may have avoided the most costly frauds ... so far. But more likely is that either the fraud rings haven't discovered the lender yet, or the fraud has begun and simply hasn't yet been uncovered.

The bottom line is that regardless of the past, no lender can afford to be complacent about fraud going forward; it's too prevalent, too costly and still too profitable for the perpetrators.

Fighting fraud on many fronts

For any company, long-term victory in the battle against fraud requires not only a spectrum of policies, processes, tools and techniques, but also their tenacious and consistent application.

Like so many business issues, fraud prevention is first and foremost about people; it begins with the people we hire and the people with whom we do business. In your company, what are the screening processes for new employees? What are the screening processes for brokers and vendors with whom you do business? What are the controls surrounding the selection of the appraiser? Do you have strong controls surrounding the settlement agent process?

Beyond the people involved in your business, you must examine the tools and policies that govern their activities. Do you train your underwriters to look for suspicious transactions? Do you use an automated tool to detect fraud on individual loans? Do you have a risk-management process that is independent of the loan decision? Do you look for common trends in early-payment default loans and foreclosures?

Clearly, the battle against fraud extends to every aspect of a company's activity, both internally and with external parties.

This time it's personal

I think I speak for a lot of people who have made the mortgage industry their career when I say that mortgage fraud is not only a business issue, but a crime that makes us personally angry. Perhaps it's a sense of betrayal of the trust and optimism that are the essence of our field.

Those who perpetrate mortgage fraud against our industry are stealing money from us, from consumers and from the American economy. They necessitate controls and costs that unfairly inconvenience honest borrowers. In incremental and insidious ways, they are stealing opportunity from American families-particularly first-time homebuyers, immigrants and underserved markets, whose margins for approval and afford-ability can be razor-thin; thus, the increased costs of home lending created by fraud can, for some families, put a home just out of reach.

From a purely business standpoint, the numbing discovery of previously undetected fraud can have devastating and longterm consequences for one's company. To fall behind in managing the risks associated with fraud is a dangerous position to be in. Thus effective and ongoing fraud prevention must be kept at the center of any company's radar screen-because, by all indications, the crooks don't seem to be going away.

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