Because of the recent mass increase in home foreclosures and defaults, the mortgage industry has lately begun applying more scrutiny to its proceedings. As a result, the number of reports of mortgage fraud has steadily been climbing. Last year, mortgage fraud reports jumped a full 26% from what they were in 2007.

Tighter standards are affecting new home loans

As reports of mortgage fraud increase, lenders are continuing to tighten their standards. Borrowers are finding it is now dramatically more difficult to qualify for a home loan than it has been in years’ past. Large down payments are now almost essential, as are solid credit ratings and verifiable proof of income.

Because of the tighter lending standards, only $1.4 trillion in home loans were issued throughout 2008. This was roughly only a third of the loans issued in 2007 (as reported by Inside Mortgage Finance).

Falsified applications are on the rise

The state of the economy and resulting recession has unfortunately sparked desperation for many people who need to secure new loans. Sadly, this means an increasing number of borrowers and mortgage lenders are falsifying their loan applications.

Roughly 60% of the mortgage fraud cases from 2008 came from falsified loan applications. In addition, inaccurate tax returns and financial statements contributed to 28% of mortgage fraud cases, and 22% of cases included imprecise appraisals.

Mortgage schemes are on the rise

One of the fastest growing schemes in mortgage fraud stems from shady characters who call themselves “foreclosure prevention specialists.”  They target distressed homeowners who are having trouble making their mortgage payments.

Such scam artists convince borrowers they can help them avoid foreclosure by promising intervention with their lenders that would result in lower monthly mortgage payments. Borrowers agree to new loan terms that appear to lower their payments. Yet in truth, they are essentially tricked into signing over the deeds to their houses.

In most cases, the lower payments borrowers think they’re obligated to last only for a short term. They are gradually instructed to pay increasingly higher amounts each month. Borrowers soon can’t make the new payments and, as per the terms of the agreement they signed, they lose their house to the foreclosure prevention specialists.

The elderly and uneducated tend to be targets for such scams, as they are more vulnerable and less likely to question the terms of a new payment agreement.

Though some states have tightened their penalties for scams like these, foreclosure fraud-makers are tough to catch. It’s difficult to prove they’re guilty and it’s rare that state attorney generals can successfully prosecute with criminal charges and jail time.

The housing boom planted the seeds for mortgage fraud

The long housing boom that the country enjoyed actually laid the groundwork for a significant amount of mortgage fraud. As long as home prices kept increasing, it was relatively easy to conceal most cases of fraud. Inflated home appraisals were particularly easy to keep under wraps.

Now, the tides have changed. As housing prices sink and the housing industry faces increasing scrutiny, lenders are much more motivated to make sure all loan information is accurate and that loans are legitimate.

New efforts to combat mortgage fraud are surfacing

In response to growing awareness of the mortgage fraud problem, law enforcement agencies are beginning to respond with prevention efforts. The Federal Bureau of Investigation (FBI) has already created a Washington-based national mortgage fraud team. The new team already has over 1,600 cases of open fraud investigation. This is more than double the amount of cases being investigated by the industry just two years ago.

Because of the jump in mortgage fraud, FBI investigators are targeting fraud schemes put into play by industry professionals. Some of these fraud schemes total several hundred million dollars. Until such schemes are under control, officials aren’t even able to focus on the fraud being committed by individual buyers.

Avoid mortgage fraud to stay free and clear in your home

Essentially, the heyday for mortgage fraud is quickly coming to a close. As the housing crisis is gradually repaired, the mortgage industry is bound to see better regulation against fraud and greater punishments for those who engage in it.

The best rule of thumb is simply to avoid mortgage fraud at all costs. This means you must be upfront with your lender about your finances and you must never “color” any numbers that represent your financial situation.

Finally, be sure to stay aware of mortgage schemes that could hurt you in the long run. Don’t agree to claim occupancy on a residence where you don’t intend to live simply because you’ll get a better interest rate. Don’t accept down payment gifts that have to be repaid (this is considered loan fraud). Don’t favor purchase contracts with sales prices that you know to be inflated.

Instead, pose questions to reliable sources whenever you find yourself unsure how best to proceed. And finally, be honest – in all respects, you’ll be better off in the long run.