U.S. Mortgage Fraud Will Reach $2.5 billion in 2008

I don’t usually write about U.S. Mortgage news unless it somehow effects us here in Canada, but this article I read had some staggering numbers of $2.5Billion.  Here in Canada were not that bad, as we do take pro-active measures to prevent these types of fraud.

A new study by a global consulting firm projects losses from U.S. mortgage fraud will reach $2.5 billion in 2008 with comparable losses to continue for “several years” through a veritable kaleidoscope of fraud schemes.

New research from Needham, Massachusetts-based TowerGroup found that current trends in mortgage fraud will culminate in about $2.5 billion in total losses in 2008 – with no signs of slowing in the years following.

Mortgage fraud is difficult to track and takes a variety forms – from illegal home-flipping to equity stripping to foreclosure rescue scams.

These crimes have left behind a trail of victims, many of whom are the most vulnerable members of the community.

“Much of the growth in mortgage fraud has been due to the ever-increasing sophistication of fraudsters’ schemes to fabricate the values of mortgaged property,” said David Hamermesh, senior analyst in the Consumer Lending research service at TowerGroup.

In 2003, the Federal Bureau of Investigation (FBI) received approximately 3,000 Suspicious Activity Reports (SARs).

By 2006, the number of SARs filed had skyrocketed to 35,000 – only to jump to 48,000 the following year.

While mortgage fraud filings in 2007 were 20 times that of 2003, the FBI indicated that they are already on track to report about 60,000 fraud cases in 2008.

The FBI only investigates cases that involve at least $500,000, but said that roughly 60% of the 1,210 cases opened in 2007 have estimated losses of more than $1 million.

According to the FBI, many of the mortgage fraud hot spots – like Florida, California, and Nevada – are also areas with the highest rates of foreclosure in the nation.

The study by TowerGroup suggested that the mortgage industry will be able to stem losses by deploying technology tools to assist in the detection and prevention of mortgage fraud.

“Fraud prevention is best done proactively, before the loan closes. Lenders must invest in analytical tools to identify loans at a high risk for fraud, while technology vendors must do more to improve the predictive power of the analytical tools they provide,” said Hamermesh.

“Technology companies that offer fraud detection solutions will need to develop professional services capabilities to provide lenders with file reviewers who are trained in assessing possible fraud. This service can supplement a lender’s own underwriters and be an efficient way to evaluate those loans flagged as most risky by automated scoring tools.”

TowerGroup projects that annual spending on anti-fraud tools by lenders will reach “several hundreds of millions of dollars” in the coming years.

The consulting firm expects that participants in the mortgage industry will come to recognize the value of pooling their data to support more accurate predictive modeling and working together on both proactive and reactive solutions. 

CMHC – 2007 Survey Results Summary

Our Industry is Well Positioned to Serve Canadians 

2007 was a great year for the Canadian ortgage industry and this was reflected in consumer responses in our Mortgage Consumer Survey. The consumer view of the Canadian housing market is a good news story: mortgage consumers are expressing positive opinions about the mortgage industry and about investment in real estate. Despite the recent negative press about the mortgage industry in the United States, the survey shows Canadians are not largely concerned about the Canadian mortgage industry with only one in seven respondents indicating that they are concerned. And a sizeable 70 per cent of respondents believe that the real estate industry is still as good an investment today as it was two years ago. A large proportion of consumers (89 percent) reported that the mortgage they chose was their best option, possibly reflecting the
many choices available in today’s mortgage market place. Additionally, 84 per cent of respondents indicated that there were suitable housing options accessible to them.

Canadian Mortgage Consumers Manage Debt Responsibly

Canadians feel confident in their ability to manage mortgage debt. This confidence in debt management appears tied to repayment goals; more than 75 per cent of survey respondents who bought a home within the last year say their goal is to pay off their mortgage as quickly as possible. In fact, many are taking steps towards that goal: one-third of purchasers have, at some point, made a lump sum mortgage payment, and a similar proportion had shortened their original mortgage amortization period. Well over half reported making weekly or biweekly payments, and the majority of these payments (84 per cent) are being made on an accelerated basis, shortening the original amortization period and reducing overall interest costs. Overall, Canadians remain fundamentally cautious with mortgage debt. That new homeowners intend to pay down principal early and are accelerating payments are good indications that their responsible behaviour will continue throughout the life of the mortgage.

2007 Was a Good Year for Mortgage Brokers

Broker share of origination in most segments showed gains in 2007 compared with 2006. Brokers gained most significantly
within the purchasers segment, increasing from 27 per cent in 2006 to 33 per cent in 2007. The survey also revealed that Canadians continue to be well served whether they arranged their mortgage through a mortgage broker or dealt directly with a lender. Brokers in particular made gains in key drivers of mortgage process satisfaction over 2006. According to more than 90 per cent of those using a broker recently, their broker listened to their needs, gave them a good understanding of the choices available, and found the best financing arrangements to meet their needs. Lenders also continued their strong showing on the key drivers of mortgage process satisfaction. Gains were noticed over 2006 for ease and convenience of arranging a mortgage as well as ensuring their customers got the best possible rate.

2007 CMHC Survey Key Findings:

• Our industry is well positioned to serve Canadians
• Consumers have differing attitudes towards debt
• Keeping in touch with your clients is critical
• Consumer satisfaction and loyalty remain strong
• 2007 was a good year for mortgage brokers

The Smith Manoeuvre – Toronto Star

The pitch sounds very seductive. “Go ahead. Make your mortgage tax deductible. Yes. It can be done. Yes it’s legal.”

The pitch is used to promote an investment technique called the Smith Manoeuvre.

According to Smith Manoeuvre Financial Corporation (smfc.com), “the Smith Manoeuvre is a financial strategy that simultaneously converts mortgage interest to tax deductions, shortens the amortization of your mortgage and builds a free and clear pension portfolio for your retirement – funded through your monthly mortgage payments and without requiring any additional monthly cash investment!”

The investment strategy is explained in a book called The Smith Manoeuvre: Is Your Mortgage Tax Deductible? by Canadian financial guru Fraser Smith (Outspan Publishing, $24.95).

But it may not be quite as rosy as it sounds.

Writing in the March issue of REM (Real Estate Magazine, remonline.com), a monthly publication for industry stakeholders, tax specialist Dan White sounds an alarm about using the strategy.

In providing a glimpse of the “dark side of the Smith Manoeuvre,” he cautions anyone contemplating using the technique to “think again and think carefully.”

Here’s how the program works: The homeowner obtains what the Smith people call a re-advanceable mortgage –which is basically a mortgage combined with a line of credit, where the balance can fluctuate from time to time.

Continue reading…