America's epidemic of mortgage fraud

The dramatic arrest of two former Bear Stearns managers, the first Wall Street executives to face criminal charges related to the collapse of the subprime mortgage market, made headlines around the world, but it was not an isolated incident.

Since March, America's law-enforcement authorities have made more than 1400 arrests nationwide in a major crackdown, dubbed Operation Malicious Mortgage. More than 53,000 cases of suspected mortgage fraud in cities and towns across America have emerged in the last year - about 10 times the level of reports in 2001 and 2002, according to the Treasury Department's Financial Crimes Enforcement Network.

The hunt for mortgage fraudsters is a major change of priorities for the Federal Bureau of Investigation, which has devoted much of its energies since 2001 to hunting down Al Qaeda sympathisers. But as Deputy Attorney General Mark Filip said: "Mortgage fraud and related securities fraud pose a significant threat to our economy, to the stability of our nation's housing market and to the peace of mind to millions of Americans."

Dozens of new cases of mortgage fraud on both the petty and the grandest of scales are coming to light every day to create a white-collar crime wave of epic proportions.

Sharon Ormsby, chief of the FBI's financial crimes section believes that large numbers of criminal and unscrupulous mortgage brokers and lenders were responsible for much of the subprime crisis that has crippled Wall Street. After all, it was they who sold many of the loans to the people who never had a chance of paying them back before they were bundled up into toxic bonds and palmed off on gullible traders. They were at the business end of a process that has so far led to more than $400 billion of writedowns and losses on Wall Street. What is more, annual losses from mortgage fraud are expected to soar to a record $5 billion this year. Ormsby's case load has risen more than 800 per cent from 7000 cases just five years ago.

One would think that as the housing market continues to crash and burn that the opportunities for mortgage fraud would diminish. But that is not the case. First, the FBI says, detection of crime tends to lag the market as the fraud only really becomes apparent once a property has gone into "foreclosure" - and is repossessed.

And there are far more opportunities for fraud in a down market as victims of foreclosure are vulnerable and therefore easier prey for the criminals. So far this year, more than 37,000 suspect cases have emerged in this second wave of scams and the rate is accelerating.

BUT OF all those suspected cases referred to the FBI only 1416 have actually been opened and investigated thus far, because manpower is spread so thinly. As those cases were opened, only 150 agents were available to solve them.

This realisation led to sweeping changes at the FBI's white-collar division earlier this month. Kenneth Kaiser, chief of the FBI's criminal investigation division, ordered 26 of the bureau's 56 offices to stop hundreds of investigations and to reassign all manpower to mortgage fraud investigations.

But more investigators are needed as the cases uncovered so far are proving to be more complex than anyone imagined. Indeed, many cases of mortgage fraud involve a ring of fraudsters operating in a gang comprising of lawyers, surveyors, building contractors as well as brokers acting in concert.