The 19th annual New England Mortgage Banking Conference was held last week in Providence, R.I.

Like the housing market itself, the types of mortgage fraud most prevalent in the industry are changing.

Identity theft is more rampant than many mortgage bankers think, said David Vinson, senior vice president of Kroll Factual Data in Colorado, during a session on mortgage fraud at last week’s annual New England Mortgage Banking Conference at the Rhode Island Convention Center in Providence. And if mortgage bankers do not stay vigilant by using the most recent tools to detect identity theft and other types of fraud, they could be liable. According to Vinson, ignorance of the law is no excuse.

“Judges have no sense of humor. Neither does the FBI,” he said at the event, which is organized by the Massachusetts Mortgage Bankers Association. The Warren Group, parent company of The Commercial Record, publishes the event’s program guide.

Massachusetts is one of the top markets for fraud, along with New York, New Jersey, California, Texas, Georgia and the area around Chicago, Vinson said. When housing markets across the country were hot, he noted, a lot of fraud was perpetrated by those who were flipping property. But since home values are depreciating in many states, property-flipping is not as much of a concern.

But as interest rates rise, so will fraud. The FBI noted a 107 percent increase in fraud in 2004, and in 2005 – out of a $3 trillion mortgage market – $1 billion worth of loans were fraudulent.

“That’s all they’ve identified,” Vinson said. “I promise you that every day forward Â… you will see more and more of that happening Â… they expect it will double again in the next 12 to 24 months.”

There is some type of fraud present in every portfolio, Vinson said. Most acts are not seen by the naked eye at the surface of the origination process.

“Fraud is out there waiting on its opportunity to erode your revenues,” he said.

And now, with the market cooling and interest rates rising, more people will not qualify for certain mortgage products, but they will figure out how to qualify, anyway. The easiest way for most mortgage companies to get hit is through loans in areas where they do not have offices or employees.

Vinson defined fraud for the group of mortgage bankers attending NEMBC as “an act, expression, omission or concealment calculated to deceive another to his or her disadvantage.”

Mortgage fraud involves intentional misrepresentation and is committed to gaining either money or property. And identity theft is one of the ways fraudsters are doing that.

Vinson’s company recently reviewed a portfolio of loans and, in the first file of 84 loans, found six that involved obvious misrepresentation. In a portfolio from another lender, of 2,000 loans that were reviewed, several of the loans were in the names of dead people. According to Vinson, 80 percent to 85 percent of misrepresented loans involve the misrepresentation of identity or collateral.

“It’s an easy thing today, unfortunately,” he said. “ID theft is becoming one of the more prevalent types of fraud today, and the reason is, it’s real simple – it’s easy to steal somebody’s mail.”

‘Bigger and Bigger’

Identities are not stolen via the Internet as often as people think, he said. A restaurant waiter or a gas station attendant is more likely to steal someone’s identity. It is relatively common for thieves to use second machines, under the counter, to swipe someone’s credit or debit card and access their information.

“Identity theft is going to become a bigger and bigger issue for you,” Vinson told the mortgage bankers.

But there are databases that use sophisticated mathematical algorithms that compare geographic and other data to find instances of identity theft, and he encouraged mortgage bankers to look into such products. “It’s just a flag that someone needs to check,” he said. “Identity theft is very difficult if you use the tools that are out there today … fraud programs today are dynamic. They are not static anymore.”

Because fraud practices change so rapidly, most of the tools used to detect fraud six months ago are not working today.

“It’s really incumbent upon [mortgage bankers] to find those tools and use them,” Vinson said. Behind identity theft, appraisal fraud is the second-most common fraud practice, but there are also tools that can detect that. And Vinson cautioned mortgage bankers who make loans in areas where there has been a flood or other natural disaster.

“You can just follow the trail [of disaster] and the fraud comes in right after it,” he noted.

Good due diligence starts at the origination process and follows through to securitization, Vinson said. He encouraged mortgage bankers to build best practices.

Forty-five percent of all first-payment or early defaults are due to fraud, and 25 percent of foreclosures are due to fraud. The average cost to the lender is $45,000 per instance, so it behooves mortgage bankers to find ways to detect fraud.

“You deal with it with every step of the process,” Vinson said. He cautioned that repository fraud checks are not enough, and that mortgage companies need other types of fraud detection.

He also pointed out some other aspects of mortgage fraud.

Some people who commit fraud do so to take advantage of the pre-approved offers for credit cards that flood the mailbox of a newly purchased home. In fact, some fraudsters will obtain a mortgage under a stolen identity, never live in the home purchased with the loan, but will pick up the mail and open credit cards under the stolen identity. Then they will max out the cards and leave the area. Because they never used their real name, they can be very hard to catch.

“Then you’ve got a default on your hands,” Vinson said.

He outlined some steps to take to prevent such fraud.

“First of all, hire good people, use your instincts, use technology,” Vinson said.

If a bad loan comes to light, it needs to be tracked. If fraud prevention software alerts the company to a name mismatch or other questionable information, it needs to be followed.

“Somebody needs to ask the question,” Vinson said. “There is no such thing as a false red flag on a fraud product.”

Mortgage companies also need to establish checks and balances, where more than one person in the company checks out possible fraud, he added.