By Celia Watson Seupel,
Special to CNBC
When real estate agent John Lebron opened EZ Investments in Tampa, Fla., he may have already been planning fraud. His very first EZ Investments transaction involved selling a distressed property to his sister, then to his brother-in-law, the kind of "non-arms-length" flopping that tips authorities to collusion. Lebron lost his real estate license and his liberty in April, when he was sentenced to 26 years in prison for a string of foreclosure and short-sale frauds.
Mortgage fraud is rampant in the U.S., with distressed homeowners offering a whole new market to criminals. The recent trend in rising foreclosures led to soaring rates of foreclosure fraud. The Financial Crimes Enforcement Network, or FinCen, reports a 58 percent rise in 2012's foreclosure-rescue fraud schemes, a rate possibly spurred by the "opportunity" created by government assistance programs.
Florida continues its run as the country's top state for mortgage fraud investigations, coming in No. 1 on the Lexis-Nexis Mortgage Fraud Index for the fifth year. With a Mortgage Fraud Index of 805, Florida had eight times the expected number of fraud investigations in 2012. It's closest second, Nevada, had only a little over 2½ times the expected rate. Plus, for the second year running, Florida came in first with the record number of defaults.
A newcomer to the Mortgage Fraud Top 10 also bears close watching: Ohio. Of mortgage frauds under investigation that originated only in 2012, Ohio ranks number one-indicating a recent fraud upswing in that state.
The last several years have also seen an uptick in collusion of industry professionals, resulting in an entire new index focused on collusion indicators alone. Collusion indicators, which are derived from public records, are based on factors like cohabitation, shared assets, family and business connections and other criteria, particularly relevant when a property has been transferred at a loss. Vermont ranks No. 1 in collusion indicators, with almost five times the expected number of incidents for 2012.
While FinCEN reports a 25 percent decline in Suspicious Activity Reports, or SARs, filed nationally in 2012, some analysts think the decline may be due, at least in part, to an overall decline in the housing market. According to National Association of Realtors spokesman Walter Molony, 2013 will see an estimated 11 percent increase in the housing market, creating all kinds of new opportunity for scammers.
Mortgage fraud is especially tricky, according the FBI, because scams morph with the market, always adapting to the latest trends. And although financial institutions file SARs by the thousands every month (there were 93,508 in FY 2011), it can take years after the fraud occurs before it is even discovered.
There are over a dozen common mortgage fraud schemes-application falsification, illegal flipping and flopping, short sales, equity skimming and more. The FBI and CoreLogic report that in 2010 more than $10 billion in loans originated with fraudulent application data, the most common kind of mortgage crime. Particularly brilliant hucksters manage to combine and pull off serial land and mortgage frauds that can bilk private investors and financial institutions alike out of millions. Two such alleged fraudsters were a couple living in Florida, Natalia and Victor Wolf. (CNBC's "American Greed: The Fugitives" reports on the notorious "developers" who vanished after their investors lost millions. Victor Wolf is pictured above.)
At the end of the housing boom, the Wolfs allegedly were engaged in every known type of mortgage fraud, said Roman Groysman, an attorney representing lenders in a lawsuit against the couple. "If one could teach a course on complex mortgage fraud and match it up against the allegations against these two individuals, I think there'd be little left to cover," he said.
"None of the lenders knew ... there were other lenders," FBI Special Agent Kurt McKenzie told CNBC. As authorities and investors began to close in on the Wolfs, the couple managed to quickly mortgage their opulent home-over and over again. There were private cash lenders, small business lenders and financial institution lenders. "By the time all was said and done," said McKenzie, "there were at least four to five loans, mortgage loans, on [the Wolfs'] house."
But when authorities went to the mansion looking for the couple, they found empty champagne bottles. The people who lost money by trusting the Wolfs have never been able to confront them. Unconfirmed reports place the couple at large in Moscow.
Upcoming changes to regulations may -- or may not -- affect rates of mortgage fraud. In January 2014, the Consumer Financial Protection Bureau will enforce new mortgage regulations that emphasize loan and borrower quality. "Under the new regulations for Qualified Mortgages," said CFPB spokesman Samuel Gilford, "certain loan features are not allowed any more, for example, balloon payments or interest-only loans or mortgages that last for over 30 years." The new Ability-to-Pay rule says borrowers must conform to a clear standard, and lenders will have to verify and document the lender's ability to repay. The no-doc loans of the past, says Gilford, "were much more vulnerable to fraud."
The latest fraud-detection tools are two new indexes in the Lexis-Nexis Annual Mortgage Fraud Report, which is available for public access: a foreclosure index, added this year, and an index of potential collusion activity, which makes its second appearance this year. The two new indexes join the on-going index of verified mortgage fraud and misrepresentation.
The potential for collusion is an important new index because in recent years, data analysis shows an increase in collusion involving multiple industry professionals. (The Collusion Indicator Index reports on the factors that make collusion possible or likely; not actual collusion.) "What the industry has found," Jennifer Butts, one author of the Lexis-Nexis report, wrote in a recent email to CNBC, "is that these indicators-properties transferred at a loss between known relatives or associates-is often an indicator of suspicious activity."
The more indexes a state appears on, according to the report's authors, the more "challenging" are the state's financial prospects for the coming years. New Jersey is the only state to appear on all three indexes. Five states -- Florida, Nevada, Illinois, Georgia and Ohio-appear on both the Mortgage Fraud Index and the Volume of Foreclosures Index. And New York and Delaware appeared on both the Mortgage Fraud Index and the Collusion Indicator Index.
Drilling down into the data reveals even more geographic information: For loans originating only in 2012, five "metropolitan statistical areas" represent 35 percent of all 2012 SARs.
More on CNBC:
Worst States for Mortgage Fraud
Mortgage Alert: Borrowers Change How They Cheat
Famous Fraudsters and Con Artists
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