In a mortgage fraud, insiders such as appraisers or brokers conspire to get mortgages for more than the actual value of the property then walk off with the difference. Each mortgage fraud scheme contains some type of material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan.

Kevin Reese, Fiducial's mortgage manager, acknowledged the problems caused by mortgage fraud schemes but says his team has not encountered any of these due to its precautionary measures in place.

"We don't operate in any gray areas -- it's all black and white," said Reese from his office in Indianapolis. "We don't charge excessive fees and all our mortgages are highly screened and scrutinized. The appraisers that we use are underwriter approved. If the chief appraisal is ever questionable then the underwriter will deny it."

Dreams can turn into nightmares

For small business owners interested in buying property, Reese reminds them that if they encounter a situation where things seem just too good to be true chances are it's a scam.

"As much as we want to believe that our property is worth three times as much -- the reality is it's not," he said.

When there's a boom in real estate, Reese says people are always trying to make an easy dollar on it with most of these frauds being sub-prime for people that have poor credit or some sort of credit issue.

Mortgage seekers sometimes seem to turn a blind eye when it comes to getting the deal of their dreams which usually turns out to be a nightmare instead. They get themselves in a bind and end up paying through the roof on closing costs.

"They think this is the only option and there are plenty of people willing to take their money," he said. "A lot of these laws have been in place for five to 10 years but the government has only been enforcing them recently."

For example, if a client bought a house in 2002 for $130,000 and then refinanced it in 2004 for $180,000, there's a good chance that something in the way the mortgage has been set up isn't quite right.

Reese's best advice to avoid any involvement in mortgage fraud schemes is to make sure that if you're purchasing a house or refinancing one, look at the Annual Percentage Rate (APR) on your good faith estimate which is inclusive of points that are being charged.

"The biggest way to make sure of your good faith estimate is to take a look at whether the APR is in line with your rate," he said. "It shouldn't get greater than .2 of your rate. So if you have a 5-1/4 percent rate it shouldn't be higher than 5-1/2 percent."

Attacking the problem head on

Experts maintain that it's difficult to determine just how pervasive mortgage fraud is in the lending industry, how many transactions are involved and what the exact dollar loss is.

"Lenders are saying this is a big concern on their radar screen and it's becoming an increasingly expensive problem," said Tim Doyle, a director in the Mortgage Banker's Association (MBA) office in Washington, D.C. "They're seeing a large amount of valuation fraud and valuation is the key to preventing losses on mortgage loans."

John Coliano, a supervisory special agent with the FBI in Washington, D.C., noted that the world's top crime fighting organization is leveraging its resources in trying to attack the mortgage fraud problem "head on."

"We can't stand by and let this go," said Coliano. "But the industry has to be aggressive. There's been a marked shift in the attitude when I got here almost two years ago. It's on the radar screens of most industry executives, it's in the eyes and minds of appraisers, mortgage brokers and escrow workers. There's heightened awareness and people should be on the alert for it."

Joining the fight with the FBI are a number of leading industry organizations such as the MBA, The Appraisal Institute, The National Association for Mortgage Brokers and the National Mortgage Association who are all working to make people more aware of fraud, providing information, education and methods to report fraud.

The latest trends show that insiders are using their industry name as a means to perpetrate mortgage fraud through identity theft, according to Coliano. Lenders are targets of identity theft organizations that are sophisticated at employing computer schemes and misleading mass media advertisements, mostly in newspapers or area mailers where a legitimate company name is used to attract attention before the potential client calls a phone number believing it to be the company listed. The company, incidentally, ends up getting billed for the ad.

One type of mortgage fraud known as flipping was quite prevalent in the mid-to-late 1990s but Coliano says that scheme has morphed into a different type of fraud where identity silent straw buyers and straw sellers are starting to become "more nouveau." In this fraud, schemers hold onto the properties longer, finding other ways to bleed equity out of the property.

The key thing to remember about most financial crimes is that they sometimes walk on the side of legitimacy. That's before you take a closer look.

"By the time you're into the third or fourth layer it's very apparent whatever the financial scheme or financial crime is," Coliano said. "You start to see the wheels coming off the car and see it's a fraud."

Tips on fighting mortgage fraud

On its StopMortgageFraud.com website, the MBA offers advice to help avoid mortgage fraud. These tips include getting referrals to real estate and mortgage professionals with a proven track record from friends, family co-workers and others you trust who also recently had a positive transaction. They should also check the licenses of the industry pros with the state or other local regulatory agencies and ask their trade group for background information.

Outrageously fantastic promises of extraordinary equity returns in short periods should be questioned, the MBA advises. Be wary of home buying deals offered by strangers making unsolicited contact by phone, email or in person. Also, shy away from high-pressure sales techniques and ask for written information, including comparable sales and other documents to verify the value of the property. Never buy a home with limited written information "attesting to the value of the home or to the experience and solid background of the company offering the deal."

The FBI's Coliano says for any business transaction you always need to seek prudent advice from leading industry professionals and talk to people that are knowledgeable within the financial industry such as attorneys, accountants and financial planners.

"Check more than one source and ask questions," he said. "You should come up with some industry norms. There's a myriad of educational and self-help information on the Internet. Be knowledgeable -- don't always believe what you read."

Doyle of the MBA pointed out that if anyone approaches you with a deal, do due diligence on what they're all about.

"Our industry members are constantly doing this," he said. "We have an industry database that tracks complaints against those in the mortgage field."

The small business owner and homeowner should take the time to ask the person presenting the "opportunity" if they are members of a national association like the MBA or National Association of Mortgage Brokers.

It's also a good idea for entrepreneurs and individuals alike to check their credit report each year for free from one of the three credit repositories to see if there's been any unauthorized access to their credit information. This will help guard against identity theft in mortgage transactions.

Most importantly, Doyle added that you should "understand what you're signing and agreeing to."

STEPHEN PAREZO is the Media Manager for Fiducial.