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The wave of lawsuits and other demands from investors in mortgage-backed securities contributed to a big spike in reports of likely mortgage fraud during the second quarter, according to a Treasury Department report.
The department's Financial Crimes Enforcement Network said Wednesday that it received 29,558 tips about possible mortgage fraud in the April-to-June period, an 88 percent leap from 15,727 in the 2010 second quarter.
A large majority of the tips examined during the second quarter involved mortgages closed during the height of the real estate bubble, the report said. In fact, 81 percent of the tips involved suspicious activities that occurred before 2008, while 63 percent involved mortgages inked four or more years ago.
The network receives the tips, called suspicious activity reports, because it enforces the law requiring banks to tell the government about questionable financial transactions. The agency helps track illegal money transfers, catch money launderers and shut down accounts linked to corrupt political leaders.
The spike in reports "is directly attributable to mortgage repurchase demands and special filings generated by several institutions," the report said. Director James H. Freis said the age of the loans in question is "an indication that financial institutions are uncovering fraud as they sift through defaulted mortgages."
When banks bundled loans into bonds or resold them, the bonds were insured against default by bond insurers and the government-controlled mortgage giants Fannie Mae and Freddie Mac. To protect the insurers, the banks agreed to buy back loans that turned out to involve mortgage fraud.
Now, repurchase demands from investors are increasingly coming through investor lawsuits. Such lawsuits typically highlight individual instances of borrowers omitting or misrepresenting their financial status to demonstrate that the mortgages backing the investments were faulty.
The report said fake documentation, followed by debt-elimination scams and scams involving the fraudulent use of Social Security numbers topped the types of suspicious activity reported.
Among the most recent lawsuits were a series of 17 filed Sept. 2 by the government against some of the world's biggest banks.
Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Morgan Stanley, Ally Financial Inc., formerly known GMAC LLC, Deutsche Bank AG, First Horizon National Corp., General Electric Co., HSBC North America Holdings Inc., Nomura Holding America Inc., and Societe Generale were all accused of selling mortgage-backed securities to Fannie Mae and Freddie Mac based on faulty documents.