According to Ms. Epstein, "The FBI told the Journal that the percentage of white-collar agents and analysts devoted to prosecuting mortgage fraud is 28%. That's four times the number working on those types of cases in 2003 when it was only 7%. Lenders must file Suspicious Activity Reports when they suspect fraud. The number of reports being filed is up by nearly 700% between 2000 and 2006. In 2003 there were 436 active mortgage fraud cases and in 2007 the case load is 1,210."
One expert believes that half of foreclosures may be due to fraud.
Here's what's interesting: It seems likely that a big part of the run-up in housing values may also have been a result of fraud. Demand was inflated by fraudsters making bids on homes that they couldn't afford -- and lenders who were lending based on fraudulent misrepresentations.
How big of a role did mortgage fraud play in inflating home prices? It's impossible to know but now that the frauds are being exposed, we're seeing home prices dropping precipitously. And without mortgage fraud, there are fewer people with the resources to scoop up homes.
It's reminiscent of the last speculative bubble in the stock market, when share prices of internet stocks soared in part because wildly bullish research reports put out by analysts like Henry Blodget -- who, as it turned out, was in the pocket of the investment banking arm of his firm.
The tendency for fraud and speculative fever to go together runs through history, all the way back to John Law's Mississippi Scheme in the early 1700's.
This may help restore confidence in the notion of efficient markets, which is seemingly weakened by the occurrence of speculative bubbles: How could investors behave rationally when they were being defrauded. Maybe they were acting rationally -- based on the information they had, which turned out to be a lie.
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