Despite heightened vigilance by financial institutions, mortgage fraud remained at elevated levels in 2010, and is attracting organized criminal groups drawn by the chance to rake in “high profits through illicit activity that poses a (relatively) low risk for discovery,” the FBI says in a new report.

Financial institutions filed 70,533 “suspicious activity reports” with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) during the fiscal year ending Sept. 30, 2010, which detail $3.2 billion in losses from suspected mortgage fraud, the report said. That’s a 16 percent increase in dollar losses from 2009, and a 117 percent increase from 2008.

The FBI has struggled to keep pace, with pending mortgage fraud investigations totaling 3,129 in fiscal year 2010, up 12 percent from 2009 and 90 percent from 2008.

FBI field divisions with the most pending investigations were Las Vegas; Los Angeles; New York; Tampa; Detroit; Washington, D.C.; Miami; San Francisco; Chicago; and Salt Lake City.

Most suspicious activity reports involve loans originated years ago. In its most recent report, FinCEN said 79 percent of the 24,485 suspected cases of mortgage fraud reported by lenders during the first quarter of this year involved activities that occurred more than three years ago.

The FBI is concentrating on more recent loan fraud, revealing that “the majority” of cases it opened last year involved criminal activity that occurred in 2009 or 2010.

The FBI said it continues to support 25 mortgage fraud task forces and 67 working groups, using “sophisticated investigative techniques, such as undercover operations and wiretaps,” to apprehend criminals engaged in ongoing schemes.

The bureau said it has developed a technique it will use in the future to identify mortgage fraud schemes “using tactical analysis coupled with advanced statistical correlations and computer technologies.”

Mortgage data aggregator CoreLogic has estimated that about $12 billion in loans were originated with fraudulent application data in 2010.

At the end of fiscal 2010, the U.S. Department of Housing and Urban Development’s Office of Inspector General also had 765 pending loan-fraud investigations involving mortgages on single-family homes, up 29 percent from the year before and up 70 percent from 2008.

To identify geographic trends, the FBI report analyzed the bureau’s data and combined it with statistics collected by HUD-OIG, FinCEN, LexisNexis Mortgage Asset Research Institute (MARI), Interthinx, Fannie Mae, Radian Guaranty, CoreLogic, the U.S. Census Bureau, and the U.S. Department of Labor.

Combining information about actual fraud with vulnerability for fraud, the report identified the top 10 states for mortgage fraud in 2010 as Florida, California, Arizona, Nevada, Illinois, Michigan, New York, Georgia, New Jersey and Maryland.

Citing a source with “good access” but whose reliability “cannot be determined,” the FBI said Asian, Balkan, Armenian, La Cosa Nostra, Russian and Eurasian organized crime groups have been linked to various mortgage fraud schemes, such as short-sale fraud and loan origination schemes.

Mortgage fraud rings “recruit people who have access to tools that enable them to falsify bank statements, produce deposit verifications on bank letterhead, originate loans by falsifying income levels, engage in the illegal transfer of property, produce fraudulent tax return documents, and engage in various other forms of fraudulent activities,” the report said.

Perpetrators include mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives, and trust account representatives.

“Mortgage fraud perpetrators have a high level of access to financial documents, systems, mortgage origination software, notary seals, and professional licensure information necessary to commit mortgage fraud, and have demonstrated their ability to adapt to changes in legislation and mortgage lending regulations to modify existing schemes or create new ones,” the report said.

Fannie Mae reported that fraud on short sales and real estate owned (REO) properties continues to “thrive as a result of the opportunities created by defaulting markets.”

Fannie Mae is investigating fraud schemes perpetrated by real estate agents who manipulate multiple listing services (MLS) data to bolster sagging sales prices.

“Fannie Mae continues to investigate REO flipping involving real estate agents who withhold competitive offers on REO properties so that they can control the acquisition and subsequent flip,” the report said. Condo conversions represent 14 percent of Fannie Mae’s mortgage fraud investigations.

Freddie Mac is also seeing property flips with phantom rehabilitation to increase property valuations, and has been interviewing borrowers and their neighbors to determine if the rehabilitations are actually occurring.

Also, Freddie Mac is reporting that fraudsters continue to use transactional lenders such as “dough for a day” businesses that loan potential borrowers money so it will appear that they have assets when applying for a loan.

Inflated appraisals remain a problem for underwriters, with overstated comparable properties used to increase the value of the subject property. Perpetrators will either employ a rogue appraiser as a conspirator or falsify appraisal documents outright.

Lenders also view short-sale fraud schemes as an increasing threat.

One of the most common short-sale schemes involves “property flopping” — obtaining a property at less than its market value, then selling the property in a dual closing the same day or within a short time frame for a significant profit.

To pull off such property flops, the FBI said, fraud perpetrators may withhold the “best offer” to the lender, manipulate broker price opinions (BPOs) and MLS data, and engage in non-arm’s-length transactions.

They may resort to bribing brokers and appraisers, or refuse to allow the broker or appraiser access to the property unless they are present.

Fraud schemers may try to provide their own comparables to the appraiser, or take unflattering photographs of the property and point out defects to the appraiser.

To hide their involvement in short sales, they may sell properties to a limited liability company (LLC) or trust months before a resale, or sell a property to a family member or other party they control and deed the property back to themselves.

Although authorities believe most mortgage fraud schemes are never detected, hardly a day goes by without an announcement of new mortgage fraud charges or convictions. Many such announcements are cataloged on the website, Mortgage Fraud Blog, authored by an attorney, Rachel Dollar, who represents lending institutions in mortgage fraud cases.

A roundup of a few cases making the news recently includes:

A federal grand jury in Ohio charged a real estate agent in Cincinnati this month with fraudulently obtaining $6.9 million in loans on approximately 59 properties by convincing clients — including close friends and fellow church members — to purchase residential properties at overinflated prices.

Four people — including a mortgage company loan officer and a title company attorney — were indicted last week in Houston for their alleged involvement in a scheme in which straw borrowers were recruited to defraud lenders of more than $22 million.

An Edina, Minn., mortgage broker pleaded guilty on Aug. 10 of conspiracy to commit wire fraud for his role in a $20 million mortgage fraud scheme that involved 57 properties.  The Manhattan U.S. Attorney on Aug. 4 announced indictments of 15 people, including five loan officers, for their alleged role in a fraud scheme involving more than 100 mortgages valued at more than $58 million.

When borrowers cannot lock the price quote that was instrumental in their decision to select the lender, which is usually the case in the post-crisis market, the price they finally lock is more likely to be higher than the original quote than to be lower.

The major reason is that lenders can usually avoid reducing the price when a reduction is called for by a decline in the market price or by an upward correction of the borrower’s credit score. Most borrowers are content when the lock price is the same as the price they were quoted earlier.

The lock price can also be affected by corrections in property value and loan amount. The lender will replace the borrower’s estimate of property value with a figure drawn from an automated valuation program, but that figure could be adjusted later — perhaps a number of weeks later — when an appraisal becomes available.

Changes in property value may affect the price by shifting the ratio of loan amount to property value (called the “LTV”) into a higher or lower band. These bands are 65.01 to 70, 70.01 to 75, 75.01 to 80, 80.01 to 85, 85.01 to 90, and 90.01 to 95. Borrowers who take a loan amount that places them at the top of an LTV band are highly vulnerable to a price increase resulting from even a small reduction in value.

Better credit score doesn’t guarantee cheaper loan.

For example, a borrower who believes his house is worth $100,000 and applies for a $90,000 loan has an LTV of 90 percent. If the lender corrects the value to $99,000, the LTV jumps to the next-highest band, which requires a higher mortgage price — or perhaps outright rejection. To remain at an LTV of 90 percent, the loan amount must be reduced to $89,100, which requires a down payment increase of $900.

Of course, the corrected property value can be higher than the borrower’s estimate, but if the borrower is at the top of an LTV band, the value increase required to shift him into a lower LTV band must be large. To shift the borrower in the example above to the next-lower LTV band requires a corrected property value of $105,883, or a value increase of almost 6 percent. This compares to the negligible reduction in value required to shift him into the next-highest LTV band.

On top of that, when a significant value increase does shift the borrower into a lower LTV band, the lender may ignore it — and most borrowers won’t notice.

The borrower at the top of an LTV band is also in danger of being forced into the next-higher band if she encounters unanticipated settlement costs, including escrows, and doesn’t have the cash to cover them. For example, if the borrower at an LTV of 90 percent in the example must add $500 to the loan in order to cover an unanticipated expense, the LTV would jump to 90.5 percent, which places her in the higher band.

In sum, because of the tendency of borrowers to gravitate to the top of LTV bands, corrections in property value and in the loan amount are much more likely to shift borrowers into a higher-price LTV category than into a lower-price category.

Further, when corrections do shift the deal into a lower-price LTV category, the lender may not pass through the price reduction the borrower deserves. Few borrowers are alert enough to catch this.

This problem is beyond the reach of any mandatory disclosures. To be assured that they are getting the correct price, borrowers would have to have access to their lender’s internal pricing system — the same access the lender provides to its loan officers. The only lenders that do that now are the Upfront Mortgage Lenders listed on my website at www.mtgprofessor.com, which provide borrowers with the means of continually updating their price until they lock. The network I am developing will provide the same facility covering all participating lenders.

Ginny:  I owned three properties. Because of the economy, I moved out of my home (putting it up for sale) and into one of the apartments in a multifamily property I own.

After two years of wrangling with the first and second lenders on my home, we closed the short sale last week. Now it feels like I can get on with my life.

But as I’m trying to plan out my bills and finances going forward, I realized I’m not sure whether there are any property taxes I’m responsible for on the house that just sold. I had fallen behind on them. Will I be getting any sort of paperwork or anything for my taxes from the banks? –Andy G., Savannah, GA

Andy:  Congratulations on closing that short sale — it’s not an easy thing to do, and it appears that you exhibited a great deal of patience and a bit of a tough time in the process. Here’s to getting back on your feet!

In terms of the back property taxes you owed on that home, you should be free and clear of them going forward. Governmental property taxes convert into a lien on a property as soon as they are due — even before they fall behind, in most areas. That just means that your escrow provider and/or title insurer have to clear those tax liens, making sure they are paid up to the date of closing, before they are able to transfer clear title to the buyer.

In the average short-sale situation, what happens is that the seller’s bank(s) has to direct some of the proceeds of the sale to covering any back taxes on the property, agent commissions, transfer taxes and such before they can apply the rest of the sale price to cover the outstanding mortgage balance(s). When escrow closes, and I mean starting the day of or the day after, the buyer is responsible for property taxes incurred from that day forward.

In some transactions, though, there are back expenses that are not extinguished by a short sale.

The most common are homeowners association dues that are not paid off or waived in the short sale. Some HOAs will continue collection efforts on back dues — not as a lien against the property under its new ownership, but as a personal debt of the former homeowner.

The other are second or even third mortgages in which the lender expressly agreed to let the short sale go forward on the condition that the seller or former homeowner pay some or all of the outstanding balance over time.

Fortunately for you, it doesn’t sound like either of these apply in your situation; if you continue to owe your second lender, it would be pursuant to an agreement you signed with them, so you would be aware of that obligation.

Now to the question of paperwork. At or just after closing, depending on where you live, you should receive a document on legal-sized paper called a HUD-1 closing statement. As with any real estate transaction, hang on to that just in case you don’t get any additional paperwork from your lenders.

To the extent that some portion of your mortgage balances were forgiven by the banks, that gap — that deficiency — is normally subject to income taxes. It’s called cancellation of debt income, or CODI.

This sort of “income” (essentially a loan that was forgiven) is usually documented by the bank sending you a Form 1099-C, in January — just as if you’d earned that income. So, you might see two of these statements in the mail early next year.

I say “might” only because some of the mortgage lenders that are no longer operating as banks or lenders aren’t sending these statements out anymore. In that event, your HUD-1 might end up being the only documentation you receive.

But because you managed to close this short sale when you did, chances are good that you’ll be exempt from income taxes on your CODI “income” under the Mortgage Forgiveness Debt Relief Act of 2007. The act applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

You’ll still need to let the IRS and your state tax agency know of your short-sale specifics, but you’ll be able to invoke the terms of the act (most states now have parallel provisions) to avoid being charged with income taxes on the forgiven debt, assuming the home was actually your primary residence, your mortgage debt was $2 million or less, and certain other guidelines are met.

Visit this dedicated page on the IRS website for more details, and best of luck on your personal financial recovery endeavors.

It’s unusual for buyers to move into a home they’re purchasing before the transaction closes. Typically, the sellers turn their home over to the buyers at or after closing.

There are potential risks with buyers taking early occupancy. For example, what if the buyers decide after they’ve lived in the home for awhile that they don’t like it and they move out? They then cancel the contract and request that their deposit be returned to them.

Who is entitled to the deposit when a buyer defaults on a purchase contract is a legal question. The buyers and sellers would need to consult their real estate attorneys for an opinion on who gets the deposit.

Real estate law is rarely black and white. The buyers might not be keen on the home because they discovered defects after they moved in that hadn’t been disclosed to them during the transaction. This could lead to a legal battle that might delay the sellers putting their home back on the market.

There could be considerable costs if the house needs to be spruced up for sale again. If the market has changed, the property might not sell for as much as it did the first time. Add to this the costs of carrying the house: mortgage payments, insurance, maintenance, property taxes, and homeowners association dues, if there are any.

Other concerns have to do with insurance coverage. Who’s responsible if the buyers have a party and one of the guests falls and is badly hurt? Who’s responsible if some of the buyers’ possessions are stolen from the house?

HOUSE HUNTING TIP: Even though there can be serious problems with buyers taking possession before closing, there are times when it makes sense for the sellers to allow the buyers to move in early.

Make sure there is a written agreement that is specific to this situation where the buyers are taking early occupancy and is not a conventional lease agreement. Set the per diem fee high enough to give an incentive for the buyers to close as soon as possible and to cover the sellers’ carrying costs.

The agreement should provide for the buyers to take over the utility payments and carry insurance to cover their personal property, which won’t be covered by the sellers’ insurance. Also, ask the buyers to have their own liability insurance to cover any incidents that might occur during their early occupancy. The sellers shouldn’t cancel their homeowners insurance until closing. It will provide coverage for fire damage. It’s also agood idea for the sellers to continue yard maintenance.

Recently, a closing in Berkeley, Calif., was delayed due to the lender. The buyers had worked diligently to close on time. The lender told them their loan was formally approved and that there would be no problem closing on time.

The buyers had sold their San Francisco property. By the day they had to deliver possession to their buyers, the lender hadn’t issued loan documents to close on the Berkeley home and there was no certainty as to when they would.

The sellers of the Berkeley home had moved out of the house to make it available to the buyers on the contract closing date. They were convinced the buyers were qualified to buy the house and that they’d close the deal. So, they agreed to let them take early occupancy. In addition to a hefty per diem fee, the buyers agreed to pay a nonrefundable deposit if the transaction didn’t close. The closing occurred almost four weeks late.

THE CLOSING: Given the current lending environment, we are likely to see more situations like this. Although risky, there are times when it makes sense to be flexible.

Jeff Taylor, the former longtime leader of Wells Fargo’s reverse mortgage division, had a stock answer when applicants declined a reverse mortgage because they felt the rates and fees were simply too high. Taylor had done the research for his own mother and decided the reverse mortgage was the best strategy to keep his mother comfortable in her later years.

“Too high compared to what?” Taylor would say. “Selling your home, paying the closing costs, and then attempting to find another acceptable place? Have you ever tried to find a senior an acceptable place — especially if that person is a member of your family? If you did, good luck on being able to afford it.”

I thought about that answer the other day when a recent AARP study (the group formerly known as the American Association of Retired Persons) revealed that 31.6 percent of seniors have experienced a substantial decline in their homes’ values in the past three years, and a fourth have exhausted their personal savings.

Among the findings in “Recovering from the Great Recession: Long Struggle Ahead for Older Americans” was that 66.6 percent of the 5,027 respondents at or approaching retirement age have had to tap into their retirement savings accounts during the past three years. A quarter of those polled had exhausted their personal savings, making them even less prepared for retirement.

If those older borrowers had taken out a reverse mortgage three years ago, chances are they would not have exhausted their personal savings or tapped as much into their retirement accounts. They could have had a lump sum reverse mortgage, a monthly draw, a line of credit, or any combination of those, yet have made no payments.

A reverse mortgage historically has enabled senior homeowners to convert part of the equity in their homes into tax-free funds without having to sell the home, give up title, or take on a new monthly mortgage payment. Reverse mortgages are available to individuals 62 or older who own their home.

The maximum amount of funds received is based on age, current interest rates and a current home appraisal. Funds obtained from the reverse mortgage are considered tax-free.

The biggest lift to reverse mortgage credibility came in 1989 when the Federal Housing Administration agreed to insure the Home Equity Conversion Mortgage (HECM), which not only allowed owners over 62 to stay in their homes for as long as they wished, but it also protected the owner in the event the lender went out of business.

HECMs now account for nearly every reverse mortgage written today. Last year, AARP reported that approximately 93 percent of applicants were satisfied with the process.

The Housing and Economic Recovery Act of 2008 approved the HECM for Purchase program, allowing older homeowners to make a large down payment on a new home and then utilize the reverse mortgage as permanent financing.

The same law reduced the maximum loan fee on reverse mortgages to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of the home’s value or the county lending limit, whichever was lower.

Look at the cost of obtaining a reverse mortgage this way: Let’s assume the three-year decline in home values cited by the AARP report is lost — whether with a reverse mortgage or not. However, without the reverse mortgage, also lost are all/some of the owner’s savings and retirement funds. What also needs to be considered is the loss of any increase in the share price of stocks and bonds and interest paid on retirement funds.

For those who depleted savings, had the reverse mortgage been completed three years ago, only the loss in home value, amount spent and interest would be gone. Little, if any, other assets would have been touched.

The homeowner can never owe more on the reverse mortgage than the value of the home. If the home continues to go down, and/or the senior spends more than the home is worth, the senior will never have to come out of pocket to repay the lender.

Never owing more than the value of the home is one of the reverse mortgage’s “four nevers.” The three others are: payments are never required; the use of funds are never restricted; and the lender never takes title to the property.

Most seniors want to age in place, staying in the home they have now. How do you put a price tag on the anxiety of leaving their longtime home and the fear of finding a new one that meets their needs and expectations? Reverse mortgage funds can help them stay put and close to their friends, church and familiar environment.

It’s the time of year for weddings in faraway churches and family reunions in relaxing places. Perhaps friends (or friends of friends) have approached you about renting your home, or vacation cabin, when you are not using it this year. And, they are willing to pay — an amount in line with the best rental properties in the area.

Do you have to declare the income to the Internal Revenue Service on your annual income tax return? How much is too much before crossing into a different tax threshold?

While many families don’t charge a fee for letting friends use their home or getaway retreat for a special gathering (hoping they’ll return the favor when your daughter gets married), you can pocket any fair-market rent as long as the term is 15 days or fewer and you don’t claim any of the tax deductions typically allowed on rental property, such as for depreciation or maintenance.

This option can come in handy for folks who do not want to be in the rental game, yet occasionally find they could rent their place. It happens all the time for annual golf tournaments, arts fairs, theater festivals, auto races and jazz carnivals.

The rules change, however, if the getaway house becomes a designated rental or investment property. Under current federal tax laws, the owner can still use a rental vacation home for 14 days or 10 percent of the amount of time the house is rented, whichever is greater, without jeopardizing its status as a rental property and tax shelter.

The owner who designates his cabin as an investment property and rents “full time” is getting a couple of benefits: First, the renters are buying the house for him — somebody else’s money is paying off the mortgage. Second, he can depreciate the building — not the property it stands on — which can provide substantial tax benefits.

Depreciating an asset means you are taking a deduction for the value lost as an asset ages. According to the firm of Ernst & Young, the period of time over which you depreciate your property has long been the subject of controversy. Often, it depends upon when the property was put “in service.”

Investors in vacation homes must use the tax benefits from depreciation to cover their costs. What is left for them then is profit made from the appreciation in the value of the property.

The 14-day “maximum personal use” rule means a house at the ocean with a 90-day rental season can be owner-occupied for 14 days, instead of the nine days that would be allowed under the 10 percent rule. With longer rental seasons, however, the 10 percent rule can be a bonus.

For example, a mountain resort home near winter ski slopes and summer lakes might be rented for 250 days a year, allowing the owner to use it for 25 days. Personal use does come at a cost. Depreciation is limited only to the percentage of time that a house is rented. If you rented for 90 days and use it yourself for 10, you can take only 90 percent of the total expenses and depreciation.

But another way to catch a few hours at the beach without eating into or exceeding the 14-day or 10 percent limit is to clean the house yourself between renters. Days spent maintaining the house do not count toward the personal-use limit. And you can deduct travel costs to get to the house and expenses such as paint and cleaning supplies.

However, if the IRS determines that you were at the house more to sit in the sun than to clean the bathrooms and paint the porch, those days may be added to your personal use and could jeopardize your tax savings.

The house also must be rented at fair market value. If you rent to relatives at discount rates, the IRS may rule that the house is not actual rental property and disallow many of your deductions.