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CHICAGO (Reuters) - As the U.S. housing meltdown forces hundreds of thousands of Americans from their homes, the extent to which fraud was a factor in the crisis is just coming to light.
Products such as stated-income loans -- known as "liar loans" because no proof of income was needed -- led to widespread misrepresentation by borrowers about their earnings.
But far more sinister forms of fraud, including identity theft and "straw buyers" -- those created using fake documents -- are also coming into the open.
Mike Reardon of nonprofit lender Neighborhood Housing Services of Chicago (NHS) points out two such properties, both boarded up, on South Rockwell Avenue in Chicago's blue-collar South Side.
The owner of one of the homes was traced to Texas, he said.
"Turns out it was a case of identity theft," Reardon said, shaking his head. "He had no idea he owned a home in Chicago."
Across the street, he points to another boarded, slowly rotting home, which had last been sold to a woman named Susan Haas.
"I may be wrong, but I've been looking for months and months and I can't find any proof Susan Haas exists," he said.
Many fraud schemes kept running as long as cash kept flowing from Wall Street. Once the credit crunch turned off the supply of easy money, the perpetrators simply walked away.
Estimates vary as to how prevalent fraud was during the boom.
Arthur Prieston, chairman of the Prieston Group, which provides mortgage-fraud insurance and training to lenders, said that "at least 30 percent of the loans out there contain some form of misrepresentation."
"But because lenders often have to sell off properties quickly to cut their losses, we will never know exactly how much mortgage fraud has been committed," he added.
Prieston estimates that mortgage-fraud losses were around $4.2 billion for 2006, adding that figures for 2007 "will be much higher."
In a recent case in Chicago, he said the authorities prepared to file charges against a woman who had fraudulently bought five properties.
"When we turned up to serve papers on her, we found she was 9 years old," he said. "Her uncle had stolen her identity."
The mortgage scam known as identity theft is relatively simple -- the perpetrator uses a stolen identity to buy property with no money down, then rents it to tenants until it goes into foreclosure, collecting rent but never making a mortgage payment.
A far more lucrative scam, using what are known as straw buyers, happened was much more common, according to Boston-based real estate analyst John Anderson.
"The vast majority of the cases I'm aware of involved straw buyers," he said. "Thanks to products like stated-income loans, people walked away with a ton of free money."
All you needed was to buy a foreclosed property at a bargain price, have it falsely appraised with a grossly inflated value, then sell it to a straw buyer at a big profit. The straw buyer never makes a payment and the home goes into foreclosure. The process was often repeated over and over again.
"We've seen some properties that were sold like this dozens of times," NHS' Reardon said. "This artificially pushed up prices in some neighborhoods and when those fake buyers walked away, the abandoned homes pushed prices down."
"The real victims are the genuine borrowers who bought here at inflated prices and are stuck now with mortgages worth more than their homes," he added.
False appraisals were also used to fool genuine borrowers.
"We get a lot of cases involving fraud that we refer to the state attorney general," said Lori Gay, CEO of Los Angeles Neighborhood Housing Services, a nonprofit lender that also offers financial counseling services. "Some 15 to 20 percent of the cases we see have some element of fraud."
The U.S. Federal Bureau of Investigation saw Suspicious Activity Reports (SARs) related to mortgage fraud rise to 47,000 in 2007 from 7,000 in 2003, spokesman Stephen Kodak said.
"This year it looks like we're on track for 60,000 SARs, which is a significant rise," he said. "This has required more allocation of manpower to mortgage fraud cases."
Prieston, the mortgage insurer, said that had major lenders been proactive in checking the identities of the people who were buying properties using stated-income loans and similar products, then a lot of fraud could have been avoided.
"A lot of lenders claim they were victimized by fraud but helped to constitute it by looking the other way," he said. "The sad fact is that the vast majority of mortgage fraud out there could have been prevented."
Anderson, the Boston-based real estate analyst, is among those who were warning for years that easy credit created an easy climate for fraud. "The banks on Wall Street had to know there would be fraud. If they didn't they're morons."
Reporting by Nick Carey; Editing by Eddie Evans