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Both states ranked in the top 10 for fraud cases in 2008, according to the Mortgage Asset Research Institute, and saw sharp jumps from the year before. Nationwide, fraud incidents climbed 26 percent, despite, or perhaps because of, increased scrutiny of lending habits.

There has been definitely more investigation of fraud as the mortgage crisis has deepened, law enforcement and banking experts say, and prosecutions are up in the St. Louis area, said Catherine Hanaway, U.S. Attorney for Eastern Missouri. Meanwhile the tough credit market has made it harder to get a loan, perhaps pushing more people to lie on applications.

"The data suggests that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud," said Denise James, who helped author the institute’s report.

Whatever the motivation, fraud has a big impact on neighborhoods. Many fraudulent mortgages end up in foreclosure, experts say, especially since it has become harder to sell or refinance properties to avoid a bank takeover. Those foreclosures, especially if there are several on a block, hurt the neighbors.

"It’s devastating," said Hanaway, who last fall launched a task force to combat mortgage fraud in the St. Louis area. "Property values around a foreclosed house decline, and the longer it’s vacant, the more rapidly they decline."

The leading cause of fraud last year, as usual, was falsified loan applications, but there are other factors, too faxless payday loans. In Missouri, 29 percent of cases involved appraisal fraud, in which an appraiser overestimates a property’s value so someone can borrow more than they should for it and pocket the extra cash.

People who have investigated mortgage fraud here say that is a particular problem in parts of the city of St. Louis, where house values can vary widely within a few blocks. The value of a beat-up vacant house can be inflated by a pricey piece of property a half-mile away. It happens most in areas that have already seen lots of foreclosure, neighborhood experts say, and drags them down.

"The biggest vehicle for this is using already-foreclosed property," said Gerry Connolly, a south St. Louis real estate agent who studies local fraud cases. "You have an area with a number of foreclosures, and the fraud kind of accelerates and triggers more of it."

The report also said banks and investigators are seeing more fraud related to foreclosure prevention schemes and identity theft, particularly targeted at the elderly and immigrant groups.

tlogan@post-dispatch.com | 314-340-8291

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