U.S. mortgage-fraud cost seen at $2.5 billion a year

NEW YORK (Reuters) - Losses from mortgage fraud such as lying on loan applications and inflated appraisals will cost the industry about $2.5 billion annually for several years, according to a report published on Thursday.

The $10 trillion U.S. mortgage industry became rife with fraud as looser lending standards and rapid price appreciation invited borrowers and lenders to twist the truth, research firm Tower Group said in the report. Property appraisers and closing agents were also involved, it said.

Suspicious activity reports, or SARs, to the U.S. Treasury soared an average 56 percent annually from 2002 to 2007, the report said. The rate will probably slow to 15 percent through 2010 amid strengthened regulation, and as lenders clamp down on practices and invest in fraud prevention tools, it said.

"The rate of increase in SARs will flatten significantly once the fraud that was perpetrated before the subprime meltdown is discovered" throughout 2008, analyst David Hamermesh said in the report.

The Federal Bureau of Investigation has estimated mortgage fraud cost lenders between $946 million and $4.2 billion in 2006, the report said.

But there is much fraud yet to be discovered in loans originated before the crackdown, Hamermesh told Reuters. Fraud is most prevalent in states where property values are falling the most, such as Florida, the report said.

Lenders that have been burned by losses will spend several hundred millions of dollars in the next few years to protect themselves, Hamermesh said. Mortgage companies will probably be more open to sharing their data to create better models of loan performance and identify fraud, he said.

"The benefit to the common good of improving lenders' ability to prevent fraud losses is too great for this data to remain proprietary," Hamermesh wrote.

(Reporting by Al Yoon; Editing by Neil Stempleman)