The rise in mortgage-fraud reports may, ironically, be a positive sign that the industry is trying to clean itself up.

With the housing market virtually shut down across huge swaths of the U.S. it’s a little hard to grasp how reported incidents of mortgage fraud nationwide could be dramatically on the rise, but it’s true.

The Mortgage Asset Research Institute, which tracks reports of fraud, said incidents rose 42% in the first quarter of 2008 over a year earlier.

But if hardly anyone is buying a home -- and that's not too surprising, given that sales of existing houses hit a 10-year low in the second quarter and prices have continued to slip in most metropolitan areas -- how can reports of mortgage fraud be on the rise?

The simplest explanation is that the numbers reflect an effort by the mortgage industry to clean itself up after years of lax lending standards.

“It’s not the fraud itself” that’s on the rise “but the discovery of it,” said Juan Boldiszar, a mortgage broker from Chicago.

In other words, the amount of fraud actually occurring in proportion to the number of mortgages originated is probably no greater than it was a few years ago, according to Boldiszar.

Instead, it’s the industry’s desire and ability to reveal fraud that’s surged -- and that’s a good thing.

“The people who perpetrated these schemes previously thought they’d be able to get away with it,” said Boldiszar.

For a while, they were right.

Just a few years ago, lenders didn’t check for fraud because lending guidelines didn’t require them to.

As long as everyone from the appraisers on Main Street to the investment bankers on Wall Street was making money from the sharp increase in the number of mortgages being approved, the lax standards were winked at and even encouraged. 

The fact was, all that easy mortgage money served not only as a catalyst for the housing boom earlier this decade, but also helped sustain it by allowing just about anyone to buy a house, whether they could afford to pay for it or not.

Products popular at the time included the now-notorious Alt A loan (often referred to as a "liar loan"), which required little -- if any -- verification of income. Because no one was asking any questions, these loans proved irresistible to would-be con artists. 

Everything unraveled when borrowers began defaulting on their loans and the domino effect coursed through the entire financial system, leading to today’s housing slump, credit crunch and general economic downturn.

Now, banks and other lenders have become far more cautious, combing through mortgage applications with a fine-toothed comb and calling in the proper authorities when things seem out of line.

It's this harsher scrutiny that explains the sharp increase in reported instances of mortgage fraud, according to Boldiszar.

What's more, as a result of the tougher scrutiny, many loans issued during the lax years are being revealed as fraudulent.

Now speculators who lied on their loans but planned to sell their properties at a profit before anyone noticed are finding themselves trapped and facing legal scrutiny.

“Once the credit crunch hit and there were no buyers, the guy who faked his income was no longer able to get out from under his lie,” said Boldiszar.

Meanwhile, MARI, the industry fraud tracker, said lenders need to remain vigilant if they hope to avoid large-scale fraud schemes designed to capitalize on the abundance of foreclosed homes dotting neighborhoods across the U.S.

MARI warned in a report announcing its second quarter findings that “mortgage fraud will not disappear -- in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry.”

Identity theft, in particular, is seen as a growing threat as lenders heighten their scrutiny of potential borrowers and the bad guys try to figure out ways to obtain homes under fraudulent means.

Consider this case in Florida, the state ranked number one by MARI for incidents of reported fraud during the first quarter of 2008.

Earlier this week, Delroy Patterson, 47, formerly of South Florida, pleaded guilty and was sentenced to two years in prison following his indictment with 10 others for falsifying loan applications, employment verification forms and salary statements, and inflating a bank-account statement in order to obtain mortgages.

Even scarier, however, was that Patterson and his cohorts stole drivers licenses and other forms of personal identification to purchase homes in other peoples’ names.

The mortgage industry expects more of this down the road. Since simply lying on a loan application is no longer acceptable, the bad guys will have to resort to more complicated schemes. And stealing the identifications of people with good credit precludes the need for lying (about oneself, anyway) on applications.