Urban myth: (n) a story that appears mysteriously and spreads spontaneously in various forms and is usually false.

This statement, by a purported fraud expert, reflected the prevailing attitude among lenders when it was published in a leading trade magazine in 2005: "Whether it's [borrowers] pretending to be someone they're not, whether it's stating they have more income than they do [fraud for housing is not really fraud because], they have every intention of paying the loan...Fraud for housing generally would be characterized as not particularly risky or particularly costly to the lender. When we use the word 'fraud' we're really talking about...fraud for profit...That's what really costs you money..."

Boy, was he ever wrong! The truth, according to Congressional testimony by FinCen's director in 2009, is that 66% of all mortgage-related SARs filed between 1996 and 2006 referenced fraud for housing. And, according to fraud expert Rachel Dollar, this "benign" type of fraud is costing lenders almost $70 billion per year.

How did this happen?

Those who bought into the myth that fraud for housing cases are harmless "one-offs" inadvertently sent the message to real estate agents, mortgage brokers and loan officers that it was OK to lie about the borrowers' qualifications because the ends-achieving the American dream of home ownership-justified the means. Some of these professionals then told their clients that it didn't matter what the loan application or the appraisal said so long as the payments were being made. And since fraud prevention was frequently viewed as a costly impediment to maintaining origination volume, some took shortcuts-like post-closing sampling, or using a fraud tool that looked only at collateral values-that were clearly not up to the task.

The problem is that fraud "for housing" requires a malignant network of professionals (who, by the way, all profit from bonuses, commissions, or additional business referrals) to succeed. Declining individual loans without putting them within the context of these networks is like bailing water out of a sinking ship using a small bucket without first plugging the source of the leak. It's the same with mortgage fraud because we all know that fraudsters who are turned away at one lender will simply go down the street to the next lender.

If all we do is decline to fund fraudulent loans (whether they are fraud for housing or fraud for profit), we are avoiding fraud, not preventing it. And until recently, we didn't really have a way to do much about that due to concerns about privacy and competition. The MERS FraudAlert gives us the opportunity to change that. An industry utility, FraudAlert provides an early-warning system to enable industrywide data sharing while protecting consumer and lenders' privacy. With an industrywide database of aggregated data on transactions, we have a chance to be as good at spotting fraud as is the FBI, which mostly uses aggregated data from closed loans. Actually, we can do better than the FBI because empowered by such data, we can actually prevent fraud, not just avoid it.

It is in everyone's best interests to participate and support this important industry development. By adding data to the FraudAlert system, the idea that nothing can be done to stop fraudsters will soon become nothing more than an urban legend.

Ann Fulmer is vice president, business relations, Interthinx. For more information, visit http://www.interthinx.com.