With the number of home loans shrinking because of the subprime meltdown and resulting tight credit, logic says mortgage fraud would be declining.

But a report this week by the Mortgage Asset Research Institute, of Reston, Va., showed fraud rose 65 percent in the second quarter over the same period in 2007.

"Desperation has an ugly face," said Abington appraiser Michael Frolove. "If you can't pay the bills or meet expenses, the pressure to commit fraud is even greater."

On the other hand, the institute "could be just discovering old fraud," said Philadelphia mortgage broker and Realtor Fred Glick.

Still, Glick agrees with Frolove's observation. "I am sure there are loan officers that need the money and will do anything," he said.

Their observations appear to be supported by the institute's report, which showed the greatest incidence of fraud was in California, Florida and Illinois, where foreclosures and falling home prices have been greatest.

There were no figures for the Philadelphia region.

Fraud can be committed by anyone in the mortgage process, from applicants to the mortgage company to the appraiser and the underwriter.

Most of the recent increase was attributed to misrepresentation on applications, such as an incorrect name or overstated assets.

"People commit fraud by falsifying documentation," said Jim Goldstein, branch manager at Gateway Funding, in Horsham. "In my opinion, fraud is up now because loans are being checked much more regularly and thoroughly now.

"The more you check," he said, "the more you find."

Peter Buchsbaum, branch manager at Arlington Capital Mortgage Corp. in Jenkintown, said every customer gives him an approximate income at application time, and then that figure is verified.

"A loan is still a loan in this environment," he said. "The borrower needs to demonstrate his or her ability to repay the loan."

Appraisers have no real way of telling if someone lied on an application or if the borrower and lender were in collusion, Frolove said.

"Where an appraiser might become party to fraud is if he or she lied by omission, not disclosing the truth about a neighborhood or even a block," he said.

No one is willing to predict how much fraud may become a factor in what could be a surge in mortgage applications in the coming weeks, as fixed rates continue to drop in the aftermath of last week's Fed decision to buy $600 billion in mortgage-backed securities.

The Mortgage Bankers Association reported yesterday that, even in a week shortened by the holiday, applications for new mortgages and refinancings rose 112 percent and 203 percent, respectively, from a week earlier.

"When rates plummeted following the Fed's announcement . . . many on the sidelines decided to take advantage of lower rates before they began to rebound," said Orawin Velz, the industry group's associate vice president of economic forecasting.

In the meantime, housing prices nationally continued to plummet, according to the IHS Global Insight/National City Corp. third-quarter update, issued yesterday.

Philadelphia-area prices were down 3.2 percent from the third quarter of 2007. Nationally, they were down 6.9 percent year over year.

Contact real estate writer Alan J. Heavens at 215-854-2472 or aheavens@phillynews.com.