Cheating on mortgage applications is so widespread and so seldom punished that it’s fueling an increase in foreclosures that will prolong the housing slump, the counsel to the director of the Office of Thrift Supervision, which oversees savings and loans, Robert Russell, said.

Borrowers and brokers commit fraud when they exaggerate the applicant’s income, qualifying the borrower for a home he otherwise couldn’t afford. Such fraud robbed lenders of an estimated $1 billion last year, according to data collected by the Washington, D.C.-based Mortgage Bankers Association and the Federal Bureau of Investigation.

“Misstatements about employment and income are being made every day,” Mr. Russell said. “The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.”

Loans that require little or no documentation of income soared to $276 billion, or 46%, of all subprime mortgages last year from $30 billion in 2001, according to estimates from N.Y.-based analysts at Credit Suisse Group. Homebuyers with those loans defaulted at a 12.6% rate in February, compared with 1.5% of fully documented prime mortgages, said San Francisco-based First American LoanPerformance, a mortgage consulting group. A 2006 study cited by the Mortgage Asset Research Institute showed that almost 60% of stated income loans were exaggerated by at least 50%.

“Everyone calls these loans ‘liar loans’ because we know these people were lying,” a spokesman at the Reston, Va.-based Mortgage Asset Research Institute, Jim Croft, said.

Nancy Olland’s application for a mortgage said she made $6,900 a month. She needed that much income to qualify for her loan. The 48-year-old mental health therapist from Cleveland Heights, Ohio, actually makes $3,286, based on her pay stub. She said she wasn’t asked to document her income. She signed the application without reviewing it and discovered the discrepancy months later.

“I don’t know where the information came from,” Ms. Olland said. “I didn’t give it to my mortgage broker. Was it literally fabricated out of thin air?”

New Century Financial Corp., the second-largest American subprime lender last year, was Ms. Olland’s lender. New Century filed for bankruptcy on April 2.

“A lender funding the transaction doesn’t have an incentive to make a fraudulent loan,” a director at the Conference of State Bank Supervisors in Wash., Chuck Cross, said. “But the originator does not have the same economic incentive not to. He makes the fee regardless of whether the loan is good or not.”

With prices falling, it’s no longer as easy for homeowners to wring cash out of their properties by refinancing. New home sales slowed to a seven-year low in February.

Nancy Olland said the loan she took out last year is too expensive and she can’t make her monthly payments. She tried to contact the broker who wrote her mortgage, but she said she can’t find him.

The broker’s boss, William Gregg of Tanager Mortgage Group Inc. in Cleveland, said Ms. Olland’s broker was fired for not following the firm’s “strict guidelines.”

“I’m not stupid, but I handled this situation stupidly,” Ms. Olland said.