Interthinx, a provider of comprehensive risk mitigation solutions, has released its 12^th quarterly report and its Mortgage Fraud Index which measures four types of fraud common to the mortgage industry.  The composite index for the first quarter of 2012 which is derived from the four underlying indices, dropped to 139, its lowest point since the second quarter of 2009.  This represented a change of -4.3 percent from the fourth quarter of 2012 and -3.1 percent from one year ago.

Nevada returned to the role of "riskiest state" after being displaced by Arizona in the fourth quarter.  Arizona fell to second place followed by Florida, New Jersey, and California.

Much of the report centers on those metropolitan statistical areas (MSAs) with the highest fraud risk.  Two MSAs in Florida, Cape Coral and Miami occupy the first and second spots with composite risk scores of 248 and 241 respectively.  They are followed by Modesto and Chico, California and Las Vegas. 

The report notes significant movement among MSAs as to the levels of fraud, the types of fraud, and their relative positions in the rankings since the previous quarter.  For example, Stockton, California had been the riskiest city for three consecutive quarters but saw a 24 percent decrease from the fourth quarter of 2011 to drop to 7^th place. 

The Property Valuation Fraud Index was 213, down 11.8 percent from the previous quarter and 4.7 percent from one year earlier.  Property Valuation Fraud is perpetrated by manipulating property values to create false equity which can be used for various purposes.  Florida led the nation in this type of fraud with five metropolitan areas (MSAs) in that state making in the top ten.  Cape Coral Florida had an index of 482, more than twice the national value, a major reason why it was also the riskiest MSA overall.  Las Vegas was second with an index of 440, but every MSA in the top ten had an index score of at least 401.  

The Identity Fraud Index was 140, down 2.2 percent from the fourth quarter of 2011 and 24.4 percent from the first quarter of 2011.  Identify fraud is frequently used in schemes to hide the identity of the offender and to obtain a credit profile that will meet lender guidelines.  The hot spot for this fraud was San Jose, California with an index of 293; Detroit was second and Ann Arbor, Michigan was in third place.

The Occupancy Fraud Index finished the quarter at 61, 23.2 percent lower than one year ago and down 2.1 percent from the previous quarter.  Offenders commit occupancy fraud by falsely claiming they intend to occupy the property they are purchasing in order to obtain a mortgage with a lower down payment or a lower interest rate.  Miami was the riskiest for this fraud, moving from second to first place even though its score of 104 was a decrease of 23.6 percent from the previous quarter.  Other MSAs appearing high on this list were Jacksonville, North Carolina; and Flint, Michigan.

The fourth type of fraud is measured by the Employment/Income Fraud Index.  This occurs when a mortgage applicant misrepresents income in order to meet underwriting guidelines.  Nationally this fraud risk has increased 18.1 percent over the last year and 4.5 percent from the fourth quarter of 2011.  Burlington, Vermont leads in this category of fraud risk with an index of 271, 80 points higher than San Diego which was in second place.  Eight out of the remaining nine MSAs in the top ten for this type of fraud are in California.

As interest rates declined the composition of loan applications in the Interthinx database have changed from a nearly 60:40 split between purchases and refinances in Q2 2011 to a 40:60 split in the first quarter of 2012.  The geographic changes that may have been caused by the composition shift were extremely granular in nature; however the type-specific risk indices did show some significant trends, especially in Identity and Occupancy Fraud Risk which saw decreases of 22 and 23 percent respectively and the Employment/Income category which increased 18 percent.  Both indices that decreased have lower values for refinances relative to purchases while the reverse is true for the Employment index.  Interthinx speculates that at least part of the major type-specific trends over the last year may be related to a change in loan composition. 

Interthinx maintains that its indices have proven to be reliable leading indicates of default and foreclosure activity therefore it advises that areas that bear watching going forward are Nevada and Arizona, the two riskiest MSAs in Florida, Cape Coral and Miami, and the New York Tri-State area where risk is rising in all three states, New York, New Jersey, and Connecticut.