An aggressive stand against
fraud by lenders is having an impact according to a new study, but attempted fraud
is still a problem in a significant percentage of loan applications and the
nature of the fraud itself is changing.
The 2010 Mortgage Fraud
Trends Report released today by CoreLogic is based on a proprietary predictive
fraud model developed by the company which uses pattern recognition to
determine a level of risk each quarter. The model produces a Fraud Index from a
representative sample of 80 million loan applications spanning the years from
2005 to 2009.
According to the report, fraud
risk in the mortgage industry is down 25 percent since its peak in the third
quarter of 2007. Still, there are
significant trends in mortgage fraud types and loan performance but, the study
found, these fraud attempts are changing and becoming better hidden.
Overall mortgage fraud
risk, including subprime loans, has been steadily decreasing since 2006 and
appears to have leveled off in 2009. However,
with subprime loans removed from the sample, fraud among prime loans was still
on the rise through the third quarter of 2007, even at a time when many of the
largest subprime lenders were going out of business.
The report found a high
correlation between fraud risk and subsequent default rates and that the Index
can be a leading indicator of future default issues. For example, of the top 12
highest ranking Fraud Index states in 2007, nine were in the top 12 highest
ranking default states in 2009.
As an example of the
changing nature of fraud, the study found that one in 200 short sales was deemed
"very suspicious" by lenders, based on a new sale transaction less
than 60 days after the short sale at a price more than 20 percent above the short
sale price. This is reflective of the
opportunity in the market where the volume of short sales increased 300 percent
between the first quarter of 2008 and the fourth quarter of 2009.
CoreLogic said that recognition
of mortgage fraud is up in the industry overall. Lenders are acknowledging the existence
of fraud in their portfolios and reporting more fraudulent loans than in the past. READ MORE.
On average, lenders are reporting 55 basis points of fraud on conforming loans,
and 122 basis points of fraud on Federal Housing Administration (FHA) loans.
One in 200 conforming loan
applications during the quarter contained misrepresentations in the file that
could lead to default. Lenders
identified the prevalence of various types of fraud as follows:
- Income: 31.0 %
- Identity: 12.6%
- Internal
Fraud: 16.8%
- Occupancy: 11.4%
- Property: 10.3%
- Employment: 8.1%
- Undisclosed
Debt: 4.0%
- Third
Party: 2.8%
- Assets: 2.7%
When the sample is
stratified, the model found variations in the types of frauds and types of
loans affected. While the entire report is not public, CoreLogic gave the
following examples in its press release:
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Income stratification found unexpected areas of fraud risk concern
in Wyoming in addition to well-known high-risk areas such as California and Georgia.
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Identity stratification confirmed that Arizona, a leader in credit
card identity fraud, is also at high-risk for identity fraud in the mortgage
industry.
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The Midwest and East Coast represent a significant risk for employment
and undisclosed debt fraud.
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Reported home equity line of credit (HELOC) fraud is highly
concentrated in California. Hotspots include Glendale, Pasadena,
North Hollywood, and San Jose. Multi-lien fraud was attributed as one
of the fastest growing fraud HELOC schemes.
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State level stratifications revealed Florida, North Carolina, South
Carolina, California, and Georgia as the highest ranking states
for mortgage fraud.
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When stratified by three-digit Zip code, some areas were found to have
three to four times the fraud risk of the national average. High risk zip codes were found in Jamaica, New
York; Orlando and Miami, Florida; Atlanta, Georgia; and Detroit, Michigan.
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Lenders and mortgage loan officers can have different Fraud Index
levels. A lender's fraud risk can vary based on their loan program, policies,
geographic footprint and pre-fund fraud prevention processes.
Tim Grace, senior vice
president of CoreLogic's Fraud Analytics said, "Lenders' aggressive stance
against fraud is having an impact. Our 2010 Fraud Index indicates that mortgage
fraud risk is on the decline. But with an estimated $14 billion in
fraud losses experienced in 2009 alone, fraud is still a major issue for the
mortgage industry."
READ MORE ABOUT MORTGAGE FRAUD