As Lenders Learn to Manage Fraud, its Nature Changes

Whilernoverall rates of mortgage related fraud appear to have fallen significantly inrn2011, some particular manifestations have increased dramatically according to arnnew report authored by CoreLogic.  Therncompany predicts that fraud related U.S. residential mortgage originations willrntotal $7.4 billion this year, a near 40 percent decline from the estimated $12rnbillion experienced in 2010.</p

Therndollar figure placed on fraud is down partially because of the decline inrnmortgage volume, but lenders are also better managing the situation.  CoreLogic said its Fraud Index whichrnrepresents the collective level of fraud risk the industry was experiencingrneach quarter, has remained relatively flat for the last five quarters and hasrndeclined more than 28 percent since its peak in the third quarter of 2007.  This indicates, Core Logic said, that lenders’rnimproved fraud controls have reined in fraud growth.  Fraud losses in 2011 are expected to be 75rnpercent below those when the CoreLogic began the study in 2005.</p

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Therntypes of fraud reported have changed significantly over the last year.  Property fraud, which increased only 4rnpercent between the first quarters of 2009 and 2010, skyrocketed 262 percentrnover the next four quarters. Fraud related to undisclosed debt grew at a slowerrnrate (19 percent) between 2010 and 2011 than in the 2009-2010 period (68rnpercent).  Fraud involving occupancyrnincreased 11 percent.  Identity theftrndropped by 45 percent during the recent period, fraud related to employment wasrndown 11 percent and fraud related to income was unchanged.   </p

Propertyrnfraud includes flips and flops, and distressed sales remain the source ofrnsignificant risk.  CoreLogic estimatesrnthat unrealized recoveries on short sale transactions may be costing lenders asrnmuch as $375 million a year. rnUnscrupulous investors, real estate agents, and other actors are preyingrnon delinquent borrowers and arranging same day flips through the short-salernprocess. </p

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Thernreport notes that FHA loans present significantly higher risk of fraud than thernnon-FHA counterparts.  The less stringentrnrequirements for loan-to-value and down payments leave borrowers with less “skinrnin the game” and lenders at risk for larger losses.</p

Inrncompiling its report, CoreLogic, a provider of information, analytics andrnbusiness services analyzed 10.5 million loan applications from the firstrnquarter of 2005 through the first quarter of 2011. </p

“Althoughrnour data shows the overall fraud rate has been relatively flat over the lastrnfew quarters, new fraud schemes are constantly evolving to infiltraternweaknesses and vulnerabilities in lenders’ fraud prevention programs,” statedrnTim Grace, senior vice president of Product Management and Analytics atrnCoreLogic.  “For example, the study showsrnthat the primary reason for the increase in property fraud risk is related tornpotential fraudulent flipping and flopping of properties. </p

Thernfive riskiest areas of the country for fraud-related originations are Chicago,rnWashington, DC; Brooklyn, NY; Atlanta, GA, and Jamaica, NY.  Each has a fraud rate that is at least 30rnpercent higher than the national average.</p

CoreLogicrnadvises originators to establish and optimize fraud prevention procedures byrncombining multiple alerts with predictive fraud scoring.  

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