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Loan Fraud Declines as Lenders Recognize Risks
An aggressive stand againstrnfraud by lenders is having an impact according to a new study, but attempted fraudrnis still a problem in a significant percentage of loan applications and thernnature of the fraud itself is changing.</p
The 2010 Mortgage FraudrnTrends Report released today by CoreLogic is based on a proprietary predictivernfraud model developed by the company which uses pattern recognition torndetermine a level of risk each quarter. The model produces a Fraud Index from arnrepresentative sample of 80 million loan applications spanning the years fromrn2005 to 2009. </p
According to the report, fraudrnrisk in the mortgage industry is down 25 percent since its peak in the thirdrnquarter of 2007. Still, there arernsignificant trends in mortgage fraud types and loan performance but, the studyrnfound, these fraud attempts are changing and becoming better hidden. </p
Overall mortgage fraudrnrisk, including subprime loans, has been steadily decreasing since 2006 andrnappears to have leveled off in 2009. However,rnwith subprime loans removed from the sample, fraud among prime loans was stillrnon the rise through the third quarter of 2007, even at a time when many of thernlargest subprime lenders were going out of business.</p
The report found a highrncorrelation between fraud risk and subsequent default rates and that the Indexrncan be a leading indicator of future default issues. For example, of the top 12rnhighest ranking Fraud Index states in 2007, nine were in the top 12 highestrnranking default states in 2009.</p
As an example of thernchanging nature of fraud, the study found that one in 200 short sales was deemedrn”very suspicious” by lenders, based on a new sale transaction lessrnthan 60 days after the short sale at a price more than 20 percent above the shortrnsale price. This is reflective of thernopportunity in the market where the volume of short sales increased 300 percentrnbetween the first quarter of 2008 and the fourth quarter of 2009. </p
CoreLogic said that recognitionrnof mortgage fraud is up in the industry overall. Lenders are acknowledging the existencernof fraud in their portfolios and reporting more fraudulent loans than in the past. READ MORE.rnOn average, lenders are reporting 55 basis points of fraud on conforming loans,rnand 122 basis points of fraud on Federal Housing Administration (FHA) loans.</p
One in 200 conforming loanrnapplications during the quarter contained misrepresentations in the file thatrncould lead to default. Lendersrnidentified the prevalence of various types of fraud as follows:</p<ol
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When the sample isrnstratified, the model found variations in the types of frauds and types ofrnloans affected. While the entire report is not public, CoreLogic gave thernfollowing examples in its press release:</p<ul class="unIndentedList"<liIncome stratification found unexpected areas of fraud risk concernrnin Wyoming in addition to well-known high-risk areas such as California and Georgia.</li<liIdentity stratification confirmed that Arizona, a leader in creditrncard identity fraud, is also at high-risk for identity fraud in the mortgagernindustry.</li<liThe Midwest and East Coast represent a significant risk for employmentrnand undisclosed debt fraud.</li<liReported home equity line of credit (HELOC) fraud is highlyrnconcentrated in California. Hotspots include Glendale, Pasadena,rnNorth Hollywood, and San Jose. Multi-lien fraud was attributed as onernof the fastest growing fraud HELOC schemes.</li<liState level stratifications revealed Florida, North Carolina, SouthrnCarolina, California, and Georgia as the highest ranking statesrnfor mortgage fraud.</li<liWhen stratified by three-digit Zip code, some areas were found to havernthree to four times the fraud risk of the national average. High risk zip codes were found in Jamaica, NewrnYork; Orlando and Miami, Florida; Atlanta, Georgia; and Detroit, Michigan.</li<liLenders and mortgage loan officers can have different Fraud Indexrnlevels. A lender's fraud risk can vary based on their loan program, policies,rngeographic footprint and pre-fund fraud prevention processes. </li</ul
Tim Grace, senior vicernpresident of CoreLogic's Fraud Analytics said, “Lenders' aggressive stancernagainst fraud is having an impact. Our 2010 Fraud Index indicates that mortgagernfraud risk is on the decline. But with an estimated $14 billion inrnfraud losses experienced in 2009 alone, fraud is still a major issue for thernmortgage industry.” </p
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Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.
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