Loan Fraud Declines as Lenders Recognize Risks
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:
- Income stratification found unexpected areas of fraud risk concern in Wyoming in addition to well-known high-risk areas such as California and Georgia.
- Identity stratification confirmed that Arizona, a leader in credit card identity fraud, is also at high-risk for identity fraud in the mortgage industry.
- The Midwest and East Coast represent a significant risk for employment and undisclosed debt fraud.
- 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.
- State level stratifications revealed Florida, North Carolina, South Carolina, California, and Georgia as the highest ranking states for mortgage fraud.
- 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.
- 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."