Mortgage Fraud Could Reach $13B in 2012, "Unemployment Pressure" a Factor

By: Jann Swanson •

About $13 billion of residential mortgages originated in 2012 could contain fraudulent information, a $1 billion increase over estimates for both 2010 and 2011. CoreLogic's Mortgage Fraud Trends Report projects this increase because of sharp growth in the incidence of both employment and identity fraud coupled with higher mortgage origination volumes. 

CoreLogic's National Mortgage Fraud Index rose 6.23 percent in the first quarter of 2012 to 85 from 80 in the first quarter of 2011 and is up by 27.5 percent from its low point of 67 in the first quarter of 2009 to the highest level for the measure since 2007.  The index provides a relative basis of comparison over time for residential loan origination fraud risk and represents the collective level of mortgage fraud that is likely to occur.  It includes risk indices across multiple fraud types including employment, identity, income, occupancy, property and undisclosed debt.

Employment related fraud is described by CoreLogic as "swelling under pressure - unemployment pressure."  Employment fraud risk rose by 50 percent between the first quarter of 2011 and the first quarter of 2012 driven by continued challenges in the U.S. labor market. Florida, Nevada and Arizona, all with above-average rates of unemployment, lead the nation in employment fraud risk.  Identify theft has followed a similar pattern with a 44 percent increase over the same time frame.

The Income Fraud Index is trending downward, possibly as a result of the use of requests for tax transcripts on an increasing number of originations.  The Occupancy Fraud Index has been flat since the first quarter of 2011

The Property Fraud Index has decreased over the last four quarters but remains elevated because of increasing short sale volume, shadow inventory entering the market, and new GSE short sale guidelines,

Short sale fraud losses will reach approximately $325 million this year, representing a $25-million increase over 2011. The increase in short sale fraud losses is due to a projected 10-percent increase in short sale volume, which is expected to reach a five-year high in 2012. California, Florida and Arizona have the highest rate of suspicious short sales and account for more than half of all short sales in the U.S.

Nevada, Arizona, Georgia, Michigan and Florida experienced the highest levels of mortgage fraud risk at the state level. Chicago is the riskiest city for the second consecutive year followed by Atlanta; Oakland, Calif.; Orlando, Fla.; and Kissimmee/St. Cloud, Fla.

"Mortgage fraud is a multi-billion dollar criminal activity that continues to be a critical concern for the mortgage banking industry. Increased risk and financial loss associated with mortgage fraud has a direct negative impact on a lender's bottom line," said Susan Allen, vice president, Product Management for CoreLogic. "Heightened awareness and analysis of emerging mortgage fraud threats are vital as criminals continuously look for opportunities to gain an unscrupulous profit at the expense of the lending community, taxpayers and homeowners."

Going forward, CoreLogic outlines a number of challenges for the remainder of 2012;

  • Employment and income fraud risk challenges will continue, driven by low interest rates and unemployment. Best practices indicate utilization of IRS Form 4506T requesting tax transcripts and both written and later verbal verification of employment.
  • HARP loans continue to represent significant risk since borrowers typically have less skin in the game due to negative equity. Fraud prevention measures should include comparing current income and tax information to hardship affidavits and performing occupancy verifications.
  • Distressed sales will continue to be problematic as their volume increases. An effective consortium-based Short Sale Monitoring Solution can help stem the tide of potential losses.