One in 200 Mortgage Applications May Contain Bad Data: CoreLogic

The risk of mortgage fraud continues to decline, but one in 200 conforming loan applications could still contain misrepresentations in the file that could lead to default, according to projections in the July 2010 edition of the CoreLogic (CLGX) Mortgage Fraud Trends Report (download here). Overall mortgage fraud peaked in Q306, CoreLogic said. But when subprime mortgages were removed from the equation, the peaked shifted to Q309. CoreLogic said its data shows mortgage fraud in prime lending was still on the rise through the peak in Q307, even when many of the largest subprime lenders were going out of business. Since that time, non-subprime mortgage fraud is down 25% at the end of 2009. The timeline below tracks non-subprime mortgage fraud, along with various milestones in the industry. Santa Ana, Calif.-based CoreLogic, which provides consumer, financial and property information and business services, produces a predictive and statistical fraud index, which analyzes data from 80m mortgages, which accounts for 65% of the Federal Housing Administration (FHA), conventional, jumbo, prime, subprime and Alt-A loans originated between 2005 through 2009 and compares them to current mortgage application data on a quarterly basis. The annual report covers fraud risk up to Q409. “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 $14bn in fraud losses experienced in 2009 alone, fraud is still a major issue for the mortgage industry,” said Tim Grace, CoreLogic senior vice president of Fraud Analytics, said in a press statement. “While the industry has done good work there is evidence that fraud patterns are changing and becoming increasingly better hidden,” Grace added. “By sharing fraud patterns with each other through CoreLogic fraud consortium members’ meetings and by statistical pattern recognition fraud scoring, lenders can help stay on top of these new trends and keep risk down.” CoreLogic said its research finds a correlation between fraud risk and subsequent default rates. Of the 12 states with the highest instances of mortgage fraud in 2007, nine were among the top 12 states with the highest mortgage default rates in 2009. Florida, South Carolina, North Carolina, California and Georgia are the highest-ranking states for mortgage fraud, CoreLogic said. Other notable states in the report include Wyoming, where income-based fraud is on the rise. In Arizona, where credit card identity fraud it high, identity-based mortgage fraud is also high. The Midwest and East Coast regions represent a significant risk for employment and undisclosed debt fraud, the report added. On a more drilled down level, CoreLogic said three-digit ZIP codes in Jamaica, N.Y., Orlando, Fla., Miami, Fla., Atlanta, Ga., and Detroit, Mich. lead the nation — sometimes with fraud rates three to four times higher than the national average. In addition to having a high rate of mortgage fraud, fraud in home equity lines of credit (HELOC) is highly concentrated in California, particularly in Glendale, Pasadena, North Hollywood and San Jose. The mortgage industry is doing a better job identifying potential fraud, CoreLogic said, adding lenders are self-reporting more instances of fraud than in the past. In 2009, lenders reported $14bn in funded fraudulently obtained mortgages, about $0.55 per $100 for total mortgage originations in 2009. In its annual mortgage fraud report, the Federal Bureau of Investigation (FBI) said the number of suspected mortgage fraud activities reported to law enforcement grew 5% during fiscal year 2009 to 67,190. The reason CoreLogic’s projections of future fraud are down but reporting of fraud instances is up is due to the lag time between when a loan is funded and it is identified as fraudulent, a period of approximately three years. The industry is just now identifying fraudulent loans that were originated in 2007. In addition, the industry is now more pro-active in reporting fraud. Lenders also identified signals of fraud in nearly one in every 200 short sale transactions. Short sale volume is up more than 300% from Q108 to Q409. Lenders reported “very suspicious” short sales when there was a new sale transaction less than 60 days after the short sale and the sale price was more than 20% higher than the short sale price. The most common types of misrepresentations experienced by lenders were: Income 31% Identity 12.6% Internal Fraud 16.8% Occupancy 11.4% Property 10.3% Employment 8.1% Undisclosed Debt 4% Third Party 2.8% Assets 2.7% Write to Austin Kilgore. The author held no relevant investments.