According to the second-quarter Mortgage Fraud Risk Report released by Interthinx, the likelihood for fraudulent activity to occur throughout the country rose on a quarterly and yearly basis. Overall, the Agoura Hills, Calif.-based risk mitigation provider said the index value is 104 in 2Q13, up 4% from the previous quarter and a year ago.
Ann Fulmer, vice president of industry relations at Interthinx, said even though fraud risk is increasing now, it is still nowhere near historic levels that were evident during the housing boom when the index values in many cities was around 400.
“Lenders have done a good job cracking down on fraud,” Fulmer told National Mortgage News in an interview. “There’s a lot more awareness now too, which has helped because during the boom, people didn’t talk about fraud the same way we talk about it now. But the industry has learned a lot of hard lessons and is now doing better for it.”
Among the four fraud risk indices Interthinx tracks—property valuation, identity, occupancy and employment/income—the only type-specific fraud that saw a decrease in 2Q13 from the previous quarter was property valuation.
Through the second quarter, the property valuation index is at 105, a 4% drop from the first quarter. Property valuation fraud is perpetrated by manipulating property value to create “equity” which is then extracted from loan proceeds by various means.
Fulmer said property valuation fraud is occurring most in markets that have a high volume of distressed housing units. The report showed that Dayton holds the top spot for property valuation fraud risk, with an index value of 199, followed by Fayetteville, Ark., at 183 and then Fort Myers, Fla., has a mark of 174.
“Rising home prices means fraud is easier to commit,” Fulmer said. “Lenders need to make sure their watching what kind of loans are being underwritten, as well as what they look like when they are reviewed and ultimately how they perform over time.”
Meanwhile, all the other three indices increased from the first quarter. Identity fraud risk was up 7% and has an index of 91. Occupancy fraud risk index is now 126, a 10% uptick on a quarterly basis, while employment/income rose by 2% with a mark of 92.
With a mortgage fraud risk index value of 132, Nevada displaced California as the state with the highest potential for mortgage fraud activity. Interthinx said California remains in the second spot, with Washington, D.C., Florida and Illinois rounding out the top five, respectively.
Despite being the second riskiest state for mortgage fraud, California contains four of the top ten worst ZIP codes for possible suspicious scams. The Golden State also features six of the overall riskiest metropolitan statistical areas, five of the riskiest MSAs for the potential of identity fraud, and the entire top ten MSA list for employment/income fraud risk.
Interthinx is also warning lenders to be wary that as interest rates and home prices rise in many markets—with wages remaining stable—the demand for adjustable rate mortgages will likely increase among borrowers.
Currently, for all fraud risk types, Interthinx said index values are much higher in adjustable-rate mortgages than in fixed-rate mortgages, which carries a significantly greater opportunity for fraud risk. Fulmer noted that ARMs are “very attractive” for those that are planning to move in the next three years and are becoming more popular as a way to reduce mortgage payments.
Therefore, she said lenders need to do proper due diligence to prevent fraud and scrutinize all loans to make sure the data are accurate.
“One of the lessons that we need to learn is that if you don’t crack down on fraudulent conduct in the beginning, it can snowball completely out of control. That’s pretty much what happened during the boom,” Fulmer added.
“We need to do our homework on the property and the borrower and pay attention to who the sellers are. As we move to a purchase market, banks also need a staff that is trained to analyze their data properly to limit any vulnerability in their loans.”