Florida Moves to Top State for Mortgage Fraud Risk

As home prices have stabilized in Florida, there is an increased risk of mortgage fraud within the state. Image: ThinkStock

Florida has moved ahead of Nevada as the state most at risk for mortgage fraud, as improving conditions there make it once again ripe for this kind of activity, the latest Interthinx quarterly report shows.

Overall risk nationwide has fallen by nearly 8% from the second quarter to its lowest level observed in the past two years. For the most recent quarter, the index was at 137, compared with 149 in the second quarter.

In part, explained Interthinx vice president of industry relations Ann Fulmer, this is due to current market conditions.

Refinancings are less prone to fraudulent activity than purchase loans, and recent application data from the Mortgage Bankers Association show refis are still over 80% of new loan apps.

Other factors include the elimination of risky loan programs and improved prevention and detection, she said.

“The important message here is that we should learn from our past mistakes and when the market does pick up and we start to see more purchase volume, we need to stay focused on prevention. We’re going to have to stay focused on quality going forward,” Fulmer said.

Florida has become a desirable market again as prices have stabilized. The economic uncertainty created pent-up demand for housing and there are a limited number of properties for sale.

According to the Florida Realtors, existing home sales in the state in October were up 25% on a year-over-year basis.

The inventory of single-family homes and condos for sale in the state both were at a 5.2-month supply. The Realtor group says a 5.5-month supply represents a balanced market.

Fulmer compared the current situation in the state to the start of the last boom/bust cycle back in 1996. “People are trying to catch the wave,” she said.

Florida’s index value is at 206, followed by Nevada at 205 and Arizona at 191.

Rock-bottom-priced housing is starting to disappear as short sales and foreclosure sales diminish. Fulmer said she read an article which states the discount for distressed properties to market value in both Phoenix and Las Vegas is now at zero. This in turns means the window to purchase a property at a discount is starting to close, which could be a contributing factor to fraud, as South Florida shares characteristics with those two areas.

Another reason why fraud risk could be increasing in South Florida is that any time there is a lot of transition in a market, there is more opportunity. For example in Brooklyn, N.Y., Interthinx’ numbers showed an increase in fraud activity which the company had a problem correlating until Fulmer read an article which about the development of the Barclays Center, a new venue which houses a professional basketball team and in the future, a pro hockey team. There was additional development in that area.

Any time there is “an inkling” of property values rising, that increases fraud risk, which is what is happening in Florida as well.

Nationwide, property valuation fraud risk is down 11% from 2Q12, continuing the downward trend that began in early 2010 that has resulted in a decrease of 23% over the last two years, said Interthinx.

As for future possibilities of fraud, Hurricane Sandy could open the opportunity for those who are less scrupulous to try and game the system in areas affected by the storm.

In these areas, “lenders are most vulnerable when it comes to representation of conditions,” especially when it comes to appraisals and valuations, Fulmer said. It could take automated valuation models some time to catch up to current market conditions.

But because the damage was so widespread, lenders are more aware of the market vulnerabilities need to be careful when making loans in these areas.

“Once fraud gets a toehold in an area, the conditions somehow make it so that it continues to be an area that attracts fraud risk.

“That is another good reason [for lenders] to focus on prevention,” she said, adding that regulators are now sending the message that deterrence is key.