Mortgage Fraud Risk Migrating Towards East Coast

As housing markets continue to stabilize across the country with rising home prices and inventories shrinking in these cities, this ultimately leads to the possibility for a higher potential of mortgage fraud.

According to a report from Interthinx, mortgage fraud risk rose 3.4% from 2011 to 2012. The report also found a shift in the likelihood of mortgage fraud happening now more on the East Coast rather than the West Coast.

For example, seven of the top ten states where mortgage fraud risk was the highest were located on the East Coast. However, Nevada remains in the number one spot for the third consecutive year, while Arizona drops from second to third on this list.

Florida jumped up one spot to rank as the second most riskiest state for mortgage fraud, with New Jersey fourth, Connecticut, rising four positions year-over-year to fifth, Georgia was seventh, Michigan was eighth, Ohio ninth, and New York rounding out the top 10.

Meanwhile, California dropped to sixth place, the first time the Golden State finished out of the top five since the inception of the yearly report in 2010. This ranking still occurred even though California contains eight of the riskiest metropolitan statistical areas for employment/income fraud risk, six of the riskiest MSAs overall, and five of the 25 riskiest ZIP codes.

“Hit hard by mortgage fraud and foreclosures early in the housing boom, many of these states are judicial foreclosure states where real estate sales activity was depressed before the robo-signing foreclosure abuse lawsuit was settled,” Interthinx said in its report. “The rise in fraud risk is an indicator that these markets may have hit true bottom, since rising markets are more attractive to fraudsters seeking profits, and fraud is easier to commit when property values are increasing than when they are decreasing.”

For specific indices Interthinx analyzes, employment/income fraud risk had the largest increase, up 7% nationally on an annual basis. In particular, the potential for this type of fraud is greatest in Northern California, Interthinx reported.

Conversely, occupancy fraud risk featured the biggest decline, down 11%, likely reflecting investors’ ability to use cash for purchases, the report stated. Despite the decline in occupancy fraud risk, Interthinx said investor loans remained significantly riskier than owner-occupied and second-home loans.

The Agoura Hills, Calif.-based risk mitigation solutions provider said these changes are likely due to the macroeconomic environment as investors shift from the buy-and-flip strategy of the housing boom years to a buy-to-hold for rental strategy, and as their purchases reduce available inventory, this leads to price increases and reduces affordability.

“Mortgage fraud risk is persistent and invasive because fraud schemes opportunistically adapt to market shifts,” said Jeff Moyer, president of Interthinx. “The mortgage fraud risk report findings from 2012 remind us it’s in our industry’s best interests to safeguard the entire residential finance life cycle vigilantly.”