Servicers Starting to Emphasize Fraud Detection

There are several challenges for mortgage servicers when it comes to detecting mortgage fraud, an executive with one of the leading technology firms told attendees at the SourceMedia Mortgage Fraud Conference here.

Lester Dominick, president of MortgageFlex Systems Inc., said much of the burden on finding mortgage fraud has been left to originators until now.

But among the issues for servicers being able to detect a fraudulent loan is that much of the industry is using legacy servicing platforms.

There is a demand for more modern technology so that information can be easily retrieved, adding there is no coordination between origination and servicing platforms.

Foreclosures increased 100% in 2006, noted Bob Norrell, senior vice president of Litton Loan Servicing, and a number of those loans were fraudulent transactions. A random sample inspection of loans that went into early payment default found that 20% were damaged, unoccupiable properties. That means, he said, these were fraudulent loans to begin with.

Mr. Norrell later added that he believes 35% of subprime mortgages are fraudulent, especially with the growth of exotic products used to put borrowers into homes they might not have gotten using traditional products.

Originators will find ways to make loans under any circumstances. But, he said, they do not understand the cost this results in for servicers.

"We have gotten too liberal in what we do in originating loans and we are not making people pay for mistakes," Mr. Norrell said.

The president and chief executive of Arvest Mortgage and Central Mortgage, William G. Roehrenbeck, said loans originated through the retail and third-party channels had different levels of fraud.

The retail company, Arvest Mortgage, has a number of preventative measures in place, including requiring appraisers and the title agency to have errors and omissions insurance in place. This allows Arvest to back to these entities if there is a loan buyback.

But the third-party side is seeing an increase in early payment defaults in prime, alt-A loans. He asked rhetorically if that was a result of the prior servicer, the producer or the product. He added the retail channel has not seen an increase in early payment defaults.

Mr. Roehrenbeck said servicers need to attack early payment defaults as quickly as possible. These loans increase the cost to service, plus there is also reputation risk for the servicer.

The obligation of the servicer, he said, is to act prudently, find out what went wrong and resolve it as quickly as possible.

There is also an impact higher up the food chain, both Mr. Roehrenbeck and Mr. Norrell pointed out. The securities investor has a stake as well.

Fraud, Mr. Norrell said, causes the tranches on securities to collapse much sooner than expected.

Mr. Dominick said to counter fraud, Wall Street firms increasingly will go direct to the marketplace and originate loans. This is being seen in several recent transactions, including the purchase of MortgageIT by Deutsche Bank and the purchase of First Franklin by Merrill Lynch. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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