Fraud Risk Impedes Portfolio Recovery Efforts

Mortgage fraud, recognized as an impediment to lender-servicer efforts to maximize portfolio recovery, is on the rise and expected to get worse, especially in property valuations.

Among others, the 2010 first-quarter Interthinx National Fraud Risk Index, based on the four most common type mortgage fraud risk indices, shows the overall fraud risk reached its highest level in six years.

“Fraud continues to plague the collateral valuation function, and the fact that more than 12 million unregulated BPOs were produced in 2009, and are increasingly used by lenders and servicers simply due to a lack of effective appraisal solutions,” says Mark Linne, executive vice president of AppraisalWorld, San Jose, Calif.

“Our industry is in desperate need of reliable and economical ways to address the pervasive issue of mortgage fraud.”

Data confirm what the nation’s lenders and servicers have been saying all along. Constance Wilson, executive vice president of Interthinx, Agoura Hills, Calif., told this publication that fraud risk mitigation “is a top priority” and must remain so.

The Interthinx Mortgage Fraud Risk Index increased by 4% from 4Q09 and 11% from 1Q09 to 151 (n = 100) exceeding 150 for the first time since 2004. Arizona, Nevada, California, Florida and Michigan remain the top five states with the highest fraud risk.

According to the first-quarter Mortgage Fraud Risk Report after a brief improvement in the last quarter of 2009, property valuation fraud risk resumed the upward trend that began in the fourth quarter of 2007, and it remains the primary driver of fraud risk.

Many in the industry now focus on conducting appraisal reviews and collateral assessments in compliance with the Home Valuation Code of Conduct established in 2009 to provide standards for soliciting, selecting and paying for appraisals for all loans sold to Fannie Mae or Freddie Mac. Lenders must make use of appropriate existing technologies to mitigate this type of risk, says Wilson.

Advanced technology is the best way to avoid business-crippling risks, she adds, which is why large and small shops “must take this type of fraud into consideration” as they develop their future business strategies.

Lenders and servicers need fraud detection and risk mitigation analytics, says Interthinx president Kevin Coop. Data analyzed in the report help anticipate market trends and impact their risk mitigation strategies.

Wilson oversees the Interthinx fraud unit and quality control. And during her tenure, she says, has seen “more lenders than ever before” show interest in sharing the types of information that eventually will allow the industry as a whole to move toward achieving better results in mitigating mortgage fraud.

The 24-year mortgage veteran also finds a growing demand for analytics. Today it is always in demand, she says, and the trend is to apply analytics that use larger pools of data “in an effort to be more effective” in avoiding fraud, even “stopping it cold.”

While the latter most probably will remain a utopist industry and consumer wish, the former goal remains plausible.

As of now three out of four indices show signs of deterioration. Both the identity and employment/income fraud risk indices were up around 10% compared to the last quarter of 2009.