Data Verification Needed to Prevent Fraud & Redefaults
Current delinquency and foreclosure rates are reaching milestones.
According to the Center for Responsible Lending a new foreclosure starts every 13 seconds, equaling nearly 6,500 a day. CRL data show the number of new foreclosure starts for the first five months of 2009 has reached one million. CRL projects a total of 2.4 million foreclosure starts by the end of the year, which is expected to reduce “property values of some 70 million nearby households” by about $502 billion, or at an average of $7,200 for homeowner.
CRL president Michael Calhoun called the situation “alarming. Foreclosures started today’s crisis and foreclosures will keep the crisis going if this epidemic continues,” he said. Longer-term CRL projections show that by 2012 at least 9 million new foreclosures will cost $1.9 trillion in lost home equity to 92 million families.
A recent mortgage trends analysis by TransUnion.com of Chicago based on data from approximately 27 million anonymous, randomly sampled customer credit files also show mortgage loan delinquency ratio among borrowers 60 or more days past due increased for the ninth straight quarter, hitting a national average high of 5.22% for the first quarter of 2009.
This statistic traditionally seen as a precursor to foreclosures, TransUnion.com said, is up almost 14% from the previous quarter’s 4.58% average — compared to an increase of 16% from the third to fourth quarter of 2008. Also, year-over-year, mortgage loan delinquency is up approximately 62% up from 3.23%.
“The troubling news is that the mortgage delinquency rate continues to climb upward at an average quarterly pace almost doubling that experienced in the last recession,” said Keith Carson, a senior consultant in TransUnion’s financial services group. “For example, during the 2001 recession (which began in March and ended in November of that year), the average quarter-to-quarter national mortgage delinquency growth rate was nearly 6.5%, compared to the nearly 12% quarter-to-quarter delinquency growth we are experiencing today.”
Mortgage borrower delinquency rates in the first quarter of 2009 were highest in Nevada (11.61%) and Florida (11.01%), with the lowest delinquency rates reported in North Dakota (1.51 %), South Dakota (1.94%) and Alaska (2.14%). Meanwhile, the average national mortgage debt per borrower rose again by 1.41% to $195,500 from the previous quarter’s $192,789, painting a difficult year for many homeowners.
“Forecasts now show the 2009 mortgage delinquency rates reaching 7% by year end,” according to Mr. Carson. “Credit performance generally lags economic conditions. Thus although there have been some pockets of promising news on the economic front, we see unemployment and deflated housing prices continuing to push up delinquency rates through the remainder of this year. At this juncture it is difficult to predict with any certainty what impact, if any, the various government initiatives will have on the mortgage delinquency.”
As the mortgage industry faces an unprecedented volume of loan modifications, income and employment data verification appears to be high up in renewed efforts to prevent fraud and redefaults. As expected at the forefront are technology solution providers and credit rating agencies now expanding to meet data verification demand.
“I think fraud is at the front lobe of everybody’s brain in the mortgage industry right now,” says Jay Meadows, CEO of Rapid Reporting Verification Co. in Fort Worth, Tex. “It’s showing in the volume of loans we process, as far as people are using our products more consistently. Internally we’ve seen clients who used to use a 4506 [tax form] in 2,000 cases a month, now they’re using it in 10,000 cases a month. That trend’s continuing and there is no end in sight for that since it need be the rule not the exception.”
The current focus on fraud prevention is caused in part by the fact that there very few warehouse lines are still available, he said, in addition to Fannie and Freddie.
“You can’t afford to get a black eye in the other lines because if you do, you’re out of business. It no longer is like in the old days when you mess up with one line and you just move to another credit line. People are being very cautious about sending bad deals out, [fraud prevention] is very important.” Third-party data verification is a proven way to achieve labor efficiency and accountability in mortgage reporting, says Mr. Meadows.
How employment verifications are obtained can literally mean the difference between catching a bad loan and getting a buyback or foreclosure down the road. A shortage of employment verification staff creates “opportunity for fraud to leak into the business.” “Independent income verification is a key component to a servicer’s increase in overall success rate of loan modifications,” agrees BasePoint president and CEO, Tim Grace. Similarly to Rapid Reporting, fraud and risk analytic solutions provider BasePoint Analytics, Carlsbad, Calif., reported record growth in the use of its newly enhanced Income Verification Service system.
Since last year BasePoint said it has recorded 100% more requests every month, showing “income verification is becoming a critical component of mortgage lending.” The company’s automated income verification service allows lenders and servicers to retrieve borrower tax returns and W-2 transcripts from the IRS database. BasePoint said the new product was released responding to demand for data verification through independent sources.
Fraud prevention however is not the only driver of thoroughness in data verification. The Home Affordable Modification program and new regulatory requirements are also pushing lenders and servicers to ensure data accuracy. “Not only did the housing bill come out with language that expressed the need for the use of a 4506 tax form to verify the income. Now the Treasury, Fannie and Freddie are getting on board. Plus, there are the 9 million modifications that are said to be in the pipeline,” Mr. Meadows said.