CoreLogic: REO Sales are a Larger Fraud Risk Than Short Sales

CoreLogic reports that there is a “growing area of suspicious activity” in real estate owned sales, and the REO market represents a larger risk to the mortgage industry than short sales.

The 2010 Mortgage Fraud Trends Report found overall mortgage fraud increased 20% compared to its lowest level in 2009. The report added that recent government loan programs were among the main factors that had a considerable impact on fraud because “many of them lacked necessary fraud controls.” Consequently, most of the fraud increase was attributed to FHA loans, Home Affordable Refinance Program loans, REO sales, foreclosures and short sales.

By November 2010 one in every 24 REO sale transactions, or 4.2% were part of an “egregious resale and therefore deemed risky.” It is way higher than the 1% fraud risk that is considered the acceptable fraud rate.

Earlier this year CoreLogic estimated that lenders were “incurring unnecessary losses of $310 million per year in short sale transactions.” It resulted from an all time high volume of short sales on single-family residencies that in the second quarter of this year reached nearly 60,000, a trend “clearly steep with the numbers, more than tripling in two years.”

Corelogic’s projections of annual totals for all short sales --including single family, condominiums and other types of properties-- are at 400,000. An outlook that is promising given that by consensus short sales are considered the best way to minimize overall losses.

Findings are based on the CoreLogic database that covers 97% of the nation’s real estate transactions deriving from 80 million loans that represent 65% of the origination market also show the last seven quarters of purchase-related fraud risk “has remained stable” during that same time period.