Efforts to minimize LoSses in general are attracting a lot of market attention when it comes to short sales, but the fraud factor in this area is sometimes overlooked.
Tim Grace, SVP of fraud analytics of CoreLogic, warns that short-sale fraud losses that so far are costing lenders $310 million a year “may increase if lenders cannot proactively identify risks in real time.” He argues that as a rule lenders and servicers are disadvantaged because they cannot cross reference pending loan applications on the same property.
A CoreLogic research study on the cost of short sales estimates that short-sale volume has increased to 400,000 transactions per year. At the same time propensity for fraudulent activity is also increasing.
Following that finding CoreLogic introduced Short Sale Monitoring Solution, a tool that gives lenders an immediate pre- and post-closing perspectives on short-sale transactions. This first-of-its-kind short-sale fraud prevention and pricing solution alerts on “risky” pending and closed short sales minimizing “unnecessary losses related to fraud and property under pricing,” the company said. CoreLogic estimates show underpricing can cost lenders and servicers an average of $41,500 per transaction.
CoreLogic reports that concerns are coming from some of the country’s largest entities including the GSEs. For example, according to Freddie Mac data, there is a short-payoff volume growth of over 1,000%, which reinforces fears the upward trend in volume leaves the short-sale market ripe for fraud. The firm is drawing on its vast data resources such as CoreLogic Mortgage Fraud Consortium, one of the largest repositories of application and transaction data that represent 65% of annual loan applications. It allows users to receive real-time access to concurrent transactions on short-sale properties.
To prevent short-sale fraud before closing the new tool matches loan details against other pending loan applications in the consortium database and public records for the same property. If another record is found the system automatically notifies the lender through an alert to delay pending further investigation. Most importantly, the tool retrieves the information allowing users to identify the entity or entities perpetrating the potential fraud. It can be used to screen already closed short sale transactions enabling the lender to continue to watch the property for a period of time and generates an alert for any subsequent loan closed on the property, the original short-sale lender and the resale lender. Moreover, it provides post-closing alert notifications, reviews of sale terms for violations, and alerts the new lender about potential for fraud in the dual transactions.
Retrospective short-sale analysis helps detect fraud, assess pricing-method accuracy and pinpoint problematic areas to avert future losses. CoreLogic defines short sales as risky when the second sale amount is vastly higher than the initial short sale, or if the second sale transaction happens too soon after the first.
Short Sale Monitoring Solution also features alerts on missed-opportunity losses in cases where properties are priced “excessively below market value” to enable investors to resell for a sizeable profit. Short-sale resales are monitored for 90 days to enable interested parties “to refine their pricing methods.”
Another type of growing fraud risk—which among other mortgage transactions can affect short sales—is identity theft.
Experian said it was developed responding to in-house research showing identity fraud is on the rise and more widespread than ever. The number of identity fraud victims who sought help from Experian in 2009 increased by nearly 20% compared to 2008. Furthermore, research revealed that fraudsters are getting better at covering their tracks since the average time to discover fraud in 2009 was 416 days, up 17 days compared to 2008.
