Now that the industry has moved to a full-doc environment, application misrepresentation is happening on the back end of the business where "it's like doing new origination" and there is the most room for potential fraud in documentation.
Jeff Taylor, managing director and chief business development officer at Digital Risk, says the fraud that is happening today is found predominantly in the modification world.
"Fraudsters go where there is opportunity. We're in a market now where 96% of the loans are going to Fannie and Freddie and FHA, and those guidelines are pretty straightforward. The money and opportunity is in the refinance programs and the modification programs," he told NMN.
"There has been a tremendous shift in the last year and a half of underwriters and sophisticated fraud tools and fraud processes and analytics on the back end to make sure that they are doing modifications and loss mit and they are not being defrauded."
Government programs and bank mandates say certain tasks must be completed within a certain period of time.
"When you put time parameters to have to lend money, that opens up opportunity for fraud, for people to beat the system. Whereas, the front end is much more methodical and a slow go-as-you-need pace. That's the market we are in now."
Digital Risk, a next-generation integration portfolio solutions manager, has created a library of forensically reviewed performing and nonperforming loans called "the outcome data."
The company takes these data and advises customers who are looking to do modifications. "From loss mitigation strategies to our analytics and solutions, we tell them what they should be looking for as they go to perform those programs, what would be the red flags, and if they should do deeper dives," he said.
"It's interesting. The revenue is still driven on the back end. But the back end was sort of a new origination mentality. It's like we are taking the lessons we've learned, and while some of it might be legacy or existing shadow inventory legacy products, we're putting in best practices and analytics to make sure these loans perform. It's almost like a new origination market that's not going to the agency."
It's the "re-underwriting of the legacy issues," he adds, but the company also makes it to the front end.
The fraudsters that were in the last cycle are most active on the back end right now and not so much on the front end.
"Fraud for housing happens on the front end, but we're seeing a lot more fraud for profit on the back end," said Taylor.
For HAMP, people try to say it's an owner-occupied house where it's rental. They are trying to understate their income to qualify.
"In essence, they are providing false documentation to fit the owner-occupied and underestimate their income and their assets. What's interesting is most of the back end is staffed with people who aren't trained necessarily to look for these types of fraud schemes. That's where we can come in and make a difference providing our risk management platform to utilize all of our analytics."
With the help of this technology, red flags will pop up and notify servicers/underwriters about what they need to look for next to make sure the system is catching fraudulent activity.
Digital Risk is doing about 20,000 loan reviews a month. Eighty percent of that is probably the legacy, says Taylor. Most of this is for preventive reviews but it's not so much always put back now.
"It's what we call 'best execution.' What's the best execution so we can get the person a modification? Should we try to sell it on the secondary market? Should we hold it? It's changed quite a bit. It's very exciting."
Servicers and lenders have to invest to make sure the loans are going to perform. Whether it's a brand new loan or a "do-over" on a loan that should not have been made the first time, "you get out of it what you put into it," says Taylor.
"We're able to streamline the costs because of our large database and all of our experience with nonperforming loans so we can make a decision and it's cost effective for people to re-underwrite these loans."
Digital Risk currently has 850 full-time employees. While the platform is in the midst of doing these forensic reviews on legacy products, it is also moving towards working with originators, conduit and warehouse lenders, sharing analytics, processes and services, to put back on the front end.
"That is a little bit slower. We are making sure we are there on the front end while we are helping them deal with the legacy products they have right now and maximize value. We educate the organization that the processes that just saved them on the making of a bad loan now good is the same methodology they need to have on the new loans they are looking to originate or securitize."
