While mortgage fraud is not at the levels it was during the middle years of this decade, it is still having a large impact on the industry.
Figures just released by CoreLogic estimate the fraud loss for 2010 to be $11 billion, down from $14 billion in 2009. But don’t get complacent. The company said the probable rate of fraud has increased by 20% due to an increase in volume in higher-risk government loan programs. But the actually fraud losses are lower only because origination market volume is down by 26%.
Merle Sharick, vice president, business development at MARI/ChoicePoint, said fraud used to be a crime of opportunity. Now it is a crime of necessity because of the tough business environment.
In its third-quarter update of its 2010 Mortgage Fraud Trends report, CoreLogic notes fraud risk is on the rise over the past 18 months.
“Lenders must face the facts that the fraudsters (in some cases the very same individuals key to the subprime meltdown) are actively perpetuating their crimes in the conforming mortgage markets.
So far, the quality of this year’s loan originations is not up to last year’s, a report from Quality Mortgage Services LLC, Franklin, Tenn., states. The company found the number of loans whose quality could be characterized as “excellent” dropped from 30.42% in 2009 to 27.57% in 2010. Loans that rank “good” dropped from 58.49% to 56.54%.
At the other end of the scale, the number of “fair” loans, which QMS said are those that may be challenged in a repurchase, increased to 13.66% from 9.71% in 2009. The number of loans where fraud for housing was found in the post closing audits increased to 2.23% from 1.38% in 2009.
QMS has a list of the 10 areas with the most problem, and found significant changes in four of them, said Tommy Duncan, executive vice president. All four areas have been controversial for the past year, if not longer.
The numbers are based on a 10% sampling and have not yet been broken out by loan type (conventional vs. government) or purpose (purchase vs. refinance).
The most common loan defect found in post-closing quality control audits is errors on the initial Truth in Lending/good-faith estimate. Those have increased from 12.35% in 2009 to 18.54% in 2010.
QMS has also found a significant increase in automated underwriting discrepancies. Most of this is a result of data in the loan file not matching what is being entered into the automated underwriting system. However, the company said, it is hard to tell right now whether these discrepancies are carelessness or the manipulation or deliberate omission of the data entered into the AUS to get a decision.
Duncan said QMS found more of this particular problem than it ever had before.
The other two areas are errors with the annual percentage rate calculation and appraisals.
QMS has been supplying mortgage quality control and compliance solutions since 1992.
Sharick commented, “We’ve got to change the way we do business and catch stuff before it gets funding.” Looking at a 10% post-closing quality control sample is too late, he added.
A recent report from Fannie Mae found that for its 2009-2010 book of business, the single largest category of misrepresentation in a loan file was the borrowers’ liabilities at 26%, followed by income at 23% and occupancy at 21%.
Frank McKenna, vice president of fraud strategy at CoreLogic, said the company’s predictive models found a number of drivers for the increase in fraud risk.
This includes an increase in the number of Federal Housing Administration-insured loans originated. This program deals with borrowers who have a lower credit score and require less of a downpayment.
Those factors make these loans “inherently more risky,” McKenna explained.
The loans are ripe for problems with occupancy as well as the use of straw borrowers. There was also potential for fraud from “high-risk refinance programs like the Home Affordable Refinance Program” as use of this loan modification program increases, he said.
Furthermore, the CoreLogic Fraud Trends report predicts an increase in fraud related to short sales and real estate owned sales during 2011.
McKenna said the large amounts of distressed real estate out there usually manifests itself in things like flipping. With so much distressed real estate, that is the opportunity for fraud.
The fraudster can talk the lender into taking a short sale for at a much lower price but then flip it to a waiting buyer, pocketing the difference.
Still at the largest lenders, quality control at application underwriting is very stringent, with everything being scrutinized very carefully right now, he said.
This is leading to better-quality loans being originated today than in the past few years. But fraud can never completely be eliminated, he continued.
“Fraud is constantly changing, because fraudsters manipulate the data, they manipulate the information based on what’s getting stopped.
“These people that commit fraud, it is a test and learn process for them. They test something out, it doesn’t work. They change it up a little bit, it gets through. They try that for a while, then all of a sudden the lenders catch on. So they have to change what they do again,” McKenna said.
So what CoreLogic promotes is the use of “collective, consortium-based tools” as being vital to combat mortgage fraud.
He explained the consortium approach has been used in many industries; it is the sharing by lenders of information regarding fraud, including trends and patterns.
Fraudsters go after the weakest link in the chain, running a scheme until detected. Once that happens, he said, they move on to the next lender.
If the lenders share data and practices, it helps in the fight. This includes sending CoreLogic information on the loans that are determined to have misrepresentations on them, so that the company can build models to track and inform other lenders.
It also involves getting together on a quarterly basis in person to discuss new scams, new schemes and the practices these lenders put in place to stop them. CoreLogic organizes these quarterly meetings.
It also presents on a monthly basis on a dial-in basis new trends and patterns it is finding.
CoreLogic’s newest fraud prevention tool is IncomeAdvisor. Borrower application information is run through pattern recognition technology.
A report is generated that gives an overall income risk assessment of high, medium or low; an income fraud score between 1 and 999; and alerts which indicate the areas for the originator to further investigate. There are also tools to estimate income.
So even though fraud might be trending up, it is much lower than it was in the middle of the last decade. Back in the go-go days, “lenders just weren’t as careful as they are today.
