Despite the national fraud risk index remaining flat from both the previous quarter and last year, increases in localized ZIP codes can affect the ranking of a state, according to the latest Mortgage Fraud Risk Report developed by Interthinx.
The report revealed that the national mortgage fraud risk index is still elevated at 140. This value is a 3% decline from a year ago and a 2% drop from the previous quarter.
Illinois had the highest national quarter-on-quarter jump of 26 index points. A major factor for the large increase is due to the local ZIP code 60621 in Chicago, which has been the riskiest area in the country for three consecutive quarters with a value of 568 in the last quarter. This ranking has caused Chicago’s overall risk to increase dramatically since the second quarter of 2010 from “moderate” to “very high risk” in the fourth quarter.
Nevada is the state with the highest fraud risk with an index value of 255, due in part to Las Vegas ranking as the top MSA with the highest mortgage fraud risk with a value of 288. Experts said the city is likely to remain in the top 10 for the foreseeable future because current fraud risk predominantly involves distressed borrowers and properties, and Las Vegas has an overabundance of both.
In the third quarter of 2010, at least 75% of borrowers were underwater, 11% of households were in the foreclosure process, and short sales and REO represented 30% and 60% of all sales within the city.
Behind Nevada is Arizona and Florida with index values of 210 and 181, respectively. California, which contains six of the top 10 most risky MSAs, is ranked fourth with an index value of 180.
This is the seventh Interthinx has released its quarterly report tracking overall and type-specific mortgage fraud risk including occupancy, property valuation, income and identity fraud.
Occupancy fraud risk, which is associated when real estate investors falsely claim the intent to occupy the purchased property so they can obtain a mortgage with lower downpayments and interest rates, continued a decline that began in the second quarter last year. This type of fraud risk decreased by 4% from the previous quarter and by 28% over the last year. The decline is likely due to continued downward pressure on housing prices, which reduces the need to obtain a mortgage, and to the increasing use of nonbank and “transactional” sources to fund purchase transactions.
Since the first quarter of 2010, property valuation fraud risk index has declined each quarter due to the fact that properties acquired through “flopping” short sale frauds are now being sold to end buyers at or near actual fair market values. The only MSA to experience an increase from last quarter and from a year ago is Las Vegas, which is ranked No. 1 on the list with a value of 654. The California cities of Modesto, Vallejo, Riverside and Stockton round out the list with index values that are double the national value of 254.
Employment/income fraud, which occurs when an applicant’s income is misrepresented in order to qualify for a loan, rose by 8% over the previous quarter and by 28% over the past year. The report said the increase is likely another indication that “fraud for property” is on the rise as borrowers, possibly being encouraged by mortgage professionals, exaggerate their income to qualify for purchase loans, refinancings and modifications.
Burlington, Vt., was the top MSA for this type of fraud risk for the second consecutive quarter with a quarter-to-quarter increase of 42.6%.
Identity fraud is used in mortgage fraud schemes to hide the names of the perpetrators to obtain a credit profile that will meet lender guidelines. Despite not seeing any changes from the previous quarter, identity fraud risk has increased 27% from the same quarter a year ago. This increase could by symptomatic of incidents of “fraud for property” where more creditworthy relatives or friends with higher incomes act as straw buyers for the actual future homeowner.
Two neighboring Ohio MSAs ranked first and third in this category, with Cleveland having a risk value of 606 and Akron at 444. This is the second straight quarter Cleveland was the top MSA for this list.
Fraud experts who helped prepare this report said that short sales and REO sales constitute a significant share of all sales in the majority of the highest-risk MSAs in the occupancy and property valuation fraud risk indices. The experts said mortgage fraud risk is serious in short sale transactions in part because servicers and loss mitigation departments do not typically screen for fraud.
“With employment/income and identity fraud risk up by more than 25% in 2010, lenders need to be more vigilant about using fraud detection systems during refinancings, modifications and purchase transactions that involve the resale of distressed properties,” said Kevin Coop, president of Interthinx.
“In addition, short sales represent an acute risk to lenders. The large number of distressed borrowers, the lack of risk controls and government pressure to avoid foreclosures are producing an environment that in some ways resembles the mortgage market of 2005 to 2006. Lenders and servicers who do not employ robust controls and analysis at every stage of the mortgage life cycle face significant financial losses.”
