While fraud risk had trended down dramatically through 2008 and even into early 2009, in mid-2009 and 2010, it started to creep back up again, according to Frank McKenna, vice president of fraud strategy for analytics provider CoreLogic.
The increase is a result of high-risk government lending programs like FHA and the Home Affordable Refinance Program.
“A lot of those programs are bringing risk back into the market,” McKenna said in a phone interview following the CoreLogic Mortgage Fraud Consortium Members’ Meeting in Chicago.
“Lenders said their biggest concern this year is ‘flipping’ again. They are concerned with all of the distressed properties out there like short sales and foreclosed properties. There are a lot of investors that are taking advantage and flipping the properties the same day for sometimes 50%-100% more than the property sold for. They are seeing that as a very big problem right now.”
Government experts from the Federal Bureau of Investigation, Financial Crimes Enforcement Network, Internal Revenue Service and Financial Fraud Enforcement Task Force were on hand to discuss policies and trends.
Lenders indicated that in 2010 FHA fraud is “the area that they are focusing in on,” McKenna said.
While there is strong underwriting, it doesn’t stop the fraud from happening. FHA is “still very attractive” to the fraudsters and fraud rings because they like to recruit straw borrowers.
“FHA guidelines, in terms of who qualifies and how much they have to put down, are a lot more lenient than the typical type of conforming programs. They can recruit young college graduates who don’t have a lot of credit history or people who don’t have great credit history and they only have to put 3% down.”
In order to help lenders with some of their pain points, CoreLogic has launched a short sale monitoring solution, which it will most likely extend to foreclosure monitoring. Through the cooperative database, lenders can share their information on what properties they are short-selling.
“If there are any subsequent loans that are being made on those properties, we will notify the lender so they can stop them,” McKenna said.
“It’s probably less about the technology and more about the sharing of data. The big piece of it is that lenders agree to share their information with each other to stop fraud. Most of the big lenders are involved. Just last week, five of them sent in their data to pilot the solution. We are getting a lot of traction in the sharing concept.”
CoreLogic started the data sharing a couple of years ago for shot-gunning fraud through a multiclosing alert program. Lenders shared their data to be notified in home equity lines of credit when there were other loans being made on the same property concurrently with their own.
“To date, known dollars saved is something over $300 million in loans that were stopped because of the fraud ring activity. It basically eliminated the problem.”
Among other highlights from the meeting, HVCC requirements are something lenders want to know if the fraud rate is lower when the appraiser is independent form the broker. There are certain loan programs that are not requiring that independence, McKenna said, and brokers are allowed to pick appraisers.
“They want to know the difference in the fraud rate. They believe that independence creates a much lower rate of fraud. They want us to investigate that for them,” McKenna added.
“They are noticing a lot more appraisal fraud in today’s market because of distressed real estate.”
