The more aggressive lenders are in efforts to gather and share fraud data, the more effective their risk control and prevention results will be. At least that is the expectation of some insiders.
Andy Crisenbery, vice president of professional services at eLynx, a portfolio company of American Capital based in Cincinnati, says his peers are talking about addressing the fraud issue as a community since “with the prevalence of borrowers going online and lenders losing that face-to-face interaction, it’s much more difficult to address specific cases of fraud.”
Crisenbery warns, however, that lenders do not seem to approach the idea of sharing data to combat fraud with as much trepidation as they have in the past.
And in the light of findings, that may not be the best approach.
In its 2010 mortgage fraud trends update, CoreLogic reported that fraud risk “has risen steadily in the last 18 months” featuring more active perpetration of crime in the conforming markets. Plus, given the unavoidable increase in both short sales and REO sales in 2011 there will be a proportional increase in related fraud.
CoreLogic concluded that the solution is in “collective, consortium-based tools” that fully leverage data and expertise “across multiple lenders, allowing individual institutions to mitigate mortgage fraud more accurately and effectively.”
Tim Grace, CoreLogic’s senior vice president of fraud analytics, argued that fraud risk can be reduced both at the national and local level if mortgage firms share data nationally.
For example, data exchanges among members of the CoreLogic fraud consortium during their periodical meetings has enabled CoreLogic to analyze fraud patterns, recognize statistical patterns and come up with fraud scoring that help lenders “stay on top of these new trends and keep risk down.”
Whatever information is available to the industry at large so far could be called a work in progress.
In April 2008 the Justice Department started tracking criminal mortgage fraud cases. The Justice Department data have a new tracking program recently set up by federal prosecutors around the country to report on current federal efforts to criminally prosecute cases of mortgage fraud.
Criminal enforcement actions are now monitored under the newly established mortgage fraud category based on referrals acted upon by each state attorneys general office.
Given the broad troubles now confronting the economy of the United States, and the role that mortgage fraud may have played in these problems, the relatively small number of cases in this area is somewhat surprising.
In 2008 the Justice Department reported that the Federal Bureau of Investigation was the lead investigative agency for these types of prosecutions. The FDIC was second with 21% of the total.
According to the Financial Crimes section of the FBI, mortgage fraud is one of several different kinds of white-collar crimes of special interest to the Bureau. The other areas are corporate crime, securities and commodities fraud, and money laundering. The FBI recognizes that mortgage fraud schemes contain some type of material misstatements, misrepresentation or omission relied upon by and underwriter or lender to fund, purchase or insure a loan.
Under a 1970 law, financial institutions are required to regularly file Suspicious Activity Reports with the Treasury Department's Financial Crimes Enforcement Network on a range of activities that may be legally questionable.
What appears to be missing is lack of a central repository that collects all mortgage fraud enforcement actions, which is why many agree that the true level of this fraud is unknown.
The 2010 Mortgage Fraud Trends Report from CoreLogic, Santa Anna, Calif., based on analysis of mortgage loan files from 2005 to 2009 found fraud risk decreased 25% since it peaked in the third quarter of 2007.
The CoreLogic Fraud Index also shows that 25% of foreclosures during this period contained fraudulent information as one in 200 conforming loans still contain misrepresentations that could lead to default.
CoreLogic’s predictive and statistical Fraud Index looks at the aggregated level of risk each quarter and compares it to other quarters in a specific time period. For this 2010 report CoreLogic said it analyzed a representative data sample from its 80 million loan applications from 2005 through 2009, and used a predictive fraud model based on pattern recognition.
The 2010 Fraud Index indicates that as lenders take a more “aggressive stance against fraud” their efforts have helped diminish the mortgage fraud risk, which is on the decline, Grace said. But with an estimated $14 billion in fraud losses experienced in 2009 alone, “fraud is still a major issue for the mortgage industry.”
Going forward, the industry will have to deal with new challenges, he added, as “there is evidence that fraud patterns are changing and becoming increasingly better hidden.”
Furthermore, there is the default and foreclosure challenge.
There is a clear correlation between fraud risk and default rates indicating that fraud and the fraud index can be a leading indicator of future default. For example, nine of the top 12 highest-ranking CoreLogic Fraud Index states in 2007 also were in the top 12 default states in 2009.
