The problem of mortgage fraud is certainly here to stay. As the industry moves toward an electronic process that relies more heavily on trusted data, no doubt the instances of fraud will decrease. However, fraudsters will evolve no doubt. So what’s the answer to cutting mortgage fraud really? A report entitled “US Mortgage Fraud: Types, Trends, and Detection Tools” by TowerGroup concludes technology will play a significant role.
The report notes that technology in this sector will likely improve in several different ways. “Recently, some of the vendors of fraud detection tools have developed professional services capabilities. These groups can provide lenders with file reviewers trained in assessing possible fraud; these reviewers can supplement the lenders' underwriters and provide an efficient way to evaluate the loans flagged as most risky by the automated scoring tools.”
The report suggests that these more robust offerings are a departure from more archaic systems that rely heavily on outdated databases. The thinking is that the industry will again realize the value of data in this part of the process and start to come together to share more historical loan information to create an industry database of sorts to enable the industry to more clearly combat fraud going forward.
Further, the report predicts “the cost of building this database will likely be borne initially by the Mortgage Bankers Association and the US Government, but the ongoing operation of it (and possibly repayment of the initial cost) will be covered by reasonable fees that vendors will pay to access it (and pass on to lenders for using their analytical tools). The benefit to the common good of improving lenders' ability to prevent fraud losses is too great for this data to remain proprietary.”
While some vendors that specialize in this area may find this infringing on their space, as long as they’re granted access to the database they can create proprietary algorithms to both analyze and present the fraud score back to the lender. As a result, there will be a need for a more integrated fraud detection tool. All of these elements will come together in an outsourced model because lenders can’t afford to add time or money to the process right now.
“In contrast to many lenders' practices during the boom times of 200304, lenders will now be much more careful about including appropriate fraud risk assessments before loans are allowed to close,” the report pointed out. “The rate of false positives generated by the fraud detection tools is so high that lenders will feel pressure to avoid having the risk assessment and manual review negatively impact process performance for the vast majority of loans that are not fraudulent. This pressure leads to the desire for effective BPM integration.”
TowerGroup goes further to predict that with “industry-wide fraud losses running to multiple billions of dollars per year for the next few years, it is certainly reasonable to expect that lenders will spend several hundred million dollars annually on tools to detect and prevent fraud.” Those that call mortgage fraud an epidemic are not overstating at all. (see the chart below)The result of this problem will be tighter credit policies, and stricter underwriting. The answer to curing this epidemic is a more holistic approach to fraud detection.
“Many vendors have developed solutions that address specific types of fraud,” the report concluded. “Only a handful of leaders have taken a holistic approach to providing lenders with a comprehensive assessment of the total fraud risk for each loan. Vendors that can provide this holistic, integrated approach will be the long-term winners in this market segment.”
But the vendors won’t be the only parties that win in this case. Less fraud means the industry wins and so does the consumer.
