Report Shows ‘New Normal’ for Mortgage Fraud Risk

June 30, 2015

Mortgage fraud risk appears to have slowed after gradually rising the past four years.

According to the Interthinx 2014 Annual Mortgage Fraud Risk Report, the fraud index decreased 4 percent over the past year. The index includes data collected in 2014 from loan applications processed by the Interthinx FraudGUARD system.

According to the report, the evolution in the residential lending market continued at a feverish pace in 2014 with heightened focus on compliance risks and the adoption of new business practices fostered through regulatory mandates.

“With this evolution came concerns that transactional risk from poor data integrity, fraud risk and loan performance would not be well served in this new environment,” Interthinx said in the report’s executive summary. “It is perhaps too early to say that fraud risk is in remission, but this report highlights a positive trend toward a nominal overall risk. However, we still see risk and performance indicators that tell a more cautionary tale around specific geographic risks, home equity risks and the re-emergence of alternate financing where history reminds us to remain vigilant.”

Interthinx tracks property, valuation, identity, and occupancy and employment/income fraud risk indices. Although property valuation risk increased by 17 percent from last year, the overall index was mitigated via decreases in each of the other three risk types resulting in the net reduction.

“The 2014 data show both an overall decrease and a shift to more localized concentrations of specific fraud types,” said Jeff Moyer, chief product and strategy officer at First American Mortgage Solutions. “In no way diminishing the imperative for lenders, servicers and investors to remain vigilant, overall market stabilization does allow our industry to focus on more highly targeted strategies to address specific fraud threats.”

The report concluded that there is less overall real estate market volatility with the stabilization of real estate prices and inventory across the nation.

Florida jumped from fifth to first in 2014 with an index of 122, a gain of 6 percent. California retained the second position with an index of 120, even with a drop of 15 percent from 2013. New Jersey and Nevada remained in the top 10 in 2014. Georgia, historically a hot-bed of risk, rose back into the top 10 list for 2014 along with Rhode Island, New Hampshire, New York and North Carolina.

Geographic distribution of fraud risk continued to become more dispersed in 2014, moving from entire states toward regional, metropolitan statistical area (MSA), and ZIP code level concentrations. Although California did see a large drop in its index, it remains an area of concern.

The main drivers of risk among the top 10 riskiest states are property valuation and occupancy fraud risk. The states that exhibit higher levels of investor activity such as California, Florida, Nevada, Georgia, New Jersey and Arizona all feature a combination of property valuation and occupancy fraud risk. While Rhode Island, New Hampshire, New York and North Carolina all exhibit property valuation fraud as the primary driver of risk.

The top 10 riskiest states all exhibit a weak housing market with the exception of California. Four of the top 10 riskiest states, Florida, Georgia, Nevada and California are noted as improving while the remaining six states are either flat or declining.

“Taking pre-emptive action against fraud, and the losses related to fraud, is critically important to protect mortgage lenders and consumers,” said Mark Fleming, chief economist at First American. “As real estate and mortgage markets continue to move toward the new, post-crisis normal, fraud remains a concern that is ever-changing and requires detection methodologies that account for a variety of risk types. Rising property fraud prevalence is not surprising given the economic conditions and rising prices we see today.”

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