California Tops Mortgage Fraud Index

February 25, 2010

California edged past Nevada as the state with the most mortgage fraud risk, according to Interthinx’s 2009 Fourth-Quarter Mortgage Fraud Report.

With the addition of several MSAs to the highest risk category, California displaced Nevada, which had topped the rankings over the last five consecutive quarters.

The indices for both California and Nevada fell slightly from a quarter ago but remain elevated at 222 and 220, respectively. The lowest risk states’ indices increased, indicating a narrowing of the Mortgage Fraud Risk Index range from Q3 2009. This redistribution of fraud risk geographically is in direct contrast to the trend observed between Q3 2008 and Q3 2009.

According to the report, California’s movement into the top spot in the rankings is significant because of the sheer volume of loans issued in this state and the magnitude of the potential economic losses to lenders. In the past, numerous regions of relatively low risk counterbalanced and moderated California’s overall fraud risk. However, the number of high risk counties in California has increased significantly, and fraud risk has spread dramatically throughout the state over the last year. In Q3 2008, the state’s fraud risk was “relatively moderate,” with no counties having an Index value exceeding 200.

The relentless increase and spread of mortgage fraud risk between Q3 2008 and Q3 2009, starting in the Central Valley region, was described in the Interthinx Q3 2009 Fraud Risk report and continues unabated. Despite the drop in the state’s overall index from 230 to 220, the number of counties with very high mortgage fraud risk has increased from the last quarter, with four additional counties (Santa Barbara, Madera, Yuba and Sutter) breaching the 200 mark. Only one county that was previously above that benchmark dropped below 200 (Yolo).

The Property Valuation Fraud Risk Index decreased 4 percent from the previous quarter, the first such decline since Q4 2007. Despite the quarter-on-quarter decrease, this index is up 40 percent over the last year and up more than 100 percent from two years ago. Schemes involving short sales, REO inventories, “wholesale” flipping, and refinancing by borrowers whose equity has been impaired by falling real estate values continue to drive this Index.

The Occupancy Fraud Risk Index rose 16 percent since the last quarter, the first significant increase in the index since Q4 2006. The magnitude of the quarter-on-quarter increase suggests that occupancy fraud risk may become a serious issue going forward, as continuing price declines and “get rich quick” schemes lure investors back into the market and as builders face continuing difficulty in moving unsold inventory.

The Employment/Income Fraud Risk Index increased 3 percent from a quarter ago, the first quarter-on-quarter increase since this index peaked in Q3 2007. The index declined by more than 50 percent by Q3 2009, likely due to the elimination of stated and low documentation loan programs, lenders’ increased use of Internal Revenue Service data to verify income and to a reduced need for misrepresentation of income as housing generally becomes more affordable. The current quarter-on-quarter increase suggests that employment/income fraud risk may be poised for a rebound.

Of the states that have consistently been well-represented in the “very high risk” category: The number of “very high risk” MSAs has increased in California, Arizona and Michigan, has decreased in Florida, Colorado and Ohio, and has remain unchanged in Nevada. The increase in the number of “very high risk” MSAs in California means that nearly all of the state’s MSAs are now included in this category. Of the MSAs in states that were represented in the “very high risk category” for the first time in the last quarter, Charleston S.C., Portland, Oregon, and Minneapolis-St. Paul, Minn., moved to lower risk categories. However, Bend, Oregon, and Washington, D.C., remained in the highest risk category, and the Winchester, Va., metro adjoining the D.C. metro is a new addition to the “very high risk” category.

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