Understanding The News: The 411 On Mortgage Fraud Trends

*The 411 On Mortgage Fraud Trends*
**Trends And Analysis**

***According to a report by CoreLogic, the fraud picture is mixed. The report says the industry’s overall fraud risk appears to have stabilized. After a 20% increase in 2009, the CoreLogic Fraud Index, an indicator of the relative level of fraud risk for the mortgage industry, remained relatively flat throughout 2010 and the early part of 2011. The level of fraud in mortgage originations for 2010 is estimated at $12 billion. Early indications based on the Fraud Index show that this trend is continuing for 2011.

****Based on lower projected 2011 origination volumes and continuing flat fraud levels, CoreLogic estimates that for 2011, the mortgage industry will experience $7.4 billion in U.S. residential mortgage origination fraud. This 2011 estimate is approximately 75 percent below 2005 levels. This is due primarily to lower loan origination volumes and reduced risk tolerances evidenced by tighter lending criteria.

****Examining the data by fraud type reveals several areas of concern despite the generally flat overall Fraud Index. This analysis is made possible by a newly created Alert Risk Index system from CoreLogic through which additional risk patterns can be observed. The rate of property fraud grew more than 250 percent in the last year, while identity fraud decreased significantly. When we evaluate the movement in the individual Alert Risk Indices, additional risk patterns can be observed. For example, the primary reason for the increase in the property fraud risk index is potential fraudulent flipping and flopping of properties.

****“The overall level of fraud is down substantially,” noted Dave Johnson, vice president, product line manager of Fraud and Consortium Solutions at CoreLogic. “That is the case because origination volume is down and lending standards are tightening. Fraudsters are realizing that this is not the easiest place to go so you’re left with just what I call professional fraudsters. Also refinances are a more secure loan product and refinancing is about 75% today.

****“However, what we’re also seeing is a new mix of fraud. For example, valuation has become more artful because of the level of distressed properties,” Johnson continued. “It’s not just a visual inspection anymore because the house down the block may look the same as mine but the financial situation of that house and homeowner is very different. Fraud is never static.”

****Distressed sales remain a source of significant risk. It is estimated that unrealized recoveries on suspicious short sale transactions may be costing lenders as much as $375 million per year. Unscrupulous investors, unethical real estate agents and other fraudulent loan actors in the mortgage application process are targeting distressed borrowers and arranging same day flips through the foreclosure and short sale processes. With the volumes of distressed real estate and rate of suspicious flip transactions continuing at near-record levels, lenders are being forced to cope with more of these risky transactions where information related to other potential offers is intentionally withheld. Most of the suspicious flip transactions appear to be well executed events with investment company buyers responsible for a disproportionate percentage of the risky transactions.