The Devil In The Details

*The Devil in The Details*
**By Scott Kersnar**

ScottK***I’ve been wondering lately whether the mortgage industry’s current obsession with regulatory compliance might be opening a door to fraud.  After all, fraud succeeds by distracting underwriters from paying attention to one thing by focusing their attention on another. Take, for instance, Fannie Mae’s 1004MC addendum.  I recently came across an online discussion of whether or not strictly following Fannie’s guidelines on filling out that addendum might lead an appraiser to indicate that the home values in a particular micro-market were stable when in fact they were declining. With everyone eager to have an improving mortgage market lead the economy into full recovery, it seemed to me that a little ambiguity like that could invite fraud.

****The way to correct a possible appraisal misstep like the one above, commented a participant in that online discussion, is to compare macro-market data with neighborhood data. And that’s where an appraisal vendor management firm like Global DMS can be helpful.

****Heavy investor activity is indeed “driving quick price changes and thus opening up small windows where home values can be manipulated by various parties,” noted Vladimir Bien-Aime, president and CEO of Global DMS. “There are many documented cases FBI cases of mortgage fraud activities, and one of the main elements to perpetrate these types of crimes are fraudulent appraisals,” he said, citing a case in West Virginia where an appraiser involved in a multi-million-dollar mortgage fraud scheme included a below-grade basement as “Gross Living Area” to enable using comps that were twice the square footage of a subject property.

****“The problem with identifying the minutia involved with valuation fraud is that your typical underwriter simply doesn’t possess the extensive experience needed to review collateral valuations for quality and fraud,” said Bien-Aime. As a result, he warned, many details in the appraisal review can be overlooked. “There are hundreds of rules utilized by Fannie and Freddie for industry standards that are a requirement designed specifically to mitigate risk and prevent mortgage fraud. It is virtually impossible for the average underwriter to review all of these little details,” he said. “This is why it’s essential to employ collateral review technology that is able to automatically and instantly review thousands of rules to catch potential instances of fraud.”  He cited gross square footage comparisons and distance of comparable as factors that should be incorporated into automated valuation models and the review process. “If such tools were employed in the aforementioned case,” he said, “the misuse of comparables to inflate values would have been detected.”

****Bien-Aime argued that a multi-faceted software system is effective for maintaining effective fraud detection in today’s valuation management process, “which is complex and has many moving parts. It’s risky to deal with too many vendors in what’s become an incredibly compliance-intensive lending landscape,” he concluded.

To Detect Fraud, Go To The Source

*To Detect Fraud, Go To The Source*
**By George Yacik**

NEW-GeorgeY***Think origination fraud has gone away just because the mortgage bubble has burst and loan volume has dropped sharply? Think again. According to Interthinx, the National Mortgage Fraud Risk Index rose to 159 in the fourth quarter of 2012. That’s up 16% from just the previous quarter and 9% from a year earlier.

****“The index has been trending up since the beginning of 2012, and is now at the highest level observed since the inception of this report in Q2 2009,” Interthinx says. The latest jump was primarily driven by a 25% increase in property valuation fraud risk. But employment and income fraud was up 7%, reversing declines over the past two quarters and pushing it to its highest level in a year.

****“You have to ask yourself, how is this possible?” says Brent Chandler, founder & chief executive officer of FormFree Holdings Corp. in Johns Creek, GA. He says there’s a larger number of fraud cases today relative to the size of the market than there was during the bubble years, when mortgage fraud was rampant. “Fraud is actually on the rise.”

****A big part of the reason, Chandler says, is that despite all the talk about mortgage automation and new technology tools, a good part of the mortgage origination process is still paper-based, which makes it a lot easier to commit fraud.

****To a large degree, lenders still rely on paper bank and wage statements supplied by loan applicants, and there’s a lot of fraud that gets through the process that isn’t checked until closing or even post-closing, when it’s too late.

****The fraudster’s main tools? Everything from WiteOut to Photoshop, which can be used to doctor income and asset reports and bank statements.

****The internet has also made it much easier to commit income and asset fraud. “There’s so much access to applications on the internet that allow you to create false information. You can get online and create your own W2,” says Becky Walzak, president of Walzak Consulting in Deerfield Beach, FL. The “old-fashioned kind of fraud where you forge origination documents, income and assets” are still very common, she says.

****The fix, Chandler says, is not to rely on borrower-or lender-supplied information at all but to get it directly from the source, meaning employers and financial institutions who hold the applicant’s deposits and assets.

****Chandler’s firm does automated verification of deposit reports. FormFree confirms with the depository institution itself whether the borrower really does have the amount of money he or she says she does, and when and how it got there. It is 100% digital and real-time.

****“Verified digital data directly from the source is the best defense against fraud,” Chandler says. “If you can get data direct from the source, such as an employer or a bank, you can virtually disintermediate fraud from both the borrower and an insider.”

****“Unless you can go direct to the source, to the financial institution, and verify and certify the ownership of that account, I think you’re always going to have fraud,” he says.

****“I don’t think fraud is ever going to go away,” adds Walzer. “There’s too much money to be made in the mortgage area.”

****But that doesn’t mean you can’t do something about it to protect yourself.

Lest We Forget

*Lest We Forget*
**By Scott Kersnar**

ScottK***When I was selling houses back in the late 70s I taught a course in real estate basics for consumers at a local junior college. The Russian River area of Sonoma County California, where I still live, was experiencing a real boom in property values at the time. I will never forget being at the blackboard one evening, masterfully showing the class how leverage magnifies the yield on a real estate investment, when someone raised a hand to ask a question: “Isn’t leverage another term for debt?” Of course, good point. But the market was hot right then. If people bought the lowest-priced home for sale in a good neighborhood, and were willing to make a few repairs and cosmetic changes (the way I told them to, the way my wife and I had just finished doing), they’d automatically make money as soon as the ink was dry on the sales contract.

****I was a relative newcomer to real estate. I had been a teacher for ten years I could keep an adult class interested, but had never been through a real estate downturn myself. It took an experienced member of my class to warn his fellow classmates how painful it would be to hold highly leveraged property purchased at the peak of the market.

****Soon after that, the S&L scandals of the 80s had everyone making cynical cracks about appraisals written in pencil until they met the numbers. “Made As Instructed” was the joke version of the acronym MAI, in place of Member of the Appraisal Institute. Watching what happened to the hotshot investors, no one needed to be reminded that leverage was debt, or that appraisers “making the numbers” to put deals together was against the law.

****But good times returned. Economists like David Lereah preached that from now on we would enjoy a real estate market with perpetual price appreciation. Then, when the mortgage debacle came in 2007, it took a long time for real estate prices and mortgage originations to end their plunge. The market also was restrained by the flight to quality and a landslide of regulations.

****So when we recently saw a twelve-month period of home price appreciation, was that good news? The Obama administration certainly didn’t complain. First-time buyers started looking in earnest and upside-down borrowers saw hope for daylight ahead. The bad news Interthinx told us in February was that increased investor activity brought with it a 25% quarterly increase in appraisal fraud risk.

****We need to keep in mind that when a rising tide starts lifting all boats, that means the pirate boats rise too. And the pirates look just like us; all they are trying to do is get rich by “making the numbers work.” These are the early days of a market upturn, so let’s remember now that fraud undermines the health of the market. Will the mid-AprilMBA National Fraud Issues Conference in Ft. Lauderdale unveil some tangible fraud remedies? Sure hope so.

Magazine Feature: Fraud Prevention Demands A Collaborative Approach

*Fraud Prevention Demands A Collaborative Approach*
**By Alec Cheung**

closing-fraud-elynx***The mortgage process is unique in that it requires the collaboration and partnership of parties that are frequently unknown to each other. These transient, short-lived relationships create opportunities for fraud. Lenders frequently find themselves working with agents whom they have no prior business relationship with. Most often, these parties don’t know each other, yet lenders are expected to transfer large sums of money with the expectation that agents will disburse the funds appropriately.

****The risk in these relationships extends to title underwriters as well, who frequently find themselves issuing policies through unfamiliar agents. With limited federal- or state-mandated controls, lenders and insurers are left to their own devices to validate the integrity of closing professionals.

****Real Consequences

****Financial institutions and their business partners are actively searching for ways to reduce risk and mitigate fraud opportunities within the mortgage lifecycle. Though most mortgage fraud occurs during the application phase, the fraud that is perpetrated at the closing table has serious consequences. Closing fraud represents a fraction of the overall frequency of mortgage fraud, with estimates putting it at 15 percent of all occurrences. But what is telling is the average loss resulting from closing fraud is dramatically higher than any other type of claims loss. Recent studies have indicated that insurers have sustained over $7.3 billion in losses since 2003.

****Despite the rate of incidence, when closing fraud occurs it has devastating consequences to everyone involved including consumers, lenders, and title underwriters.


  • According to a recent article in ALTA’s TitleNews, last year alone, three title underwriters stopped issuing new policies because of solvency issues caused by closing fraud.
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  • In New York, Washington Title Insurance Company became insolvent after reporting higher than normal claims.
  • ****

  • New Jersey Title Insurance Company stopped issuing new policies after a dramatic increase in losses from agent defalcations.
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  • TitleServ (agent company of New Jersey Title Insurance), abruptly closed in April, and lawsuits against the company indicate more than $18 million is involved in defalcation.
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  • Southern Title Insurance Company, an insurer in business for over 90 years, discontinued issuing new policies after discovering embezzlement by a single agent in Texas.  The company was placed in receivership.

****Boiling Over

****Unfortunately, the air is full of skepticism and distrust among today’s borrowers who have been affected by the downturn in the mortgage industry and other relevant issues like robo-signing. These borrowers are demanding government intervention in what they see as a broken process, where opportunities for fraud and theft are many.

****It’s going to be critically important for mortgage professionals to demonstrate they have the ability to protect the interests of the public. Regulatory influence is on the rise, and the Consumer Financial Protection Bureau (CFPB) is continuing to flex its muscle to protect consumers from harm. The CFPB’s mandate that organizations are responsible for their third-party servicers reveals a deeper need for more transparency among all parties involved in the process. This new, shared responsibility to protect consumers demands that these parties be more open with each other.

****Come Together

****The quickest and most practical way to arrive at an effective solution is to start from the premise that settlement agents are trustworthy. What the industry then needs is a national registry where any industry participant—a lender, a title underwriter, even another closing professional—can look up the profile of any settlement agent or search for agents that meet certain criteria. This is similar in concept to the Nationwide Mortgage Licensing System & Registry (NMLS) used to register financial services participants. A database like this would collect, consolidate and share information, incorporating local and state-based financial services regulation with independent data sources into a national closing professional platform that can be used throughout the mortgage industry. If executed at a national level, all parties involved in transactions would have visibility into the registry’s data and services.

****This Is Not A Hypothesis

****Companies are working on such solutions today, but approaches to date have faced significant resistance from the industry. At eLynx, we have been listening to the outpouring of frustrations from agents and are working closely with them, lenders, and title underwriters to gain an understanding of a more viable approach than what currently exists.

****Based off these shared insights, it’s important that all parties can be a part of the registry at no fee—any closing professional including independent agents, captive agents, and attorneys. In addition to data reported by registrants, the system will need to reach out to third-party sources to independently extend and validate information that will be stored in an agent profile. The profile data should include business insurance coverage, state and local licensing, prior judgments, watch list inclusions, and a host of other data that is used to verify the fidelity of an agent.

The Fraud Problem Widens

*The Fraud Problem Widens*
**Government Data**

***Yesterday PROGRESS in Lending Association shared data from risk mitigation vendor Interthinx indicating that fraud in Florida is on the rise. Today, we have more shocking numbers. As we all know, the recent economic downfall led to foreclosed homes and dismal mortgage situations for homeowners across the country. According to the FBI’s most recent Mortgage Fraud Report, more than $10 billion in loans originated with fraudulent application data in 2010.

****The National Crime Prevention Council (NCPC), with funding from the U.S. Department of Justice, has recently produced new radio public service announcements (PSAs) to warn individuals about mortgage fraud and how to avoid falling victim.

****The PSAs encourage listeners to consult NCPC’s website for resources including free legitimate housing counselors who can help protect citizens from con artists trying to steal their homes.

****The new PSAs are available on NCPC’s website, along with additional resources on mortgage fraud, such as podcasts and webinars, for prospective home buyers, current home owners and victims of mortgage fraud. Also on the website is information regarding NCPC’s upcoming Mortgage Fraud Virtual Conference, which will take place spring 2013. The conference is designed to teach about mortgage fraud, preventative measures for avoiding it and what resources are available to its victims. Additionally, the conference will provide information for service providers and fraud counselors to teach them how to most effectively help those who come to them for help.

****In upcoming months, NCPC will continue to add to its resource portfolio with a new public education toolkit and online videos about mortgage fraud awareness and prevention, both of which will be hosted on the website.

National Fraud Levels Decline, But Not In Florida

*National Fraud Level Declines, But Not In Florida*
**Interthinx Releases Report**

***Interthinx has released its quarterly Mortgage Fraud Risk Report covering data collected in the third quarter of 2012. According to the most recent analysis, overall risk nationwide has decreased by nearly 8 percent to the lowest value observed in the past two years. However, significantly increased levels of fraud risk in Florida pushed it past Nevada and into the top spot for overall fraud risk.

****Florida also appears on three of the four type-specific top 10 riskiest lists this quarter. Of particular concern is the finding that in Florida, investment purchases have more than three times the level of employment/income fraud risk than purchases for primary residences.

****Other notable findings include:

****>> Florida and Nevada are the two riskiest states with Interthinx Mortgage Fraud Risk Index values of 206 and 205, respectively. Currently, Florida has 17 metropolitan statistical areas (MSAs) classified as “very high risk.”

****>> Arizona is the third riskiest state for mortgage fraud, with a risk index value of 191.

****>> California, which is the fifth riskiest state in the country, has six of the top 10 riskiest metros, including Merced — the riskiest metro in the nation. California also has one of the 10 riskiest MSAs for identity fraud, three of the 10 riskiest MSAs for occupancy fraud, five of the 10 riskiest MSAs for property valuation fraud, and eight of the 10 riskiest MSAs for employment/income fraud.

****>> Iowa City, Iowa, leads the nation in identity fraud risk with an identity fraud risk index of 325, a 118.4 percent increase from the second quarter of 2012.

****>> Miami-Fort Lauderdale-Pompano Beach, Florida, appears on all of the type-specific top 10 riskiest lists except employment/income.

****“The report shows that even when overall fraud risk is decreasing nationwide, there are still areas of concern, as we see with this quarter’s findings in Florida,” stated Mike Zwerner, senior vice president of Interthinx. “The report’s actionable intelligence helps lenders pinpoint where additional due diligence may be needed, improves loan quality, reduces repurchase risk, and ultimately helps the economy recover.”

****The Mortgage Fraud Risk Report is an Interthinx information product created by an internal team of fraud experts. This is the fourteenth time Interthinx has released its quarterly report. The report provides deeper insight into current fraud trends through the analysis of more than 12 million loan applications amassed from the industry’s use of the Interthinx FraudGUARD loan-level fraud detection tool.

Fraud Risk In The U.S. Goes Up

*Fraud Risk In The U.S. Goes Up*
**New Research Released**

***Interthinx has released its quarterly Mortgage Fraud Risk Report covering data collected in the second quarter of 2012. According to the most recent analysis, overall risk resumed its upward climb after a one-quarter pause, with the Index value rising nearly 7 percent to 149 (n = 100). The change was primarily driven by the recent inclusion of 91 metropolitan statistical areas (MSAs) that moved into the “very high risk” category. That includes Chattanooga, Tennessee, which — with a quarter-on-quarter increase of more than 30 percent in its Index value — is currently the riskiest MSA in the country. In addition, Georgia has joined the top five states for overall mortgage fraud risk for the first time since the report started in second-quarter 2009. Other notable findings include:

****>> The New York City MSA continued its precipitous rise in the rankings, climbing to sixth place in the current quarter from seventeenth place just six months ago. In addition, five New York City area ZIP codes — including three in Brooklyn — are now among the top ten riskiest ZIPs in the nation.

****>> Nevada and Arizona remain the two riskiest states despite experiencing a small decrease in overall fraud risk over last quarter. Nevada’s Index value is currently 208, and Arizona’s is at 206. The MSAs for Las Vegas-Paradise, Nevada, and Phoenix-Mesa-Scottsdale, Arizona, are notably absent from the list for the first time since fourth-quarter 2009.

****>> Florida remained the third riskiest state, with a Fraud Risk Index value of 199. Contributing to Florida’s ranking is its dominance of the overall and type-specific top ten lists: Miami-Fort Lauderdale-Pompano Beach, Cape Coral-Fort Meyers, and Port St. Lucie for overall risk at the MSA level; two of the riskiest MSAs for Property Valuation and one for Occupancy Fraud; and four of the riskiest ZIP codes.

****>> For the first time since the inception of this report in second-quarter 2009, California is not in the top five and is replaced by Georgia. Despite California’s overall decline in fraud risk, its metros are well represented in all the top ten lists, taking nine of the top ten spots for Employment/Income Fraud Risk. The San Jose-Sunnyvale-Santa Clara MSA was the riskiest metro for Identity Fraud Risk with an Index value of 280 — 20 percent higher than its nearest rival.

****>> Fraud risk for condominiums differs from that of single-family homes. In particular, condos are more at risk for Employment/Income and Identity Fraud Risk but less at risk for Property Valuation Fraud Risk. Geographically, the difference in risk between census divisions varies as well, with condos presenting less risk in the East North Central, Middle Atlantic, and New England divisions and having more risk in the West North Central Division.

On The Move: Fraud Detection Vendor Adds Critical Staff

*Fraud Detection Vendor Adds Critical Staff*
**New Hire Announcement**

***Interthinx has added two new executives to its team to enhance the company’s ability to address the full spectrum of risk mitigation needs for the financial services sector. Jim Portner has joined Interthinx as vice president of product for origination solutions, and Nick Volpe has joined the company as vice president of capital markets and servicing.

****“Interthinx is recognized as the mortgage industry leader in loan-level fraud risk mitigation,” said Kevin Coop, president of Interthinx. “We also provide clients with automated and human driven end-to-end solutions designed to meet compliance, data integrity, and forecasting needs in a changing business environment. The skills and experience of our new executives will better position us to address a wider range of mortgage industry issues.”

****Jim Portner is a seasoned professional with 25 years of experience in product development and product management. In his new role, Portner will determine the overall strategic direction and tactical execution for all products within the Interthinx origination solutions market segment. Previously, Portner served in executive positions at Intuit, Sage Software, ADP, and CoreLogic. He brings to Interthinx a rich background in the dynamic mortgage and analytics technology marketplace and a thorough understanding of the opportunities and challenges in delivering solutions for today’s lenders.

****Nick Volpe will lead the Interthinx product development, product marketing, and program management teams for the loss forecasting, loan review solutions, surveillance, regulatory compliance, and rescission services product lines. In his previous position at Clayton Holdings, Volpe was senior managing director/business development. He brings to his new role at Interthinx more than 16 years experience in the diversified financial services industry with customer segments including investment firms, commercial banking, hedge funds and private equity firms, as well as governmental agencies.

Market Analysis: Election Year Drama

*Election Year Drama*
**By Tony Garritano**

***In an election year anything can happen. For example, we have a president that now miraculously supports same-sex marriage and just now decided to change immigration law enforcement through executive order after he himself said a year ago that immigration law could not be changed through executive order. I guess when the economy is in the dumps you have to do some crazy stuff to shore up your base. We’ll just have to see what candidate Romney comes up with on his end. Theatrics aside, the politicians are calling the shots in our space, too. So, what can we do? We have to be prepared. To this end, Interthinx has a series of Washington, D.C., Beltway breakfast forums dedicated to building confidence in the mortgage markets through a renewed focus on data integrity. The inaugural topic of “Reluctance to Reliance: Are We Ready to Be Compliant?” explored how the current political environment shapes policy that impacts the financial industry, the regulatory climate, and the future development of solutions and policies to reduce risk for the residential mortgage markets.

****The panel discussion, moderated by Interthinx Director of Federal Government Accounts Alison Beckner, included the following speakers:

****>> Tony Fratto, partner, Hamilton Place Strategies

****>> Rod Alba, vice president, Mortgage Finance and Senior Regulatory Counsel, American Bankers Association

****>> Tim Rood, partner, The Collingwood Group

****“Together, we can become the antidote for the mortgage fraud, waste, and abuse that threaten the solvency of various government agencies,” said Beckner. “The goal of the forum was to provide information, data analysis, and insight to help agencies conserve federal tax dollars through greater efficiency and data management. With open discussion about the regulatory environment and current challenges, we were able to identify industry best practices to detect loan defects, prevent fraud, and ensure compliance.”

****“Future policies and regulations need to address the demands of two key constituents: borrowers and providers of private capital. Borrowers and prospective borrowers are suffering from a crisis of confidence, and investors are suffering the effects of intolerable uncertainty,” said Tim Rood, partner and managing director for The Collingwood Group.

****Interthinx plans to host future forums in the Washington, D.C., area covering additional material on data integrity, data transparency, regulatory compliance, risk reduction, and strategies to conserve federal tax dollars.

On The Move: Great Minds Are In Demand

*Great Minds Are In Demand*
**New Hires Exude Industry Knowledge**

***Where is the market going? Have we hit bottom? Who knows. Everyone has an opinion. What can be said with certainty is that if you’re looking to build your executive team, now is not the time to hire the new guy with no mortgage experience. In a volatile market, experience matters. Recent hires at Interthinx and Gateway prove this point. Here’s the news:

****First, Shareé McKenzie Taylor, most recently director of public policy for the Mortgage Bankers Association (MBA), has joined Interthinx as director of industry relations. Taylor will be stationed in Washington, D.C., as part of industry expert Ann Fulmer’s team and will focus on expanding relationships with leaders in the real estate finance industry, lawmakers on Capitol Hill, and various federal agencies.

****“Risk management and regulatory compliance are critical to restoring confidence and achieving a successful housing recovery,” noted Ann Fulmer, vice president of industry relations for Interthinx. “Taylor brings a unique blend of skills and experience that will help us monitor and report on regulatory changes and industry trends affecting our clients. I had the pleasure of working with her while she was with the MBA, and I know she’ll bring valuable insights to bear during these challenging times.”

****“I’ve had the opportunity to work closely with many companies seeking to help the mortgage industry recover from the downturn,” said Taylor. “Based on its excellent reputation, I’m excited about the opportunity to join Interthinx. I’m particularly looking forward to increasing the firm’s profile in Washington by working with key policymakers on issues critical to the industry.”

****Prior to her position with the MBA, Taylor was with Wexler & Walker PPA, where she worked primarily on matters related to financial services, foreign affairs, trade, and energy. Taylor started her legal career at Simpson Thacher & Bartlett LLP as a corporate attorney. Born in Jamaica and raised in Canada, Taylor attended the University of Toronto, where she earned her B.A. with honors in both economics and political science before continuing on to earn a J.D. from Boston College Law School.

****Second, Gateway Mortgage Group LLC, a privately held mortgage company offering originations, servicing and correspondent lending, has hired Robert Rothrock to lead its marketing and corporate development department. Rothrock brings more than 20 years of experience to the role and focuses on expanding Gateway’s retail footprint as well as supporting its correspondent and servicing lines of business.

****Prior to joining Gateway, Rothrock was senior vice president of marketing, public relations and talent acquisition for Dallas, Texas-based NexBank where he oversaw all marketing, advertising, public relations, sales and recruitment activities. During that time, he drove the bank’s overall revenue and profitability higher while also helping to grow annual mortgage loan volume to $1 billion in a three year period. Previously, Rothrock held leadership positions with Countrywide Bank and Bank of America.

****In addition to recently launching correspondent, servicing and subservicing divisions, Gateway has added three new retail offices in St. Louis and Omaha, Neb. and continues to pursue the establishment of branches in other strategic locations.

****“As we focus on increasing market share through expanding our retail footprint, it is vital to further develop and enhance the resources that assist our new and existing retail locations,” said Kevin Stitt, president of Gateway Mortgage Group. “The addition of Rob to our team not only enhances that support by providing our branches with local marketing guidance and support, it also provides a strategic and integrated approach to Gateway’s growth plans across all of our channels.”