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Leveraging Advanced Intelligence to Combat Short Sale Fraud

Dec 26, 2013

The housing market collapse brought with it an unprecedented number of distressed properties, leaving mortgage professionals to find ways of minimizing potential loss through careful disposition planning. One of the most popular and effective strategies is short sales. Short sales not only provide a graceful exit for borrowers, they also allow lenders, servicers and investors to ease the burden of maintaining and reselling properties acquired through the foreclosure process. However, the increase in short sale activity has paved the way for unprecedented levels of short sale fraud. In fact, the Financial Crimes Enforcement Network (FinCEN) has stated that 10 percent of the 100,000 Suspicious Activity Reports (SARs) filed in 2012 relating to mortgage fraud were classified as short sale fraud—a significant increase from 2011. In addition, a recent DataQuick study found that 6.5 percent of all short sales had some type of suspicious activity associated with them, while no such activity was reported the year before. Although it may be impossible to completely eliminate all instances of short sale fraud, there are many strategies that can be used to counter the efforts of fraudsters. Five of the most effective approaches leverage advanced data and analytic solutions to identify potential fraud hotbeds in order to more effectively target and respond to fraudulent activity. These approaches help combat the growing issue of short sale fraud and also help prevent avoidable short sale losses caused by below-market property valuation. Recognize high activity levels to identify markets with the greatest fraud potential Though it may seem basic, the foundation of all fraud prevention strategies is ensuring a constant flow of market intelligence to understand where short sales are most common. This provides a clear picture on where the most risk exists and where to deploy the most intense prevention efforts. In a recent study of just more than 205,000 short sales from the past two years, DataQuick found significant variances in the percentage of all property sales accounted for by short sales. Wayne County, Mich. (38 percent) and San Diego County, Calif. (26 percent) had a much higher rate, whereas the rate in Miami-Dade County, Fla. (15 percent) and Clark County, Nev. (10 percent) were quite low. Know the fraudster profile Understanding where short sale activity is concentrated is a good start, but there is much more intelligence that can be utilized to pinpoint where the greatest risk lies. In the same recent study, DataQuick leveraged its National Property Database to identify suspicious short sales and create a fraudster profile. The suspicious sales were then compared to all short sales within these different segments to help clarify the profile by segmenting the market by geography, price band and property type. These are just a few useful ways to identify the fraudster profile: ►As a general finding, the study found a much higher incidence of suspicious activity in Maricopa County, Ariz. and much lower rates in Los Angeles County, Calif. and San Diego County, Calif. It is also important to dig deeper within a county as short sale fraud can and does vary from one zip code to another. The study clearly identified that even though Maricopa County as a whole was a hotbed for short sale fraud activity, there were many micro-markets within the county that reported very little suspicious activity. The converse would definitely hold true for counties with less short sale fraud overall. ►A variety of real estate trends vary based on the property value, and suspicious short sale activity is no exception. In general, a much higher incidence of suspicious activity occurred in lower-priced properties. ►Fraud discrepancies occurred in varying property types as well, but the research pointed to a slightly higher than expected rate of suspicious activity with multi-family properties compared to single-family residences. These three analyses are samples of the different types of evaluations that could be completed to profile the short sale fraudster. Specific approaches will vary based on individual requirements and fraud history. Implement early warning triggers Anticipating where short sale fraud is likely to occur and who is most likely to perpetrate this fraud are vital guides to overall strategy, but it is also critical to implement analytic tools that effectively and efficiently evaluate the risk of fraud on specific short sale offers. This is especially important to lenders and servicers in their ongoing portfolio management efforts. Here, the emphasis is on identifying potential short sale fraud on loans within the portfolio as quickly as possible—ideally immediately after a property is listed. Integrating decisioning with comprehensive property intelligence can provide this type of early warning system characterized by the following components: ►Review all loans in a portfolio against a national MLS data source on an ongoing basis. ►Identify loans on new listings that have a high likelihood of short sale by comparing the listing price to current property value. ►Gauge the borrower’s motivation to potentially bend the rules by identifying all liens on a property, performance on these loans and CLTV. ►Use a fraudster profile, such as the one discussed in the previous section to further pinpoint potential problem borrowers. ►Escalate those loans and borrowers identified as having the highest likelihood of short sale fraud for more intensive review and follow-up. Though advanced analytics and automated decisioning drives these types of solutions to quickly provide accurate analysis of all transactions, they do not take the human element out of the equation. In fact, these automated solutions optimize the deployment of critical human resources by flagging problem transactions that require the evaluation of an expert. Review teams are freed from the drudgery of a full evaluation on the transactions that already conform to pre-determined business rules and standards, and are able to spend their valuable time on the transactions that need the most care. Know what is right before the offer is made Along with implementing these early warning systems to evaluate each short sale immediately after the property is listed, lenders and investors can also deploy solutions to protect them before the offer is made. One of the most effective tools to deploy is automated valuation models designed specifically to estimate the discount that should be expected for different stages of default—including short sales.  The emphasis should be on a very local view of distressed properties, as it is essential to understand the zip-to-zip variations that are prevalent in most markets. By evaluating discounts at the most granular level of geography, mortgage professionals can quickly detect potential fraud and accept or reject a short sale with a much higher degree of confidence. Leverage technology to quickly evaluate the offer The final best practice builds on the rest to provide an automated, more comprehensive evaluation of the short sale offer and a more in-depth review of the potential for fraud. By utilizing a variety of valuation sources, lenders and investors benefit from a more thorough interrogation of the offer and generate more defensible documentation to justify their decision to accept or reject an offer. This type of valuation validation can be deployed as follows: ►A consensus value is determined for the specific property based on a custom “expert panel” selected by the reviewer. The panel can consist of a variety of valuation sources, including: MLS Valuation Model, Tax Assessed Value, HPI Index Value and others. ►Based on the distribution of values within the expert panel, a confidence score is developed to provide a clear understanding of the level of accuracy associated with the consensus value. ►The offer price is then compared to the consensus value and either accepted or rejected based on the pre-determined tolerance level. Tolerance levels can vary based on property type, geography, price band and a host of other variables. Based on these outcomes, some may choose to adjust the consensus value by applying the short sale discount percentage for the subject property’s specific location. Following this type of approach will provide the confidence that all short sale offers have been evaluated in a consistent, accurate fashion. More importantly, it will help ensure that any fraudulent activity is identified before finalizing critical lending decisions. As long as there are short sales, there will be short sale fraud. The best practices outlined above provide a strong foundation to combat fraud by profiling where the risk is greatest and deploying advanced intelligence to quickly assess short sale fraud potential. This is a great start, but truly effective anti-fraud solutions come when these tools are integrated with a lender’s specific business requirements, systems and institutional knowledge of market-specific fraud trends. This combination will lead to the most relevant, effective solutions possible. Randy Wussler is vice president of product management and marketing for San Diego-based DataQuick. He may be reached by phone at (858) 597-3295 or e-mail [email protected].
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Dec 26, 2013
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