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In the realm of mortgage fraud, there is an abundance of good news. The degree of tumult and trauma created by fraudsters in the run-up to the 2008 crash appears to have safely departed into the history books, with no evidence of a roaring comeback.
However, while mortgage fraud has abated to a great degree, it has not evaporated completely. Indeed, the slow transition from a refi-heavy market to a purchase-driven market is giving many fraud observers experts a slight case of agita, as the potential for new chicanery quietly awaits.
But first, let’s focus on the positive news. According to the Mortgage Fraud Report issued in September by Irvine, Calif.-based CoreLogic, approximately 19,700 mortgage applications in the second quarter of 2013, or 0.8 percent of the total number of applications, were identified as having a high risk of fraud. This is down from 20,900, or 0.7 percent, in the second quarter of 2012.
Furthermore, CoreLogic found that fraudulent loan applications reached a combined value of roughly $10.5 billion for the first half of this year. Fraud risk among U.S. mortgage applications declined 5.6 percent in the second quarter of this year, slightly up from $5.2 billion in the first quarter, but down from $5.5 billion in the second quarter of 2012. Ed Gerding, senior fraud and risk strategist at CoreLogic, credits the current numbers on the industry’s abilities to target suspicious activity.
“Overall, quality control and quality best practices are starting to surface in the downward trend in mortgage fraud risk,” Gerding says.
And while a combined value of $10.5 billion in fraudulent applications in the first six months of 2013 may not seem like a tiny figure to some, it is a far cry from the pre-recession years.
“The Financial Crisis Inquiry Commission reported that between 2005 and 2007, $112 billion in fraud losses occurred in mortgage industry,” recalls Brent Chandler, CEO of Suwanee, Ga.-based FormFree Holding Corporation. “The Commission pinpointed this was a direct result of lenders’ willful disregard to assess the borrower’s ability to repay. But, of course, lenders were not all to blame—investors buying loans and saying, ‘Hey, we need more loans.’”
Rick Sharga, executive vice president at Irvine, Calif.-based Auction.com, credits much of the decline in fraud risk to a more vigorous attention to detail at the origination level.
“There are much tighter underwriting standards and much more diligent quality control work done by originators,” Sharga says. “It is very difficult for borrower to perpetrate fraud in today’s lending environment.”
“Banks have become aware of how dangerous unchecked fraud can be,” says Ann Fulmer, vice president of industry relations at Agoura Hills, Calif.-based Interthinx. “From the 30,000-foot view, fraud risk down significantly since the boom.”
Yes, but …
However, mortgage fraud—both in possible risk and actual practice—was not permanently buried in the rubble of the 2008 crash. Fulmer notes that Interthinx’s data on the subject has discovered an acute problem that could seep back into the industry.
“According to our mortgage fraud risk report, the risk of fraud is up very slightly from quarter to quarter,” Fulmer explains. “This concerns us. As the market shifts from refi to purchase, risk goes up. You have more actors involved and more moving parts in a purchase market than you have in refi. All additional moving parts bring higher risks.”
CoreLogic’s Gerding agrees, adding that some sections within the mortgage world are already showing evidence of problems.
“We are seeing an increase in three out of six risk areas: Income fraud risk, undisclosed debt income fraud risk and occupancy fraud. As the market changes, the refi boom leads to a purchase market. Refi is less risky than purchase–with refi, lenders already know the borrowers and do less verification.”
Ruth Lee, executive vice president of sales, marketing and business development at Denver-based Titan Lenders Corporation, notes that other types of fraud are percolating across the housing market.
“Right now, fraud is in a different place than it was a few years ago,” Lee says. “A major area in application fraud involves owner-occupancy fraud, where the fraudster claims they are buying for owner-occupant, but are not. There are also ‘asset mules,’ which involves renting other people’s assets and bundling them in with their own. There are also flash listings on the Multiple Listing Services, where real estate agents put up homes for a few hours and then pull then down, thus contributing to appraisal fraud.”
One area that has been raising a number of red flags involves short sale activity. Randy Wussler, vice president of product management and marketing at San Diego-based DataQuick, says that his company has been following national trends that point to suspicious happenings that may have significant consequences.
“Between 2011 and 2013, the incidents where people were buying low and selling have been amazingly high,” Wussler explains. “There are incidents where the short sale price is less than 50 percent of the market price and the subsequent sale is 200 percent higher—and within six months of the initial short sale. According to our data, 6.5 percent of all short sales had that activity. We found that incredibly high.”
Wussler adds that Arizona’s Maricopa County appears to the epicenter of this trend—the county registered 41 percent of the national volume of short sales and 59 percent of suspicious activity relating to buying extremely low and selling extremely high. Southern California came in second with 27 percent of all short sales and 15 percent of all suspicious activity. Properties valued at less than $100,000 made up 16 percent of short sales and 25 percent of suspicious activity, while properties valued between $100,000 and $200,000 were 28 percent of short sales and 39 percent of suspicious activity.
Wussler notes that these figures do not necessarily mean that every short sale was a fraudulent transaction. “It is not illegal to buy low and sell high,” he states. However, he expresses concern over the possibility of a new wave of malfeasance relating from any potential collusion between sellers and agents.
But considering the excess inventory that has burdened the housing market, it would not be cynical to imagine that more than a few cases of dubious behavior have occurred.
“Whether at the applicant or underwriter level, there are going to be folks who are compensated or incented to get business done at a rapid pace and high volume,” says FormFree’s Chandler. “When you have that, then you will have fraud.”
So what can today’s industry do to hammer back at the fraudsters? Brian C. Coester, CEO at Rockville, Md.-based Coester Valuation Management Services, advises mortgage bankers to recognize that the nature of loan origination will never allow for a fraud-free environment.
“You can make the process so complicated that it would be 100 percent fraud-proof,” Coester says. “But, at the same time, it would make it so complication that no one would get a loan.”
For Coester, the strongest defense comes in the intelligent use of technology–specifically, in using today’s software systems to determine the points along the origination route where possible fraud may have taken place. “We had an issue where the FBI came into our office because the lender was changing the appraisal values and the FBI wanted to see the original appraisal,” he adds. “It is important to make the loan process more traceable so we can see what a file originally looked like and what looks like now. The technology is there to accomplish this. It is just a matter of putting it all together.”
“From my perspective, fighting mortgage fraud is about data integrity or lack thereof,” says Fulmer. “As much as Dodd-Frank and the Consumer Financial Protection Bureau cause pain at a variety of levels, they nonetheless elevate data integrity to a level of compliance. The government-sponsored enterprises have also been pushing for this.”
But despite the most targeted data solutions, there is also the question of the extremes that some fraudsters will go to in order to achieve their goals.
“Although we continue to make tremendous strides, the fraudsters are very good, too,” says Michael Kuentz, senior vice president of mortgage services at Atlanta-based Equifax. “We know of cases where they are stealing identifications or taking advantage of hospice facilities in order to get control of Social Security numbers and circulate them into mortgage arena.”
Titan Lenders Corp.’s Lee calls for a more diligent human element to fight back against mortgage fraud.
“For all of the many advantages in technology, a human component is required to ferret out when people are lying,” Lee says. “Data can be perfect, but identity theft is a big issue in fraud. With home equity conversion mortgages, for example, there is a disproportionate amount of fraud because many counselors do their counseling over the phone. When you do that, you don’t know who the heck you’re talking to.”
Lee adds that the fight against fraud needs to be part of a daily operation, involving all employees in the origination chain. “It is not a reflection on you if fraud occurs,” she says. “But it is a reflection on you if you don’t implement training on suspicious activities reports.”