Recently, the Mortgage Asset Research Institute (MARI) released a report that reflected an interesting phenomenon. First, mortgage fraud incidents as reported by major mortgage lenders, agencies and insurers indicate that in 2003, Florida and California slid in the rankings of states with the most alleged mortgage fraud. The report also showed that states in the Midwest — notably Illinois and Michigan, with Ohio moving up behind them — are starting to experience more suspected fraud activity than in previous years.
What’s interesting is the correlation between early payment defaults in these states and reported cases of fraud.
A spokesman at Fidelity National Default Solutions, a leading provider of REO (real estate owned) asset management solutions, said the company is seeing less REO activity and a ‘more stable’ market in California, with the inventory of foreclosed properties declining. Conversely, the company is seeing an increase in foreclosures and REO inventory in Michigan and Ohio.
While there may not be a one-to-one ratio between increased foreclosures and fraud, statistics have shown that at least half of all early payment defaults involve some form of misrepresentation in the loan application process. A report from LoanPerformance Inc., a company that collects monthly payment data on more than 42 million loans, also shows a strong correlation between areas that rank the highest in early payment defaults, and those ranked by MARI as having high reported fraud rates. So what’s going on?
Of course, the easiest answer is that borrowers are “fudging” information in order to get their loans approved, and then can’t make their mortgage payments. However, there is a different answer that is not as easy to talk about, although it is more likely true. Someone in the mortgage chain — a broker, loan officer, appraiser, underwriter, title agent — is involved in the fraud. Most individuals outside the mortgage industry do not know which factors in their application to alter to get a loan approved. Nor do they have the sophistication or expertise to falsify documents or property valuations without the help or coaching of someone associated with the mortgage process.
So is the Midwest experiencing an influx of mortgage professionals suddenly willing to perpetrate fraud? Probably not. It is more likely a combination of factors, such as a soft housing market and some downward pressures on local economies. Still, the precipitous drop in refinancing activity has put tremendous pressure on originators to be more aggressive in order to keep making their numbers. As a result, some mortgage professionals have crossed the line and are already involved in fraudulent practices. Unfortunately, most of these perpetrators are serial offenders.
So what is the answer? Prevention is the most viable solution. That means lenders must implement a strong antifraud policy, educate their employees about fraud and utilize sophisticated technology to provide real time analysis of loan files. There are simply too many scams and tools used by fraudsters for manual quality control processes to be successful.
Mortgage fraud may decline in one area only to increase in another, but in most cases it is detectable and preventable with automated analysis and sound internal practices. The relationship between fraud and early payment defaults is undeniable. To reduce both, and the losses they cause, lenders must face the facts, get the right tools and be relentless in their fight.
