Preventable mortgage fraud has played a role in the rash of early defaults plaguing mortgage lenders, according to a recent analysis.
Seven out of 10 early payment defaults can be linked to a significant misrepresentation on the original loan application, BasePoint Analytic said in an announcement today. Its analysis of over 16,000 loans reportedly confirmed the presence of egregious misrepresentations that later led to a default.
“Many lenders are facing increases in repurchase requests and early payment defaults,” said Tim Grace, BasePoint president and chief executive, said in the written statement. “In an effort to help lenders deal with these challenges, BasePoint has rigorously studied the issue and found a direct correlation between [early payment defaults] and mortgage fraud.”
The study further found that loans with egregious misrepresentations were up to 5 times more likely to default in the first six months than loans that did not, the provider of scientific fraud analytics and consulting services said. The misrepresentations included fraud such as income inflated by as much as 500 percent, appraisals that overvalued property by 50 percent or more, and false employers and tax returns.
“More importantly, the study concluded that predictive models could be deployed early in the loan process to help lenders predict which loans were likely to default within the first six months, enabling the loans to be rejected pre-funding,” BasePoint added.
Such conclusion coincides with research from Interthinx, a fraud detection software developer that has previously reported that “one of the most critical aspects of any fraud detection program is a review of 100% of the applications on a pre-funding basis.”
BasePoint noted that the tradition of relying on credit scores to assess a borrower’s risk is effective when the information on the application is true but not as effective when a borrower or broker misrepresents fundamental characteristics such as income, employment, debt or the value of the property.
BasePoint touts that its FraudMark for Origination model correctly identifies approximately 40 percent of a lender’s loans pre-funding that, if booked, would stop paying within the first six months. The model reportedly outperforms traditional credit scores by over 200 percent in determining early payment default when fraudulent misrepresentations are present in the application and has enabled lenders to prevent nearly $1 billion in suspicious loans from funding.
“We can demonstrate for lenders and investment banks how they can substantially reduce their [early payment default] losses, and often within a short period of time,” Grace said.
Risk assessment and fraud prevention solutions provider CoreLogic, which recently found that 7 percent of brokers account for 63 percent of early payment defaults, said it helps lenders evaluate and manage the risk associated with their broker network through ThirdParty Scorecard.
BasePoint, which previously found that “the most serious mortgage fraud risk is broker-facilitated fraud,” enables broker scoring through BrokerWatch.
