A recent report showed Nevada topped the list of states with the most subprime residential mortgage fraud, while Georgia reigned in the prime market. The results were based on alleged fraud information and incidents reported by major mortgage lenders, the secondary market agencies and insurers to a database.
Risk-management services provider Mortgage Asset Research Institute Inc., or MARI, reported that Nevada, Georgia, South Carolina, Utah and Michigan lead the top ten states in subprime mortgage fraud, in that respective order. In the prime lending sector, the same states, except Michigan, were on the upper half of the list.
MARI said industry participants have been submitting information to its central database — MIDEX, or Mortgage Industry Data Exchange — for the past nine years, but the report’s results were based on loans with origination dates between the year 2000 to 2003.
Nevada had a Subprime MARI Fraud Index (MFI) score of 292. Where a zero would indicate no reported fraud from a state and a 100 would indicate fraud is at a national average — what one would expect in terms of fraud rates, given its population size — a 292 is almost three times what is expected, according to the report.
In one Nevada fraud case, former mortgage broker David Ferradino allegedly collected $5.7 million from mostly local investors for two Las Vegas home-building developments, then passed the funds on to a company that he owned 50% of without the permission or knowledge of the investors. Ferradino was reportedly sentenced to five years’ probation and ordered to pay $4.2 million in restitution to 90 investors, according to a story in the Las Vegas Sun.
Another Nevada mortgage broker was reportedly gunned down outside his Las Vegas area home, apparently the result of bilking millions of dollars from dozens of investors in a nationwide Ponzi scheme. According to the Las Vegas Review-Journal, bankruptcy documents indicate Richard Wood defrauded investors of $4 million to $6 million by swaying participants in finance seminars he taught across the country to invest in bogus ventures.
Georgia came in at No. 2 with a score of 212, South Carolina had a 211, Utah a 210 and Michigan 197. The remaining top subprime mortgage fraud areas were Florida, followed by Maryland, California, Colorado and Missouri.
Georgia has broken up entire fraud networks, with one Atlanta fraud ring responsible for more than a hundred million dollars in losses on hundreds of properties.
Compared to data within the last 10 years, one of the notable differences in the most recent analysis was the shift in the geographic area where alleged fraud is most common — California and Florida had traditionally held the top two spots in mortgage fraud for both subprime and nonprime loans, MARI general manager Bill Matthews told MortgageDaily.com.
Prime MFI scores, were similarly ranked with the Subprime MFIs. Georgia scored first in prime loan mortgage fraud with a score of 239. Although Florida didn’t make the top 5 in the subprime lending sector, it placed second in the prime sector with a 229. Nevada was third with a 223, followed by South Carolina, Utah, Colorado, California and Missouri. Maryland was right on the national average, and Michigan, which ranked higher up in subprime loan fraud, had the lowest Prime MFI score of the top 10 states — a 75, or 75% of the national fraud rate for prime loans.
MARI pointed out that even though Ohio did not make the top ten problem states in subprime or prime loan fraud cases reported by MIDEX subscribers, industry professionals have been informally discussing a jump of fraudulent activity in that state. Many of these schemes, MARI said, involve purchases of overvalued, foreclosed properties, in which the sellers lured buyers into no-money-down purchases with false representations that the properties were rented or could be sold back to the sellers in one or two years.
Matthews said the reported data also showed that although the type of subprime fraud data MARI has on file has been relatively stable over the four-year period, there was a significant increase in percentage of tax return and financial statement misrepresentation.
Fraud in tax and financial statements was reported at 49% in 2003, up from 44%, 22% and 19% in 2002, 2001 and 2000, respectively. However, MARI noted that the 2003 values are quite preliminary, as even the numbers for the prior year were likely to change as fraud is discovered in subprime loans originated in those two years.
Matthews also highlighted that there was a notable decrease in subprime loan appraisal misrepresentation since 2002, but added that MARI does not believe this to be the actual case since there is a lag in the reporting of these misrepresentations. Appraisal/valuation fraud decreased to 10% in 2003, from 17%, 21% and 38% in 2002, 2001 and 2000, the report said.
While application fraud tied with tax and financial statement fraud at 49%, it has reportedly been the most common type of fraud throughout the years, but is not surprising given the comprehensive nature of the application form, MARI said.
The report also revealed that many loans that become delinquent more than ninety days in their first year — Early Payment Defaults, or EPDs — contain some form of misrepresentation and should not have been made. An analysis performed by LoanPerformance Inc., which collects monthly payment data on more than 42 million loans, reportedly showed that Utah ranked the highest in EPDs on subprime originations made last year, it scored 265, almost three times over the national average. The remaining top 10 in EPDs were Oklahoma and Colorado, which tied in second place with scores of 199, followed by New Mexico, Mississippi, Georgia, Ohio, Louisiana and Indiana. South Carolina ranked lowest in EPDs within the top 10 states in 2003, but ranked the highest in 2002.
As far as EPDs in prime loans, Salt Lake City ranked highest among metropolitan statistical areas in 2003 with a score of 300. The year’s remaining top five metro areas in prime loan EPDs were Dallas-Ft. Worth and San Antonio — both in Texas and tied for second place with 280 — followed by Atlanta and Charlotte. These areas showed steady and, in most cases, dramatic increases in their prime loan EPD rates over the past four years.
MARI pointed out that with the significant reduction in originations expected for 2004, additional fraud cases could surface at a rapid rate as some originators try to maintain former high origination levels.
The risk-management services provider recently introduced its Mortgage Fraud Alert System, which alerts subscribers of fraud schemes reported by other subscribers in its network.
