Mortgage fraud is more than twice as high on government-insured loans than on conventional mortgages, according to a new report that also indicated fraud is playing a big role in repurchase demands. The study highlighted a single street in Florida with the highest risk of fraud where prices have tumbled from more than $200,000 to less than $30,000.
An estimated $14 billion in mortgage fraud will be reported by lenders for last year’s originations, according to the 2010 Mortgage Fraud Trends Report released today from CoreLogic.
The Santa Ana, Calif.-based data provider based its findings on an analysis of 7 million loans originated between 2005 and 2009. CoreLogic said its full database includes 80 million loans contributed by members of the Mortgage Fraud Consortium and represents 65 percent of the origination market.
“Lender-reported instances and levels of fraud losses are at their highest levels in recorded history,” the report stated.
However, the increase was impacted by lenders who are more accurately reporting fraud because of an elevated level of awareness.
As a share of originations, fraud is 55 basis points on conforming loans and 122 BPS on loans insured by the Federal Housing Administration. The report suggested that increased FHA originations have not been accompanied by additional investments in fraud prevention. Last year’s FHA fraud losses are expected to reach $7.5 billion.
Nearly one-third of mortgage fraud is tied to bogus income, while internal fraud accounts for 17 percent and identity fraud represents 13 percent. Home-equity fraud, where multiple liens are involved, is emerging as one of the fastest growing fraud schemes.
But the risk of mortgage fraud has declined each quarter since the third-quarter 2007 — when the risk of prime mortgage fraud peaked. Including subprime mortgages, fraud risk peaked in a year earlier. The CoreLogic Fraud Index has fallen from 112 in the last quarter of 2007 to just 85 in the last quarter of 2009. The index ranges from a low of zero to a high of 999.
CoreLogic noted that the decline in the fraud risk index reflects a delay in the reporting of mortgage fraud compared to the origination of the loan; it normally takes three years after the loan closing before fraud is reported. It also reflects more rigorous policies adopted by lenders during the past three years.
But criminal are adapting — moving away from lying about income and moving towards practices like hiding debts. Short-sale fraud involving “flops” — where the home value is fraudulently lowered to extract a bigger discount — is also increasing and often not detectable during underwriting. Another scheme is the use of falsified lien releases. CoreLogic predicts an increase in emerging schemes.
States with the highest risk of fraud are California, Florida, Georgia, North Carolina and South Carolina.
The report also broke out fraud risk by zip code and by street. Jamaica, N.Y., was the worst zip code, with the risk of fraud at 447 percent of the national average.
Five of the 10 worst streets are located in Orlando, Fla., where the risk of fraud equal to 415 percent of the national average. The foreclosure rate on those five streets is 50 percent and the average fraud risk score exceeds 850. Every loan on some of the highest-risk streets appears to involve fraud.
On the worst street, located in Orlando, the average selling price for properties sold was $220,000 between 2007 and 2008. Units listed for sale are asking between $10,000 and $25,000. Most have been converted to rentals.
Of loans that wind up in foreclosure, CoreLogic said one-quarter had some evidence of fraud in the initial application, while up to 70 percent of early payment defaults involve fraud.
The level of fraud is expected to begin rising again once risk stabilization is achieved and the appetite for new production eventually returns.
Mortgage fraud is also playing a role in lender repurchases. CoreLogic said undisclosed liabilities were responsible for 31 percent of repurchase in the last year, while income fraud accounted for more than a quarter and occupancy fraud was involved in 17 percent.
“Lenders are combating this problem with much better pre-funding controls,” the report stated. “However, when one repurchase reason is mitigated, agencies will begin to look more intently for other types of fraud to push back.”
