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Mortgage broker, originator and banker criminal cases. Real estate flipping and appraisal fraud. Mortgage fraud prevention, studies and analysis.

Risk of Valuation Fraud Diminishes

Q2 2013 Mortgage Fraud Risk Index 104

Aug. 22, 2013

By Mortgage Daily staff

The risk of mortgage fraud edged higher thanks to deterioration in occupancy fraud. But the risk of appraisal fraud was down on a quarter-over-quarter and year-over-year basis.

The Mortgage Fraud Risk Index was 104 in the second quarter. An index of 100 indicates a nominal level of fraud risk based on fraudulent indicators from 2003 through 2007 in states with low levels of foreclosures.

The index was up 4 percent from the first-quarter of this year, when it came in at 100.

That was according to The Interthinx 2013 Mortgage Fraud Risk Report for the second quarter. The Agoura Hills, Calif.-based company said that the index is based on data derived from loan applications processed through its FraudGUARD system. More than 40 indicators are considered.

Interthinx said in the most recent report that the index has increased 2 percent from the second-quarter 2012. However, the original year-earlier report had the index at 149 -- suggesting that the risk of mortgage fraud had actually fallen 30 percent over the past year.

But Interthinx Director of Analytics Shane De Zilwa explained in a telephone interview that the indices were recalibrated in the first-quarter 2013 with a new base period of the first-quarter 2012. In addition, the methodology of calculation was adjusted to reflect a reassessment of the FraudGUARD alerts that were being used to the determine the index -- which was originally launched in 2009.

De Zilwa also noted that the overall index, which used to reflect the share of loan applications with at least one FraudGUARD alert, was changed to represent an average of the four sub-indices. The new calculation enables easier identification of which sub-categories are having the most impact on the overall index.

Nevada's index of 132
overtook California's 130 as the state where mortgage fraud is most likely. Nevada's poor standing was driven by the Reno-Sparks Metropolitan Statistical Area and the Las Vegas-Paradise MSA, which respectively ranked as the fifth- and sixth-worst MSAs. California was home to six of the 10-worst MSAs.

No. 3 was Washington, D.C.'s 128 index, followed by Florida's 117 and Illinois' 116. Florida was the location of the worst MSA -- Cape Coral-Fort Myers.

Interthinx's state rankings were similar to those reported by the Financial Crimes Enforcement Network for last year. FinCEN's data indicated that California's per-capita filings of Suspicious Activity Reports were the highest, followed by Nevada, Florida, Arizona and Washington, D.C.

At the other end of the spectrum was North Dakota, which Interthinx said had an index of only 45.

The risk of property valuation fraud fell 4 percent from the previous quarter, leaving the national Property Valuation Fraud Risk Index at 105 in the second quarter. The likelihood of valuation fraud has declined 3 percent from the second-quarter 2012.

Interthinx indicated that the risk of valuation fraud rose 31 percent from the first quarter in Dayton, Ohio -- the most quarter-over-quarter deterioration of any MSA in this category and pushing Dayton to the highest risk level. On a year-over-year basis, the Detroit-Warren-Livonia MSA worsened by 140 percent, more than any other MSA.

The risk of identity fraud worsened 7 percent nationally from the prior quarter but subsided 9 percent from the same quarter in the prior year. That put the national identity fraud risk index at only 91 -- making it the lowest-risk category. At 174, the index for the Fayetteville-Springdale-Rogers, Ark.-Mo., MSA was the highest. In Madison, Wis., the index increased 269 percent from the first quarter, the biggest jump of any MSA. It was up 125 percent from a year earlier in York-Hanover, Pa., also more than any other MSA.

The U.S. Occupancy Fraud Risk Index was 126, worsening 10 percent from three months earlier and 14 percent worse than a year earlier. Cape Coral-Fort Myers, Fla., scored worst in this category at 267. The 57 percent increase in Springfield, Mass., was the highest from the first quarter, and a 110 percent rise in Deltona-Dayton Beach-Ormon Beach, Fla., was the biggest year-over-year increase.

The risk of U.S. employment and income fraud edged up 2 percent from the prior period and was 5 percent higher than in the second quarter of last year -- though the index was still just 92.

The Employment/Income Fraud Risk Index was highest at 164 in the San Diego-Carlsbad-San Marcos, Calif., MSA. The biggest increase from the first quarter was 52 percent in San Luis Obispo-Paso Robles, Calif. The Salinas, Calif., MSA increased 72 percent from the second-quarter 2012, the worst deterioration of any MSA.

Interthinx noted that adjustable-rate mortgages are expected to account for a growing share of mortgage originations as interest rates rise -- a development that will likely increase the risk of mortgage fraud since ARMs have higher indices than fixed-rate loans. For instance, the Employment/Income Fraud Risk Index for ARMs was 169 versus 92 for fixed-rate mortgages.

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