Ratings agencies are not responsible for detecting mortgage fraud in residential mortgage-backed securities they rate, according to a new report from Standard & Poor’s. Fraud was found to be more common among brokers than retail originators.
While lousy underwriting guidelines and home price declines are often cited as the culprit for the poor performance of recent vintage subprime loans backing RMBS, the New York-based agency today said mortgage fraud at origination has also emerged as a significant factor.
“It’s important to note that rating opinions are neither audits nor due-diligence reviews of mortgage originators,” S&P stated in an announcement.
The ratings agency said it is reviewing its fraud analyzation process to determine whether originators and issuers have good procedures for addressing mortgage fraud prevention and detection. It reportedly surveyed the top 25 RMBS issuers about fraud detection capabilities and practices. In addition to underwriting, appraiser and mortgage broker approval was analyzed.
Loans originated during 2006 have seen reports of fraud jump 30 percent as of May compared to 2005 loans as of a year earlier, S&P said. The agency cited a study from the Mortgage Asset Research Institute, which maintains the MIDEX national fraud database.
The most common mortgage fraud involved income and employment, the MARI study reportedly noted.
“Control and mitigation of fraudulent activity are even more complicated when independent mortgage brokers have originated a considerable portion of the mortgages in a portfolio,” S&P stated. “Preliminary conversations with industry participants indicate that misrepresentations and data-quality issues are more common for broker-originated loans than for loans originated through the retail channel.”
Mortgage broker oversight has been limited while regulation has been absent — leading to more fraud by brokers and borrowers who are motivated to close the loans, the announcement said. In addition, pressured appraisers may have complicated the fraud by inflating estimated values.
Lenders have offset these risks with broker and appraiser approval processes and monitoring, S&P said. They also use automated technology that determines fraud risk scores, validates income and identifies red flags in the areas of identity, occupancy and value.
S&P said it may survey a larger base and use that information to help better forecast loan performance.
