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Fraud Flourishes in Florida

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Mortgage fraud grew by almost one-third last year, with the Sunshine State dethroning Georgia as the state with the most fraud problems, according to an annual review prepared for mortgage bankers. The report indicates it could be five years before fraud from the 2006 subprime vintage is uncovered.

Such conclusions were derived from the Ninth Periodic Mortgage Fraud Case Report issued to the Mortgage Bankers Association by the Mortgage Asset Research Institute LLC. The report of U.S. residential mortgage fraud and misrepresentation is based on information major mortgage lenders, agencies and insurers submit to MARI’s central database, Mortgage Industry Data Exchange.

“Fraud against mortgage lenders is a growing concern to all who have a stake in our industry,” said John M. Robbins, MBA chairman, in an announcement. “While we continue to try to get our arms around the full scope of the problem, the MARI report significantly helps the industry better understand where we need to focus efforts in defending our companies and communities against mortgage fraud as it increases in frequency across the nation.”

The number of reports in the database pertaining to 2006 originations came in approximately 30 percent higher than the number of reports in 2005, according to the report.

“This increase is partially a result of lenders finding and reporting more cases of fraud from their 2006 loan originations,” MARI said in the report. “The cooling of real estate markets this past year has also helped reveal cases which strong price appreciation has masked during the past few years.”

While reported fraud has grown, MARI noted that “incidents of mortgage fraud are now more evenly distributed across nearly all states whereas, in prior years, reports tended to be concentrated in relatively few states.”

Based on fraud reports submitted to MARI through the first quarter of 2007, Florida took the crown in having the highest number of loans with misrepresentation originated in 2006. The state had a MARI Fraud Index of 208, which means the reported fraud rate was more than twice what MARI expected, based solely on the state’s origination volume. The Sunshine State climbed to the top after ranking a revised fourth place a year earlier for having a reported fraud rate 68 percent higher than it should have had on its 2005 volume.

Florida fraud worsened from being the fourth highest last year. While Florida was reported as the top state for misrepresentation in 2005 loan originations, subsequent submissions of alleged fraud pushed Georgia to No. 1 — as Florida had a rate 68 percent higher than what it should have had that year, or just over half the rate of Georgia, MARI noted.

No. 2 in the current report was California, with a reported fraud rate of 188, or 88 percent higher than what was expected and worse than its previous No. 8 rank. Some industry experts have suggested that California’s fraud had been masked by high real estate appreciation, but the recent slowdown in its housing market may explain its return to high ranking in this year’s report, MARI said.

Michigan came in third with a reported fraud rate 38 percent above its origination rate, improving from second place in the previous year through a rate 96 percent higher than expected, according to the report.

Georgia’s reported fraud rate of 125 was the fourth highest — sinking from the previous year’s No. 1 fraud rate of 310 and “showing the greatest improvement from prior years’ rankings,” MARI said. In prior years, the states ranking fourth had “much higher” reported fraud rates. Aside from mortgage fraud reported for the 2006 book of business being more uniformly distributed than in prior years, another important factor in its improvement is that fraud reports on its 2006 loans has fallen 32 percent from the prior year.

“This drop may be due to the aggressive legislation, consumer awareness campaigns and enforcement Georgia and federal officials put in place during 2005,” MARI said.

In May of 2005, the state passed the Georgia Residential Mortgage Fraud Act and became the first state to criminalize mortgage fraud, providing severe penalties of up to 10 years in jail for first offenders and 20 years per property for violations involving multiple properties and loans. Another example of the collaborative efforts in the state was the Department of Banking and Finance’s action to have all its mortgage examiners trained and qualified as Certified Fraud Examiners.

The remaining top 10 states for misrepresentations in 2006 originations were reportedly Utah, with a rate of 122; New York, with 114; Illinois, with 113; Minnesota, at 112; Colorado, with 108; and Nevada, with 103. Of these states, only Illinois and Colorado had less reported fraud than in the previous year when they respectively ranked third and fifth.

MARI highlighted that Florida’s fraud rate, compared to the previous leading rates of Georgia ranging from 310 to 506, and Colorado’s and Nevada’s rates only slightly above the expected value, point to the more even distribution.

The report also highlighted Indiana ranked 22nd among the states — a sharp contrast to its second place ranking in both 2003 and 2004.

Unlike the increased overall number of MIDEX report submissions, reporting specific to 2006 subprime originations is lower than it was for the 2005 book of subprime business, perhaps “reflective of the broader challenges these lenders have been facing.” MARI said it will likely take three to five years to uncover most of the fraud and misrepresentation in the 2006 book of subprime business, as during this time, many ARM loans will be refinanced, potentially preventing discovery of some of these issues.

The states with the highest reported fraud in subprime loan originations for 2006 were similar to those for overall originations.

The top three were Florida, with a reported fraud rate in subprime originations of 241; Utah, with a 209; and Michigan, with a 190. For subprime originations in 2005, Georgia was the fraud king due to a 330 fraud value and was followed by Michigan, Utah and Florida.

The rest of the top 10 in misrepresentations for 2006 subprime originations were Minnesota, with reported fraud of 162, followed by Georgia’s 152, and then Arizona, Indiana, New York, Ohio and Colorado’s 120.

Fifty-five percent of overall fraud incidents reported contained application fraud, versus 65 percent of subprime fraud incidents. These percentages are hardly surprising given that the application form is comprehensive in collecting personal identity, employment, asset and liability information.

“The most common types of fraud found to date in 2006 originations are in the areas of employment history and claimed income,” MARI said.

The report additionally utilized serious early payment default data from First American LoanPerformance, which tracks the delinquency and prepayment performance of more than 50 million active individual mortgage payments per month.

The metropolitan statistical areas with the six-highest default values for 2006 prime loans that became 90 days delinquent within the first three months of origination were all areas affected by hurricane activity: Hattiesburg and Jackson, Miss.; Beaumont-Port Arthur, Texas; Biloxi-Gulfport-Pascagoula, Miss.; New Orleans, La; and Mobile, Ala.

The seventh-highest early payment default rate for prime loans belonged to Buffalo-Niagra Falls, N.Y., followed by Enid, Okla.; Alexandria, La.; Corpus Christi, Texas; Danville, Va.; Elkhart-Goshen, Ind.; Flint, Mich.; Lake Charles, La.; and Jackson, Michigan.

Some Midwestern metro areas, California and Massachusetts are experiencing early payment problems among subprime loans.

For subprime loans, early payment default rates were highest in Jackson, Mich., followed by Enid, Kankakee, Ill.; Oakland, Calif.; Detroit, Mich.; Jackson, Miss.; Fitchburg-Leominster, Mass.; Stockton-Lodi, Calif.; and Brockton and New Bedford, Mass. Possibly, “California and Massachusetts made this list, at least in part, due to the slowdown of property appreciation in those states,” MARI wrote.

Current industry dislocations are likely to include confluence of several conditions that could be a recipe for “mortgage fraud disaster,” MARI said, citing, among other things, the subprime fallout which has raised quality thresholds, including having ARMs requiring that borrowers be qualified at more realistic rates than teaser rates.

“The bottom line is that there will be more professionals chasing a smaller pool of business,” MARI wrote. “There will be many that yield to temptation and try to make unqualified borrowers look more qualified than they are. When these conditions are coupled with a regulatory environment (in most states) where fraud perpetrators face relatively light penalties, the conditions are temptingly ripe for escalated mortgage fraud activity.”

Thus, “collaboration is the key for the mortgage industry as it continues its efforts to fight mortgage fraud against lenders,” a MARI executive said in an announcement.

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