The latest mortgage fraud data suggest increasing problems in the states of New Jersey and Colorado. Another area of growing concern is collusion between industry professionals. Fraud on new originations in Florida, however, appears to be past its peak.
Of all fraud investigations last year, 60 percent involved some type of application misrepresentation or fraud. This category includes — but is not limited to — fake names, misrepresentation of occupancy and income fraud as well as lying about assets or debts.
That was according to the 14th Annual Mortgage Fraud Report from LexisNexis. The case report was previously known as the MARI Fraud Report.
Subscribers to the Mortgage Industry Data Exchange, or MIDEX, submit reports about subscriber-verified fraud and material misrepresentation in an effort to notify each other of adverse experiences involving mortgage industry professionals. Subscribers are then able to perform due diligence checks on mortgage professionals and companies.
The LexisNexis report is prepared using the MIDEX data as well as Home Mortgage Disclosure Act data sourced by the Mortgage Bankers Association.
Appraisal fraud was involved in around a third of investigations for 2009, 2010 and 2011. But the number drops to 17 percent for just loans originated last year from a high of 34 percent for the 2009 vintage.
“The highest reported categories for all reported 2011 investigations are application and appraisal fraud and misrepresentation,” the report stated. “The highest categories for reported 2011 originations are application and verification of deposit (and other bank-related documentation) fraud and misrepresentation.”
The biggest drop in reported fraud and misrepresentations was with verifications of employment and bank statement documentation, which has fallen to 4 percent on 2011 originations from 15 percent for the 2007 vintage.
While 80 percent of Suspicious Activity Reports tracked by the government in fiscal 2011 involved fraud mostly perpetrated by borrowers in order to qualify for a home loan, a majority of MIDEX incidents involved fraud for profit involving industry professionals.
The share of MIDEX reports involving mortgage fraud committed in previous years has gone from 77 percent in 2007 to 94 percent in 2011. The increase reflects growing repurchase demands.
Of the 445,101 total SARS filed between 2001 and last year, 121,165 were on loans originated in 2007, while 117,371 were on 2006 vintage loans and 60,475 were on 2005 originations. The data “seem to demonstrate the plethora of older loans being investigated as a direct result of both decreased new origination volumes and increased delinquency rates and repurchase demands.”
Florida’s share of overall mortgage fraud investigations during 2011 was 7.66 times greater than its share of mortgage originations and the worst of any state. Florida has maintained its No. 1 standing each year since 2007.
Nevada moved to the second spot from the third spot in 2010. After that was Arizona, which slipped from its No. 2 position in 2010, then Michigan and Rhode Island.
But based on MIDEX reports through the first quarter of this year only for 2011 originations, New Jersey had the highest rate of mortgage fraud during 2011 — leaping from the ninth position based on 2010 originations. Fraud investigations on the 2011 vintage in the Garden State was 2.93 times its share of originations for the same period, worsening from 1.45 times during the previous year.
Colorado had the next-highest rate of fraud on just last year’s originations — climbing from No. 15 based on the 2010 vintage. The fraud index in Colorado climbed to 248 last year from 103 in 2010.
Florida followed, falling one position both last year and in 2010 — an indication that newer originations in the state involve less mortgage fraud. Florida’s index declined for the third consecutive year in 2011 to 227 from the prior year’s 305.
No. 4 based on the 2011 vintage was Michigan, and California was No. 5.
Drilling down to metropolitan statistical areas, 16 percent of all reports last year were in the Los Angeles-Riverside-Orange County MSA.
The New York-Northern New Jersey-Long Island MSA accounted for another 11 percent, while the Miami-Fort Lauderdale MSA encompassed 7 percent.
Between 2010 and 2011, reports of material fraud and misrepresentation involving industry professionals fell 35 percent.
But collusion between professionals was on the rise between 2008 and 2010. While just 5 percent of investigated 2008 originations involved transaction that were not arm’s length, the share doubled by 2010. The share subsequently retreated to 7 percent on the 2011 vintage.
LexisNexis cited a case reported in 2011 where 26 loans originated over a four-year period involved three loan officers at a single company — one who was the underwriter and another who was the seller on three transactions. The closing agent was the same on nine of the loans, each which had fraudulent HUD-1 settlement statements. The paralegal at the closing agency also owned the real estate agency involved in 10 of the transactions. The same three appraisal firms prepared inflated appraisal report, and some of the reports included appraisal identity theft.
The report identified Alabama, Kentucky, New York and Pennsylvania among the states with the most risk of collusion.
LexisNexis noted that the FBI’s Financial Crimes Report to the Public for FY 2010-2011 indicated that distressed homeowner fraud displaced loan origination fraud as the biggest mortgage fraud threat in many of its offices.