Residential mortgage fraud continues to plague the industry, according to a report from the Mortgage Asset Research Institute, but much of it is not being reported. And recently made subprime loans with serious defaults, which usually involve some sort of misrepresentation, are raising flags in states not traditionally known for high rates of fraud.
Among the findings from the recently released 2004 Periodic Report on Mortgage Fraud is that the Midwest is becoming a concern and fraud seems to be shifting from the larger metropolitan areas to cities of more moderate size.
Application fraud continued to be most common type, but tax and financial statement fraud have gained popularity, according to the data, which reportedly contain 10 years’ worth of alleged incidents reported by major mortgage lenders, agencies and insurers. And a reported drop in appraisal fraud can be tied to an increase in the use of automated valuation models.
While California had traditionally been one of the top fraud states, its current average of reported incidents is below the national average — likely masked by high real estate appreciation, MARI said.
Potential borrowers in hot real estate markets like those in the Golden State feel pressure to get into a home before they become unaffordable and therefore tend to misrepresent their circumstances, according to the report.
For example, multiple families might purchase a home together, but make the loan application in the name of the family with the best credit record and highest credit score, and the “income” shown is the pooled income of all the families. Although such cases represent “fraud for housing,” mortgage records often show timely payments and lenders debate whether to report the applications as “fraudulent.”
For the second consecutive year, Georgia remained the top fraud state with the highest rate of reported fraud by both prime and subprime lenders during the prior four-year period, according to the report — which was prepared for the National Home Equity Mortgage Association. And even though the rate for the Sooner State was almost three times the national average, given the level of Oklahoma originations, South Carolina came in second with the rate of reported fraud about 2.5 times higher than the national average. Next was Florida, followed by Utah, North Carolina, Missouri, Nevada, Texas, Illinois and Michigan.
Florida came in behind Georgia for the highest level of subprime mortgage fraud, according to MARI. When fraud was broken out for subprime lending, Georgia was followed by South Carolina, Nevada, Utah and Michigan — all of which have appeared regularly as problem areas in the past. North Carolina placed 10th.
But South Carolina’s fraud score drops significantly in the subprime category, MARI noted, and three new states in the top 10 seem to have growing subprime fraud problems: New York, Arizona and Mississippi.
While Serious Early Defaults — loans that become delinquent by more than 90 days or go into foreclosure in the first six to 18 months — do not necessarily involve fraud, they usually contain some form of misrepresentation and should not have been made.
Subprime serious early defaults were highest in Oklahoma, Mississippi and Ohio, which have defaults at more than twice the national average, MARI said.