Hot spots for mortgage fraud risk

Reports point finger at organized crime rings, Realtors

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 19, 2010

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Reports point finger at organized crime rings, Realtors

Steve Bergsman
Inman News

I never really thought about mortgage fraud in terms of geography, but after getting my hands on Interthinx's quarterly Mortgage Fraud Risk Report, I've had to change my point of view.

Interthinx of Agoura Hills, Calif., provides risk mitigation and regulatory compliance tools for the financial services industry and what it has been able to do is mine its data to locate nodes of mortgage fraud risk.

The operative word here is "risk," because Interthinx's fraud detection tools find discrepancies in loans, but the company can't use the word fraud unless litigation is brought forward, so "mortgage fraud risk" is the phrase it has devised.

Mortgage fraud risk means that individual loans have red flags in regard to such things as manipulated property value or borrower identity, explained Ann Fulmer, Interthinx's vice president of business relations.

"You can't say it's fraud until that loan blows up, investigated and identified as fraud. In the environment we are in now with the secondary market and all the repurchases, there is an awful lot of investigation going on into these loans and it is becoming very clear there is a huge amount of fraud."

What's interesting about Interthinx's report is that it centers on individual locations because incidents of mortgage fraud migrate geographically to take advantage of local market conditions.

In its most recent report, issued late summer, the five states highest on its mortgage fraud risk index were Nevada, Arizona, California, Rhode Island and Florida.

Four of the top five are fairly obvious because fraud thrives where there is uncertainty in property values. To a lender, valuation represents security, but when valuation is manipulated it represents profit margins to fraudsters. The states with the highest ranking of fraud risk are those with high levels of foreclosure activity and underwater borrowers.

What's happening in these states is that individual borrowers want to refinance but they have impaired equity and not enough income to support a refinance so they are fudging income and employment facts.

All that shuffling of numbers is secondary to the primary incidents of mortgage fraud risk, which is the manipulation of property values when your home is underwater and your opportunities to refinance are limited.

The odd state out in the top five for mortgage fraud risk is Rhode Island, which economically has its own set of troubles. The state is experiencing serious unemployment problems and high mortgage failures.

With foreclosures come a lot of uncertainty in property values, thus there is opportunity for fraud. Combine that with the desperation that's often a byproduct of unemployment and you get a lot of motivation to commit fraud.

The 10 states with the lowest mortgage fraud risk rankings are: Wyoming, Louisiana, Montana, Alabama, Alaska, Mississippi, South Dakota, West Virginia, Kansas and Maine.

If one drills down into the Interthinx data to cities, the top 10 metro areas for mortgage fraud risk are all in the busted residential states of California, Arizona and Florida: Modesto, Calif.; Stockton, Calif.; Vallejo-Fairfield, Calif.; Cape Coral-Fort Myers, Fla.; Riverside-San Bernardino-Ontario, Calif.; Phoenix-Mesa-Scottsdale, Ariz.; Las Vegas-Paradise, Nev.; Visalia-Porterville, Calif.; Fresno, Calif.; and Bakersfield, Calif.

Diving even deeper into the data to individual ZIP codes, one finds some real surprises: Of the top 10 ZIP codes for mortgage fraud risk, the No. 1 and No. 3 spots are in Chicago and the No. 6 and No. 10 rankings in Atlanta.

Locally what happens, Fulmer explained, is that once fraud gets hold of an area, it infects public records and creates so much uncertainty that a cycle of fraud develops.

Fulmer used a personal case as an example. In her neighborhood, which remains unidentified but is probably near Agoura Hills, Calif., there were eight homes involved with fraud and it took eight years to get those homes out of the fraud cycle and into the hands of true owner-occupiers.

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