According to the 2010 CoreLogic Fraud Index, the mortgage fraud cases making it to the courts today primarily happened between 2006 and 2009. In fact, CoreLogic estimates that $14 billion in fraud losses were experienced by lenders in 2009. But yesterday's fraud increases are causing headaches for today's borrowers.
Why should homebuyers care about fraud?
CoreLogic found a high correlation between fraud risk and subsequent default rates. I'll bet you're not surprised to hear that, especially when you think of the so-called liar loans, or no-income loans, that were so prevalent during the housing bubble. As an everyday borrower doing the right thing, the efforts to recognize mortgage fraud are likely making it harder for you to get a mortgage.
Income fraud is the most common type of fraud lenders report. About 30 percent of lenders identified this as the top fraud. Internal fraud is second with 16.8 percent and identity fraud is ranked third with 12.6 percent of lenders saying this is the top cause of fraud. Other fraud scams include occupancy fraud (11.4 percent), property fraud (10.3 percent), employment fraud (8.1 percent), and undisclosed debt (4 percent).
Fraud risk differs by state as well. In fact the number one state for income fraud is Wisconsin. Other states known among lenders for high levels of income fraud are California and Georgia.
Arizona, which is known as the nation's capital of credit-card identity fraud, also takes the lead for identity fraud in the mortgage industry. The Midwest and East Coast are best-known for employment and undisclosed debt fraud.
The states with the highest level of mortgage fraud are Florida, South Carolina, North Carolina, California, and Georgia. The study can even break down mortgage fraud by zip codes. The highest risk ZIP codes were located in Jamaica, N.Y.; Orlando, Fla.; Miami; Atlanta; and Detroit. The index can even take fraud risk to the street level and the report found the street with the highest score in Orlando, Fla., but CoreLogic did not name the street.
The correlation between mortgage fraud and default rates is very high, CoreLogic found. Of the top 12 CoreLogic Fraud Index states in 2007, 9 were in the top 12 highest ranking default states in 2009.
Even with the improvements in recognizing fraud, CoreLogic estimates that one in every 200 conforming loan applications in 2009, the period of the 2010 Mortgage Fraud Trends Report, still contain misrepresentations that could lead to fraud.
In addition to fraudulent mortgage applications, CoreLogic found that nearly one in every 200 short sales were deemed "very suspicious" by lenders. Lenders deem short sales suspicious when the property sells for more than 20 percent of the short sale price within 60 days.
"While the industry has done good work, there is evidence that fraud patterns are changing and becoming better hidden," Tim Grace, senior vice president of Fraud Analytics for CoreLogic said. CoreLogic runs a fraud consortium that helps lenders stay on top of fraud trends.
Alas, until we move into a more normal real estate environment where short sales and foreclosures no longer dominate real estate sales, the risk of mortgage fraud will likely continue at current levels.
Lita Epstein has written more than 25 books including "The 250 Questions Everyone Should Ask About Buying Foreclosures."
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