During the housing crisis, risk mitigation companies in the mortgage industry created products designed to prevent fraud. On the surface, though, it doesn’t appear as if these solutions are doing a sufficient job in slowing down scammers. But lenders and vendors have a different viewpoint.
Mortgage fraud is not as high as its peak in 2012, but there was about a 2.6% uptick in mortgage app fraud in the second quarter of 2013 compared to the previous quarter, according to Kroll Factual Data.
Over the past year, fraud increases on a quarterly basis averaged around the 1% mark, much less than the 2.6% figure posted in the second quarter, the Loveland, Colo.-based data provider revealed.
This increase in fraud activity is occurring as the
“There is always going to be fraud, it’s just that more fraudsters are now moving to different areas where there are judgment calls,” says Mike Mauseth, senior vice president product and channel development at Kroll Factual Data, a verification services company that provides information to mortgage lenders, banks, credit unions and property management firms.
“We’re seeing more instances of potential valuation fraud as opposed to identity fraud because there are more definitive answers out there to determine whether you are who you claim to be.”
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With fraud rising in the second quarter, it may appear as if the technology lenders and servicers are using to mitigate this type of activity is not working properly.
“There are some systems available today that can actually look very closely at documents, not just data,” says Deborah Sturges, CEO of Hallmark Home Mortgage and USA Wholesale, based in Ft. Wayne, Ind. “These systems can compare borrowers’ signatures side by side on any document in the loan file at the push of a button.”
However, such tools can often be overwhelming in their scope and output, says Brian Koss, executive vice president at Mortgage Network, a Danvers, Mass.-based private mortgage lender. Koss compared the mortgage industry’s fraud prevention products to alarms at a hospital, in which people can “become numb to the constant beeping.”
“Unless technology is able to identify real trouble among all the small fixes, there is a danger that critical information can be ignored,” Koss added.
Meanwhile, if diligent underwriting staffs and proper technology are not being utilized correctly, many loan applications that are submitted with fraudulent information would become real loans.
“Technology provides lenders with an efficient and cost-effective way to quickly identify when borrower-submitted information is not accurate. It does so consistently and it also produces documentation to prove that the loan was subjected to appropriate due diligence, which is a critical piece of lenders’ compliance with the qualified mortgage/ability-to-repay rule,” says Ann Fulmer, vice president of industry relations at Interthinx.
The top five metropolitan statistical areas that posted the highest increase of potential fraud on a quarterly basis with at least 1,000 loan applications per quarter include Philadelphia (up 35%), Greenville, S.C. (35%), Miami (25%), Jacksonville (24%), Norfolk, Va. (18%), Oklahoma City (17%) and Worcester, Mass (17%), Kroll Factual Data reported.
Meanwhile, other notable markets which have the highest propensity for mortgage application fraud are Atlanta, Tampa and Riverside, Calif., according to CoreLogic data. Miami was also second on CoreLogic’s list. Conversely, Pittsburgh and Minneapolis were the least risky cities for mortgage application fraud, the Irvine, Calif.-based analytic provider noted.
Georgia has been notorious for mortgage fraud since the housing meltdown, with the state having the most bank failures since 2008 with 78.
Besides lenders and servicers utilizing technology solutions, enforcement is a major key to slowing down mortgage fraud.
“Seeing actual prosecutions for those who are involved in fraud will scare those in the middle, especially builders, Realtors and attorneys,” Koss says. “This fear will prevent people from tempting fate.”
Transparency is another crucial aspect that will help mitigate fraud in the future, Mauseth says, because it helps the industry “zero in and predict where potential fraud is going to exist tomorrow as opposed to where it happened yesterday.”
“Products are being put out there that help mitigate risk and we’re also quantifying it,” Mauseth added. “Now that you have a number, you can watch it go up or down and adjust to what the fraudsters are doing. I don’t necessarily think technology is failing. I would say that technology is making us more aware and making it easier for lenders to act upon it.”
However, if various tools throughout the industry don’t have the ability to detect false information in a loan application, then a vigilant underwriter becomes the best defense in preventing mortgage fraud. That is why it is imperative for lenders to train their underwriters to look for certain misconceptions scammers use when they submit an inaccurate application, such as including too much data like extra bank statements and pay stubs that were not asked for.
“This is a good opportunity for lenders to make sure their underwriters are up to speed and that their alert structures are updated to make sure that everything makes sense in the current market and in their current risk appetite as a lender,” said Michael Larkin, director of risk management at Indecomm Global Services. “Underwriters today need to understand what’s going on with the entire loan, not just bits and pieces of it, to make sure they’re not missing something that may get them in trouble or cause a fraud situation later on.”
