Mortgage Fraud Risk Index Reaches Highest Level Since 2004: Interthinx

The risk of mortgage fraud is on the rise. According the quarterly Mortgage Fraud Risk Report released Tuesday by Agoura Hills, California-based Interthinx, overall mortgage fraud risk in the first quarter of 2010 jumped 4 percent from the previous quarter and was 11 percent higher than the same quarter a year ago.



The quarter-to-quarter surge brought the fraud risk index to a value of 151. This, Interthinx said, is the first time since 2004 that the index has exceeded 150.

On state-by-state basis, the report found that Arizona, with an index value of 246, had the highest mortgage fraud risk in the first quarter, surpassing California which was ranked No. 1 the previous quarter. Interthinx said the rise in fraud risk in Arizona was likely due to a migration from neighboring Nevada, similar to that which occurred in 2004 to 2006.

Nevada remained in second place with an index value of 237, and California dropped down to the No. 3 spot with an index value of 216. Florida stayed in fourth place with an index value of 202, and Michigan was again ranked fifth with an index value of 178.

The Mortgage Fraud Risk Report also included indices for the four most common types of mortgage fraud risk, including property valuation fraud, employment/income fraud, identity fraud, and occupancy fraud. The findings showed an increase in all indices, except for the occupancy fraud index.

After a brief dip in the last quarter, property valuation fraud risk resumed its upward trend that began in fourth quarter of 2007 and rose 4 percent in the first quarter of this year. Interthinx said this type of fraud remains the primary driver of the overall mortgage fraud index and is perpetrated by manipulating property value to create “equity,” which is then extracted from loan proceeds by various means.

Identity fraud, which is frequently used in mortgage fraud schemes in order to hide the identity of the perpetrators and/or to obtain a credit profile that will meet lender guidelines, soared nearly 10 percent in the first quarter. This notable increase followed a small decline in the identify fraud risk index during the previous quarter.

In addition, employment/income fraud, which occurs when an applicant’s income is misrepresented in order to qualify for a loan, surged 11 percent. Interthinx said the rise in employment/income fraud risk seems to strengthen evidence that this type of fraud is starting an upward trend after a long period of decline. However, the company said it is still unclear whether this uptick portends a rebound in employment/income fraud risk or whether it reflects a temporary “blip” associated with schemes involving the federal homebuyer tax credit that expired on April 30, 2010.

The only type of mortgage fraud that showed no increase in the quarterly report was occupancy fraud, which is perpetrated by investors who falsely claim the intent to occupy the purchases property in order to obtain a mortgage with a lower downpayments and/or interest rates.

According to Interthinx, the occupancy fraud risk index actually plummeted 11 percent in the first quarter, erasing much of the 16 percent increase seen the prior quarter. Still, the company said, it is likely that this index will trend upward in the near future, fueled by plentiful inventories and the expected release of “shadow” foreclosure inventory.

Going forward, Interthinx projects that while interest rates remain low, the predominant fraud type will continue to be related to property valuation as speculative investors return to the market and as consumers attempt to refinance their mortgages under the Federal Making Home Affordable program despite reduced equity in their properties. The company also expects that the overall fraud risk index will continue to rise through 2011 as a wave of adjustable-rate mortgages, the majority of which contain negative amortization features, recast for the first time.

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