Mortgage Asset Research Institute Quarterly Fraud Report

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1 Mortgage Asset Research Institute Quarterly Fraud Report August 25, 2008 Fight Mortgage Fraud with Solutions that Help You Know your Customer, Employee and Vendor ChoicePoint Asset Company LLC. All rights reserved. MARI is a service mark and ChoicePoint, and the ChoicePoint logo are registered trademarks of ChoicePoint Asset Company.

2 MARI Quarterly Fraud Report 1Q 2008 Executive Summary The Mortgage Asset Research Institute (MARI SM ), a ChoicePoint company, provides valuable industry insight derived from its Mortgage Industry Data Exchange (MIDEX ) database, which contains an aggregation of reported incidents of fraud and verified misrepresentations submitted by leading mortgage industry participants. MARI analyzes this data and helps the industry depict a national composition of residential mortgage fraud and misrepresentation to support efforts to combat mortgage fraud. The mortgage industry is currently in a volatile state, as many constituents try to protect themselves from those who continue to use these turbulent times as an opportunity to commit new fraud and inflict additional financial damage for our nation s lenders. To respond faster to the industry we serve, MARI has moved to updating its MIDEX database twice weekly, and is pleased to introduce the first MARI Quarterly Fraud Report. As a result, MARI subscribers will now benefit from: Improved currency of information; and More timely access to new and evolving fraud trends. The timeliness of these communications is critical to facilitate more accurate identification of mortgage professionals, companies and geographic locations that expose lenders to financial and reputational risk. As a leading provider of industry insight, MARI presents this inaugural quarterly report supplement to further strengthen mortgage fraud awareness and continued efforts to stop fraud s impact on the industry. 1

3 Report Highlights and Trends During the first quarter of 2008, MARI experienced a 42 percent increase in received incident reports over the same period in General Application Misrepresentation continues to take the top spot for incident type, followed closely by Income and Employment. The top five mortgage fraud states in the first quarter of 2008 are: Number 1: Florida Number 2: California Number 3: Illinois, Maryland and Michigan (tied for third place.) Leading Metropolitan Statistical Areas (MSAs) for each state highlighted incidents for properties near coastlines and major urban areas. Multiple fraud types continue to be reported on loan transactions, including identity theft and identity fraud. State Rankings As shown in Table 1 below, Florida owns the top spot as the state with the most properties with material misrepresentation submitted by MARI subscribers for loans originated during the first quarter of Twenty-four percent of all incidents submitted nationwide were for properties in Florida. California ranks second, followed by a three-way tie for third place among Illinois, Maryland and Michigan. Table 1 1Q 2008 Mortgage Fraud Rankings by State 1 1 Florida 2 California 3 Illinois 3 Maryland 3 Michigan The majority of reports submitted for Florida and California involve properties near the coastline. The Miami MSA boasts 49 percent of all of the reports submitted for properties in Florida. In California, 52 percent of the properties with misrepresentation are in the Los Angeles MSA. Major urban areas also score the highest in Illinois, Maryland and Michigan. Ninety-four percent of investigations in the state of Illinois are for properties in the Chicago MSA. In Maryland, 25 percent of reports are in the Baltimore MSA. In addition, the Detroit MSA encompasses 56 percent of all of the misrepresentation reported for Michigan. 2

4 Fraud Types Table 2 represents segments and associated percentages for specific mortgage fraud types in each high ranking state. Table 2 Mortgage Fraud Types 2 Fraud Analysis of 1Q 2008 State-Specific Findings Classification Florida California Illinois Maryland Michigan General Application Misrepresentation 3 74% 76% 69% 56% 56% Income Misrepresentation on the Application 51% 36% 31% 31% 6% Employment Misrepresentation on the Application 25% 40% 38% 25% 6% Asset and/or Debt Misrepresentation on the Application 25% 20% 19% 6% 38% Occupancy Misrepresentation on the Application 23% 8% 6% 19% 6% ID Theft 2% 4% 6% 0% 0% Verification of Employment Misrepresentation 21% 16% 25% 19% 13% Verification of Deposit and/or Bank Statement Misrepresentation 18% 24% 19% 13% 31% Tax Return and/or Financial Statement Misrepresentation 18% 24% 25% 69% 6% Undisclosed Non-Arms Length Transactions 11% 16% 0% 6% 6% Appraisal Misrepresentation 7% 12% 13% 6% 19% Credit History Documentation Misrepresentation 7% 0% 13% 0% 13% Escrow and/or Closing Document Misrepresentation 4% 8% 6% 6% 0% 3

5 The data presents a number of interesting trends: In general, misrepresentation on the mortgage application trends high in each of the states. Income and employment misrepresentation on the mortgage application rank high in Florida, California, Illinois and Maryland. Florida and Maryland report higher income than employment misrepresentation, and California and Illinois report slightly higher employment than income misrepresentation. Michigan shows a high percentage of asset and debt misrepresentation on the mortgage application. Appraisal misrepresentation (including value inflation and incorrect use of comparables) is most prevalent in Michigan. Maryland has an abnormally high percentage 69 percent of tax return and financial statement misrepresentation. Conclusion The first quarter data reveals that loan application misrepresentation continues to plague the industry. According to the FBI s 2007 Mortgage Fraud Report, the downward trend in the housing market provides an ideal climate for mortgage fraud perpetrators to employ a myriad of schemes suitable to a down market. 4 Simply stated, mortgage fraud will not disappear in fact, it is expected to significantly grow, evolve and penetrate new areas within the industry. As the nation s lenders redraw their credit practices, we see a continued need to highlight and eliminate loans that are not in good order at the point of origination, well before prefunding processors spend any effort to seek added verification or validation of the mortgage application information. If loan applications are not in good order when submitted, the loan data may likely be adjusted to fit the business practice expectation to meet the requirements for funding, which ultimately may result in funded loans that quickly go bad. To save itself from schemes both commonplace and new, the mortgage industry must continue to strengthen its attention to and practice of due diligence to ensure that transactions are in good order at the point of origination. This includes an analysis of the borrower s identity, as well as the players involved in each of the real estate roles whether they are outsourced or work directly for the lender. As lenders pursue higher-quality loans for the market, the priority should be on identifying poor quality at the earliest possible point in the process and at the lowest possible cost. In MARI s view, the origination and prefunding processes offer the largest and least expensive opportunities to assure funding of higher quality loans. How a lender accepts or rejects a loan application at the front door is often all a criminal needs to see how much further he or she may push through the loan process. 4

6 Pre-funding fraud detection solutions can help prevent the risk of application discrepancies, exposure to compromised identities and establishment of relationships with insiders who leverage someone s good name to perpetrate fraud. If on the mortgage application general misrepresentation or income, appraiser or employer misrepresentation were checked adequately at origination and pre-funding, in this quarter s examples, would there still be significant fraud to report as highlighted above? Mortgage fraud inflicts damage to profits, reputations and consumer confidence. Today, it is wise to ensure you know the customers, employees and vendors involved in every loan transaction doing this early in the process can result in overall protection from tainted pipelines and hidden threats to loan quality. 1 Ranking is based on investigations submitted to MARI by its subscribers for loans originated during the first quarter of This is not a MARI Fraud Index (MFI) ranking. 2 It should be noted that the total percentage for each state exceeds 100 percent, as most incidents contain more than one type of fraud. 3 General application misrepresentation includes, but is not limited to: incorrect name(s) used; occupancy, income, employment, debt and asset misrepresentation; different signatures for the same name; invalid Social Security number(s); incorrect address(es); and incorrect transaction type. 4 Federal Bureau of Investigation, 2007 Mortgage Fraud Report, p. 10, April 2008, < (5 Aug 2008). 5

MARI. Eleventh Periodic Mortgage Fraud Case Report To: Mortgage Bankers Association. By Denise James Jennifer Butts Michelle Donahue

MARI. Eleventh Periodic Mortgage Fraud Case Report To: Mortgage Bankers Association. By Denise James Jennifer Butts Michelle Donahue MARI Mortgage Asset Research Institute Eleventh Periodic Mortgage Fraud Case Report To: Mortgage Bankers Association By Denise James Jennifer Butts Michelle Donahue March 2009 Executive Summary ELEVENTH