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MORTGAGE FRAUD LOOMS LARGE IN CERTAIN AREAS The national mortgage fraud index fell in the third quarter of 2012 to hit its lowest level in two years after spiking in the previous quarter, according to Interthinx. The company's mortgage fraud index dropped to 137 in Q 3, down 7.7 percent from Q2 2012 and down 4.5 percent from Q 3 2011. The number of metropolitan areas in the "very high risk" category also declined, falling to 70 in the third quarter from 91 in the second quarter. Two states—California and Florida— accounted for more than half of the very high risk metros. The number of metro areas considered very high risk increased by one in Florida, bringing the total number in the state to 17. Meanwhile, California's total stayed flat at 19. California held six of the top 10 metros most at-risk for fraud. Merced, California, led as the riskiest metro in the country. Florida's high fraud index value of 206 gave it the lead as the riskiest state. Nevada was a close second with a value of 205. Arizona, New Jersey, and California took the next three spots on the risk barometer. According to Interthinx, the mortgage fraud indices are proven indicators of default and foreclosure activity, so areas with a high risk for fraud are expected to maintain high foreclosure rates. 32 "The report shows that even when overall fraud risk is decreasing nationwide, there are still areas of concern, as we see with this quarter's findings in Florida," Mike Zwerner, Interthinx SVP, said. "The report's actionable intelligence helps lenders pinpoint where additional due diligence may be needed, improves loan quality, reduces repurchase risk, and ultimately helps the economy recover." The analytics company tracks four specific types of mortgage fraud: property valuation, identity, occupancy, and employment/income. Risk for property valuation fraud was concentrated in California and Florida metros. The nationwide index value for property valuation fraud was 203, but in Merced, California, and Lakeland, Florida, the respective values were 498 and 438. Iowa City led as the riskiest metro for identity fraud. It had an index value of 325 and saw a 118 percent increase in identity fraud risk between the second and third quarters of last year. Two Michigan metros ranked high for occupancy risk, with Lansing leading as the riskiest among all metros and Monroe ranking third. Interthinx's study also found that investor properties are over three times as risky for employment/income fraud compared to owneroccupied properties. Salinas, California, was the riskiest metro for employment/income fraud. Eight of the 10 riskiest metros in the category are in California. In a separate study, looking at more historical data, CoreLogic said it is anticipating a $1 billion increase in originations tainted with fraud for the 2012 calendar year. The firm's fraud index estimated $12 billion in fraudulent originations during the 2011 calendar year but projects about $13 billion in mortgage fraud in 2012. By CoreLogic's assessment, all categories of mortgage fraud increased year-over-year in the first quarter of 2012. Employment fraud was out in front with a 50 percent increase. CoreLogic attributes this rise to continued high levels of unemployment across the nation combined with low mortgage rates incentivizing homeowners to misrepresent their employment status on loan applications. Identity fraud followed employment fraud with a 44 percent increase year-over-year. Income fraud increased 35 percent; occupancy fraud rose by 25 percent; and undisclosed debt fraud increased by the smallest amount, 8 percent over the year. The Financial Crimes Enforcement Network (FinCEN), which tracks suspicious activity reports (SARs), notes mortgage SARs "increased significantly" in both 2010 and 2011. FinCEN also reports a 31 percent decrease in SARs reported in the first quarter of 2012 when compared to the first quarter of 2011. However, SARs have risen by just 10 percent over the year in 2012. "This upward spike in mortgage fraud counts, according to FinCEN, is largely attributable to mortgage repurchase demands and special filings generated by several institutions," CoreLogic explained. Mortgage SARs may not be recorded until well after the suspicious act was committed. In an environment of elevated distressed sales, CoreLogic sees heightened risk for fraud, especially among short sales. "CoreLogic research indicates that the mortgage industry is likely to originate $325 million resulting from short sale fraud in 2012," the firm stated in its report. Ed Gerding, senior fraud strategist for CoreLogic, explains the $325 million is "the dollar amount of loss that will be incurred" from short sale fraud. As an example, Gerding says if a lender does a short sale for $100,000 and a resale occurs shortly after the short sale for $125,000, that $25,000 difference would be the amount of incurred loss by the lender. CoreLogic also warns servicers to remain vigilant when dealing with government programs such as the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP). "HARP 2.0 and HAMP loans continue to represent significant risk," the company said.

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