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24 THE RISING COST OF MORTGAGE FRAUD A new report from LexisNexis found fraud costs are rising for both U.S. and Ca- nadian financial services firms. For every $1 lost to fraud now costs U.S. financial services firms $4.23, compared to $3.64 in 2020—a 16.2% increase. Canadian financial services firms saw fraud costs rise 19.6%, from $3.16 in 2020 to $3.78 in 2022. Additionally, the report said the volume and cost of mortgage-related fraud are high for originators, servicers, and title/settle- ment firms. Most of that cost goes toward labor used for fraud detection, investigation, reporting, and recovery. Depository originators have the highest cost, with every $1 of fraud costing them $5.34. "It's clear that fraud has become more complex with various risks occurring si- multaneously," said Chris Schnieper, Senior Director of Fraud and Identity Strategy for LexisNexis Risk Solutions. "To minimize fraud, organizations can no longer rely on manual processes or point solutions to reduce fraud, manual reviews, and costs. Firms using a multilayered solutions approach that integrates identity verification and authenti- cation within the digital consumer experience can lower their cost and volume of successful fraud. is approach improves identity veri- fication and fraud detection effectiveness and lowers friction for trusted consumers." e report says fraudsters are targeting mobile channels, increasing bot attacks, and "buy now, pay later" scams are a growing concern for financial services and lending firms. e report continued, adding mobile channels now generate a "sizable" level of transaction volume and fraud costs. "Banks and credit lenders are beginning to accept BNPL (buy now, pay later) as a digital payment method, which respondents indicated represents one-third of the overall average transaction volume," the report said. While fraud costs have increased, CoreLogic reported that mortgage fraud risk declined in Q2 of 2022, falling 7.5% annually, according to its latest Mortgage Fraud Report. CoreLogic reported that an estimated 0.76% of all mortgage applications contained fraud—approximately one in every 131 applications. For comparison, Q2 2021, that estimate was 0.83%, or approximately one in 120 applications. Risks of Income and Property Fraud posted the largest year-over-year increases in Q2, 27.3% and 22.6%, respectively. e authors of the report were not surprised, considering that purchase loans now account for more mortgage transactions than refis and that the former are more susceptible to fraudulent activity. MORTGAGE DEFAULTS: WHAT WE LEARNED FROM 2007 A new white paper by Gopal "Sharath" Sharathchandra, the SVP of Financial Solu- tions for Ventera, entitled "How High Will Mortgage Defaults Go? Lessons from the 2007 Recession" forecasts the impact of the recent decline in home prices and the effects it might have on the mortgage market. According to Sharathchandra, price declines are likely to mirror those seen in 2007, but across a larger cross-section of the country. Unlike 2007, when it was high home prices that made homes unaffordable, today it is both home prices and mortgage rates, which have recently eclipsed the 7% mark for the first time in over 20 years. e national nature of mortgage rates has contributed to a geographically broader increase in house prices and is now likely to make the decline in house prices similarly so. "e post-2007 mortgage default data does not support the argument made by a number of economists that, even if house prices were to decline steeply, there is little likelihood of mortgage defaults being anything similar to the post-2007 experi- ence because of stronger underwriting and better borrower financial conditions today," Sharathchandra said. "Rather, the data indi- cates that the biggest driver of mortgage de- faults is falling house prices and the negative equity that results from it and that this, by far, outweighs the contribution of borrower and underwriting characteristics such as FICO scores or subprime status." Data from Fannie Mae and Freddie Mac showed that even the low-risk portion of the prime mortgage portfolio contributed 40% of total credit losses with the overall prime portfolio contributing nearly 70%. Today's prime portfolio is arguably higher risk, due to higher loan-to-values, and has a greater volume of vulnerable borrowers than did the 2007 prime portfolio, raising the potential for even bigger losses today if a house price decline comparable to 2007 was to occur. Journal