MortgageFraudReport-12thEdition

Mortgage Asset Research InstituteTWELFTH PERIODIC MORTGAGEFRAUD CASE REPORT

April 2010

Research provided by:

Denise James, CFEDirector, Real Estate SolutionsLexisNexis® Risk Solutions Jennifer ButtsManager, Data ProcessingLexisNexis® Risk Solutions, Mortgage Asset Research Institute

2

Table o Contents

Executive Summary ...................................................................................1Data and Inormation Sources Used in This Case Report ............................3Mortgage Asset Research Institute Reports and SAR Filing Trends ...............3Geographical Distribution o Mortgage Fraud ............................................4Types o Fraud Reported ............................................................................8Spotlight on Appraisal Fraud and Misrepresentation.................................10In Conclusion: Adapt, Veriy, and Report – A Message to the Industry ......12Appendix I...............................................................................................13Source and Analysis o the Mortgage Asset Research Institute’sMortgage Fraud Data ...............................................................................13Appendix II..............................................................................................14Computation o the Mortgage Asset Research InstituteFraud Index (MFI) ....................................................................................14Appendix III.............................................................................................15About LPS................................................................................................15The Need or Actionable Analytics rom LPS ............................................15End Notes ................................................................................................16Executive Summary .................................................................................18Insights on Appraisal Issues......................................................................18Identiying Appraisal Fraud ......................................................................18The Appraiser’s Role in Fraud ...................................................................19The Fraud Opportunity ............................................................................19Solutions .................................................................................................21Electronic Appraisal Data Delivery ..........................................................21Appraisal Scoring ....................................................................................22Valuation Risks Beyond Fraud ..................................................................22Forecasting To Assess Collateral Risk ........................................................23Projected Five Weakest Markets (shown in Image 3) ................................23Conclusion ..............................................................................................24LexisNexis

®

Mortgage Asset Research Institute would like to thankadditional report contributors Lender Processing Services (LPS) and Verosor their contributions to this report and collaboration in providing thoughtleadership to the industry.

1

Reported mortgage raudand misrepresentationincreased 7 percent rom2008 to 2009. Thougha smaller increase thanin recent year-to-yearcomparisons, this increaseover 2008’s record-settingsubmission volume remainsa marker o strongreporting activity.

Mortgage Asset Research InstituteTWELFTH PERIODIC MORTGAGE FRAUD CASE REPORT

April 2010

Executive Summary

Fraud continues to be a pervasive issue, growing and escalating incomplexity. The market is attempting to recover rom devastating nanciallosses and reputational harm due to the lack o controls, and denial andgreed that enabled a allacy o fourishing prots during the mortgageindustry boom years. In 2009, we saw the beginning o a laser-ocusedeort to realign this industry back to the basics o sensible and accountablebusiness practices. The ndings throughout this report qualiy the needor greater visibility into industry processes, proessionals and consumers.Incidents reported by subscribers to LexisNexis

®

Mortgage Asset ResearchInstitute refect veried experiences o unscrupulous activities perpetratedby industry proessionals who may or may not have involved complicitconsumers. The bad news is that because o its adaptability, raud cannever be completely eradicated—but the good news is that, using industry-submitted inormation like that used to generate this report and proper duediligence standards, it can be proactively deeated.As this report will indicate, reported mortgage raud and misrepresentationincreased 7 percent rom 2008 to 2009. Though a smaller increase than inrecent year-to-year comparisons, this increase over 2008’s record-settingsubmission volume remains a marker o strong reporting activity. Themarket experienced a meltdown, housing inventories are at an all-timehigh and it is next to impossible to obtain credit; so why is reported raudand misrepresentation

still

increasing? There are various reasons or theincrease, including new opportunities to take advantage o consumers,maintenance o liestyles obtained during the boom period, consumerswho are desperate or the American dream o homeownership, and theneed or new, creative methods o moving illicit unds. How is raud stillbeing acilitated? Technology has provided raudsters with the ability toaccess inormation, conduct criminal activities and remain anonymousvia the internet, and manipulate processes that rely on the need orexpediency. Although technology is an enabler o raud perpetration, orthe scammer there must be a system to beat and/or a victim to manipulate.Fraudsters are opportunistic and oten prey upon the vulnerable withinsociety. Systems and processes that can be beaten are the easiest targetsand are oten selected. For example, 2009 saw record oreclosures inseveral major metropolitan areas, a trend which led to the emergence o several dierent types o oreclosure rescue scams. In these scenarios,vulnerable homeowners in danger o losing their houses are being takenadvantage o by raudsters ahead o the raud curve. They know that it willtake time or the industry to catch up. This slow-moving reactive lag timeis what must change.In 2009 and beyond, the industry-at-large has been orced to succumbto constant change in what is considered acceptable business practices.Many lenders have adapted and adjusted their methods o veriying theinormation presented to them or varying consumer products providedby their organization; however, some have not and continue to remain