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Western States Crowned "Riskiest" for Mortgage Fraud

Mortgage fraud risk over the last year seems to have migrated westward, with Nevada and California dominating the 10 riskiest metropolitan statistical areas (MSAs), according to a new study released by Interthinx this week.

One of the study’s most telling findings – the states with the highest overall levels of mortgage fraud risk correspond to the states with the highest levels of foreclosure activity.
Here’s how the numbers stack up. Nevada – which claimed the highest state foreclosure rate in the latest RealtyTrac report – also has the highest mortgage fraud risk, with an Interthinx Fraud Index value of 245.
California, which contains eight of the 10 riskiest MSAs, has the next highest Interthinx Fraud Index value of 176. Guess where it ranked on RealtyTrac’s foreclosure report – No. 2.
As a reference point, Interthinx says the fraud index value for the whole United States is 130. Nationally, fraud risk in the second quarter declined 4 percent from the first quarter, but is up 7 percent over last year, due to the nature of mortgage fraud to flourish and capitalize on deteriorated economic conditions, Interthinx explained.
Mortgage fraud in the second quarter shifted to schemes that target distressed borrowers and the glut of bank-owned properties, Interthinx said.
“Federally funded economic stimulus and stabilization programs that target foreclosure prevention are also contributing to the current shift to schemes involving defaulted and foreclosed properties,” the company’s analysts said in their report.
The Property Valuation Fraud Index jumped 56 percent from the same period in 2008, reflecting fraudulent activity involving short sales, REO inventories, and refinancings. Valuation fraud is currently the most common type of fraud perpetrated against the industry.
The Occupancy Fraud Index, which is typically tied to schemes involving speculative investments, declined 25 percent. The decline was caused by the generally depressed market for residential investment and rental properties, Interthinx said.
So what makes Nevada and California such breeding grounds for fraudulent activity? Interthinx says fraud risk, particularly valuation fraud, occurs in any market with acute pricing volatility, whether home prices are rising or falling.
Even more foreboding for these two, the company says fraud risk is actually a leading indicator of foreclosure risk, which suggests that the nation’s hottest fraud spots today are likely to be the leading foreclosure MSAs within two years.
Interthinx analysts expect fraud indices will continue to rise over the next three years as a large number of adjustable-rate mortgage (ARM) loans – especially option ARMs with negative amortization – reset between now and the first quarter of 2012.


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