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2016 Could Reach Highest Fraud Risk Since Crisis

Largest increases expected in historically lower-risk metropolitan areas

Bret Fortenberry    |    Mortgage Performance

Industry professionals agree that mortgage origination fraud activity peaked between 2005 and 2008, period that offered unprecedented opportunities to manipulate the system, contributing to the boom and following bust. Through increased regulation, better controls and tighter lending guidelines, we have experienced a strong reversal, with very low fraud rates in the last several years. As we look to 2016, it is likely that loosening credit guidelines and a recovering purchase market will increase the opportunities and motivation for origination fraud, such as inflated sales prices to cover down payment misrepresentation.

CoreLogic has been tracking mortgage fraud risk since the third quarter of 2010. During that time, mortgage fraud risk has shown an oscillating trend with an average increasing slope. Based on current analysis, we expect the trend to continue to follow this oscillation pattern and believe we are on the bottom cusp of the next period. If the mortgage fraud risk continues this trend, it could peak around the second quarter of 2016, reaching the highest fraud risk since 2010.

The five-year national mortgage fraud index is shown in Figure 1. The green line represents the national fraud index and the purple line shows a predictive oscillation path the index has been following. The last peak in the mortgage fraud index occurred in the first quarter of 2014 with a decreasing trend until the first quarter of 2015. The index leveled off and then started to climb in the third quarter of 2015. The increase can be attributed to an improving job market and continuing low mortgage interest rates.

Additionally, the increase in mortgage fraud risk is shifting from historically risky markets to lower-risk markets. During 2014, the national fraud risk index decreased overall. However, certain regions, such as Florida and New York/New Jersey, continued to increase in risk. These regions have now stabilized at a high-risk level, and join Las Vegas, Los Angeles and Chicago (which have been high risk since early 2014). We are beginning to see regions that had relatively low fraud risk increase.

CoreLogic produced two heat maps for the largest 100 Core Based Statistical Areas (CBSAs)1 based on population. The first map is a snapshot of current fraud risk for Q3 2015 and the second map shows the year-over-year change in risk. In the first map, you can see that the highest fraud risk is concentrated in several CBSAs in Florida and the New York/New Jersey regions. Las Vegas shows just slightly less risk than those areas. The second map reveals that the top five growing regions are: Wichita, Kan., Dayton, Ohio, Syracuse, N.Y., Akron, Ohio, and Springfield, Mass. surprisingly, none of these areas are currently ranked in the top 30 percent for fraud risk among large CBSAs.

Fraud is on the rise. The highest risk areas are staying stable but remain high so the growth in fraud risk is attributed to previously lower-risk areas. CoreLogic expects mortgage fraud risk to increase over the next year, with the impact of the increase spreading into currently less risky regions across the nation. Table 2 categorizes the CBSAs that currently have or could potentially have the highest fraud risk in the nation. The first column shows the CBSAs that have historically high mortgage fraud risk and currently have the highest fraud risk. These regions should be noted when the fraud risk is both high and low nationally. The second column contains medium-risk CBSAs that had a large increase in fraud over the past year. We expect that these CBSAs will continue to grow and may become part of the top ten riskiest CBSAs. Ventura, Calif. and New Haven, Conn. have moved up in the ranks and are now just slightly below Los Angeles and Chicago. If they continue to increase, these metro areas will move into the top ten riskiest CBSAs. The third column contains CBSAs that are currently lower in risk, but have experienced large increases in the past year. If this trend continues for another year, these CBSAs will enter the top twenty riskiest CBSAs.

Two-thirds of the U.S. population lives in the top 100 CBSAs, but there is still fraud risk outside of these areas. CoreLogic has found a correlation between rapidly growing CBSAs and increasing mortgage fraud risk. North Dakota is an interesting example of a lower-risk region that is experiencing a rise in fraud risk. The recent oil boom has brought new businesses and population migration to Williston N.D., the fastest growing micropolitan area in the state. This is contributing to the state’s rapid increase in occupancy fraud and income fraud risk, 175 percent and 550 percent year over year, respectively.

This blog is based on analysis of loan-application fraud risk the mortgage industry is experiencing as measured quarterly by the CoreLogic Mortgage Application Fraud Risk Index, which is based on residential mortgage loan applications processed by CoreLogic LoanSafe Fraud Manager™.

[1] Population is based on 2014 US Census Bureau data.

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