While the national Mortgage Fraud Risk Index, still elevated at 140 (n=100), remains essentially flat from both the previous quarter and from a year ago, increases in fraud in the Chicago area may illustrate the danger of previously localized risks spreading throughout a metropolitan area according to Interthinx’s Q4 2010 Mortgage Fraud Risk Report.
• Illinois, with a jump of 26 points, saw the largest quarter-on-quarter fraud risk increase. It contains the Chicago zip code 60621, which has been the most risky
zip code in the United States for three consecutive quarters. Over those three quarters, the overall risk in the Chicago MSA has increased dramatically, from “moderate risk” in Q2 2010 to “very high risk” in this quarter, which suggests that previously localized risks may be spreading throughout the metropolitan area.
• Nevada continues to be the state with the highest fraud risk with an index value of 255, followed by Arizona and Florida with index values of 210 and 181 respectively.
California, which contains six of the top ten most risky MSAs, is in fourth place with an index value of 180.
• The Employment/Income and Identity Fraud Risk indices are up by more than 25% over the last year. The sharp rise in fraud risk in these categories is primarily
associated with re-finances, loan modifications, and purchase mortgages involving the resale of distressed properties.
• The Occupancy Fraud Risk Index, which is closely associated with undisclosed investment properties, continued a decline that began in Q2 2010. This downward
trend is likely due to the fact that short sale purchasers are increasingly turning to private “transactional” and non-bank funding sources and away from traditional
mortgages with occupancy requirements.
• The Property Valuation Fraud Risk Index has also declined each quarter since Q1 2010, most likely due to the fact that properties acquired through “flopping”
short sale frauds, which played a large part in the run up in this index in 2008 and 2009, are now being sold to end buyers at or near actual fair market values.
• Short and REO sales constitute a significant share of all sales in the majority of the highest risk MSAs in the Occupancy and Property Valuation Fraud Risk indices and
present an area of critical fraud risk for lenders today in view of an abundant supply of distressed borrowers and government pressure to avoid foreclosures. The risk
is acute for lenders and servicers who do not employ risk controls and analysis in their servicing, loss mitigation and origination departments. The aggregated financial
losses to lenders, servicers and investors from short sale and other default related fraud schemes are significant and rising.