2014 data reveals “new normal” for mortgage fraud risk, … 2014 2 infor af ˜liates. Executive...

1Mortgage Fraud Risk Report 2014 Annual

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of First American Corporation. No part of this publication may be reproduced, stored in a retrieval

system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording

or otherwise, without prior written permission. The information contained within should not be

construed as a recommendation by Interthinx, Inc. or First American Corporation for any course of

action regarding financial, legal or accounting matters.

2014 data reveals “new normal” for mortgage fraud risk, with an overall decrease tied to market stabilization and fraud factors concentrated more locally. see page 17

The Mortgage Fraud Risk Report represents an in-depth analysis of residential mortgage fraud risk throughout the United States as indicated by the Interthinx® Fraud Risk Indices. We hope you find it meaningful to your business endeavors and welcome you to leave comments or pass along to your colleagues.

Executive Summary

Trends

Hot Spots

Type Specific

Special Interest

About This Report

22014 Annual©2015 INTERTHINX, INC. All Rights Reserved. Interthinx, Inc. is a member of the First American family of companies. Interthinx, Inc. makes no express or implied warranty respecting the information presented and assumes no responsibility for errors or omissions. First American and the eagle logo are registered trademarks of First American Financial Corporation and/or its affiliate. FraudGUARD is a registered trademark of First American Financial Corporation and/or its affiliates.

Executive Summary

This report highlights some of the most significant mortgage fraud risk trends based on analysis of loan applications processed in 2014 by the Interthinx FraudGUARD® system.

Evolution in the residential lending market continued at a feverish pace in 2014 with heightened focus on compliance risks and the adoption of new business practices fostered through regulatory mandates, such as Dodd-Frank. With this evolution came concerns that transactional risk from poor data integrity, fraud risk and loan performance would not be well served in this new environment. It is perhaps too early to say that fraud risk is in remission, but this report highlights a positive trend toward a nominal overall risk. However, we still see risk and performance indicators which tell a more cautionary tale around specific geographic risks, home equity risks and the re-emergence of alternate financing where history reminds us to remain vigilant. This report highlights the most significant risk trends based on analysis of loan applications processed in 2014 by the Interthinx FraudGUARD® system.

• The 2014 Annual Mortgage Fraud Risk Index is 100 (n = 100), a 4 percent decrease from 2013. Each index is calibrated so that 100 is equal to a nominal baseline of fraud risk based on historical reviews. This shows a halt in the gradually rising trend in fraud risk observed over the past four years. We believe this is reflective of less overall real estate market volatility, stabilization of real estate prices and inventory across the nation.

• Florida jumps from fifth position to first in 2014 with an index of 122, a gain of 6 percent. California retains number two position with an index of 120, even with a drop of 15 percent from 2013. New Jersey and Nevada remained in the top 10 in 2014. Georgia, historically a hot-bed of risk, rises back into the top 10 list for 2014 along with Rhode Island, New Hampshire, New York and North Carolina.

• Geographic distribution of fraud risk continued to become more dispersed in 2014, moving from entire states toward regional, MSA, and ZIP code level concentrations. Although California did see a large drop in its index, it remains an area of concern.

• The main drivers of risk among the top 10 riskiest states are property valuation and occupancy fraud risk. The states which exhibit higher levels of investor activity such as California, Florida, Nevada, Georgia, New Jersey and Arizona, all feature a combination of property valuation and occupancy fraud risk. Meanwhile Rhode Island, New Hampshire, New York and North Carolina all exhibit property valuation fraud as the primary driver of risk.

• The top 10 riskiest states all exhibit a weak housing market with the exception of California. Four of the top 10 riskiest states, Florida, Georgia, Nevada and California are noted as improving while the remaining six states are either flat or declining.

3Mortgage Fraud Risk Report 2014 Annualinterthinx.com 800.333.4510 [email protected]

Legend1. LOW RISK: 0-74

2. MODERATE RISK: 75-99

3. HIGH RISK: 100-124

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Figure 1: Mortgage Fraud Risk Index Annual 2014 by State

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Fraud Risk Trends

The national Mortgage Fraud Risk Index for 2014 is 100 (n = 100), a 4 percent decrease from last year.

Figure 1 shows the Mortgage Fraud Risk Index for each state, with risk decreasing from left to right. Moving from number five last year, Florida tops this list with a Mortgage Fraud Risk Index of 122. California remains number two with an index of 120, although its risk dropped 15 percent from one year ago. New Jersey jumped from tenth in 2013 to third for 2014 with an index value 118, a gain of 10 percent. Rounding out the top 10 this year are Rhode Island, New Hampshire, Georgia, New York, Nevada, North Carolina and Arizona. The least risky state in 2014 is South Dakota with an index of 43, and Iowa, Mississippi, West Virginia, Nebraska, North Dakota, Idaho, Montana, Missouri and Kentucky follow as the 10 least risky states for 2014.

Figure 1: Mortgage Fraud Risk Index by State


Figure 2 shows the overall Mortgage Fraud Risk Indices and the type-specific fraud risk indices: Property Valuation, Identity, Occupancy and Employment/Income for the top 10 riskiest states and national level. Property valuation fraud risk is the key contributor to the overall risk for all the top 10 states except for California. In California, occupancy fraud risk is the biggest driver of its elevated state of risk.

State risk snapshot benchmarked against national averages.

Figure 2: Top 10 States and Risk by Fraud Type(State risk snapshot benchmarked against national averages. See interactive version for other states.)

Riskiest State

Florida has anIndex of

122

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Nat

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132

6582

0

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161

5983

OverallFraud Risk

Property ValuationFraud Risk

IdentityFraud Risk

OccupancyFraud Risk

Employment/IncomeFraud Risk

OverallFraud Risk

Property ValuationFraud Risk

IdentityFraud Risk

OccupancyFraud Risk

Employment/IncomeFraud Risk


Figure 3: Mortgage Fraud Risk Annual 2014 by MSA

TypeALL

PURCHASE

REFINANCE

Legend1. LOW RISK: 0-74

2. MODERATE RISK: 75-99

3. HIGH RISK: 100-124

4. VERY HIGH RISK: 125+

You can:� Hover over any MSA to find out the Mortgage Fraud Risk Index.� Select to view information for All Loans, or only Purchases, or only Refinances using the radio buttons to the left

Hot Spots

A trend of regional dispersion of risk has occurred over the last four quarters as noted in previous editions of the quarterly Interthinx Mortgage Fraud Risk Report. Figure 3 shows the concentration of fraud risk across MSAs. Once again, California shows a high density of high risk metropolitan areas, contributing 11 of the 25 riskiest MSAs. Florida is home to four of the riskiest 25 MSAs, and New Jersey contains two.

Figure 3: Mortgage Fraud Risk 2014 by MSA


UNITED STATES 1. FAYETTEVILLE -SPRINGDALE -

ROGERS, AR - MO

2. FRESNO, CA 3. PALM COAST,FL

4. MIAMI - FORTLAUDERDALE -

POMPANOBEACH, FL

5. BRADENTON -SARASOTA -VENICE, FL

0

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135

159

139 137

100

141

Figure 4: MSAs with the Highest Overall Fraud RiskAnnual 2014

TypeALL

PURCHASE

REFINANCE

You can:� Select to view information for All Loans, or only Purchases, or onlyRefinances using the radio buttons to the left.

Figure 4 lists the top five MSAs with the highest overall Mortgage Fraud Risk Indices, with risk decreasing from left to right. Moving from number two last year, Fayetteville-Springdale-Rogers, Arkansas-Missouri, is the riskiest MSA in 2014 with an index of 159. Property valuation fraud risk and identity theft fraud risk are both primary drivers for the overall Mortgage Fraud Risk Index in this MSA.

Figure 4: Top Five Mortgage Fraud Risk 2014 by MSA


Table 1 lists mortgage fraud risk for the 25 MSAs with the highest estimated originations, ranked by origination in descending order.

Table 1: Mortgage Fraud Risk for MSAs with Highest Estimated Originations in 2014

MSAFraud Risk

Index Annual2014

Pct Changefrom Annual

2013

LOS ANGELES-LONG BEACH-SANTA ANA, CA 132

CHICAGO-NAPERVILLE-JOLIET, IL-IN-WI 99

RIVERSIDE-SAN BERNARDINO-ONTARIO, CA 114

ATLANTA-SANDY SPRINGS-MARIETTA, GA 101

DALLAS-FORT WORTH-ARLINGTON, TX 100

PHOENIX-MESA-SCOTTSDALE, AZ 105

HOUSTON-SUGAR LAND-BAYTOWN, TX 128

SAN FRANCISCO-OAKLAND-FREMONT, CA 112

NEW YORK ET AL, NY-NJ-PA 120

MINNEAPOLIS-ST. PAUL-BLOOMINGTON, MN-WI 85

DENVER-AURORA-BROOMFIELD, CO 102

MIAMI-FORT LAUDERDALE-POMPANO BEACH, FL 137

SAN DIEGO-CARLSBAD-SAN MARCOS, CA 123

WASHINGTON-ARLINGTON-ALEXANDRIA, DC-VA-MD-WV 92

SACRAMENTO--ARDEN-ARCADE--ROSEVILLE, CA 110

SEATTLE-TACOMA-BELLEVUE, WA 88

PHILADELPHIA-CAMDEN-WILMINGTON, PA-NJ-DE-MD 110

DETROIT-WARREN-LIVONIA, MI 100

ST. LOUIS, MO-IL 81

TAMPA-ST. PETERSBURG-CLEARWATER, FL 114

LAS VEGAS-PARADISE, NV 110

INDIANAPOLIS-CARMEL, IN 94

AUSTIN-ROUND ROCK, TX 92

SAN JOSE-SUNNYVALE-SANTA CLARA, CA 119

KANSAS CITY, MO-KS 82

UNITED STATES 100

-12.6%

-20.2%

-10.2%

-6.5%

-1.0%

1.0%

19.6%

-24.3%

11.1%

-20.6%

-10.5%

2.2%

-14.6%

-13.2%

-19.1%

-18.5%

6.8%

-13.8%

-10.0%

-0.9%

-6.0%

8.0%

-14.8%

-17.9%

-2.4%

-3.8%

Table 1: Mortgage Fraud Risk for the 25 MSAs with the Highest Estimated Originations - Annual 2014

TypeALL

PURCHASE

REFINANCE



Table 2 lists the 10 ZIP codes with the highest mortgage fraud risk for 2014. ZIP code 85355 in Waddell, Arizona, is the riskiest ZIP code with an index of 375. High property valuation fraud risk plays the most important role in all top 10 riskiest ZIP codes, except for ZIP code 35243 in Birmingham, Alabama, which has high risk in both identity and occupancy types.

Table 2: ZIPs with the Highest Mortgage Fraud Risk 2014

Rank ZIP City, StateFraud Risk Index

Annual 2014

1 85355 Waddell, AZ

2 35243 Birmingham, AL

3 89084 North Las Vegas, NV

4 34746 Kissimmee, FL

5 93638 Madera, CA

6 77375 Tomball, TX

7 30349 Atlanta, GA

8 28215 Charlotte, NC

9 10950 Monroe, NY

10 47201 Columbus, IN

375

366

357

346

341

340

326

321

320

320

Table 2: ZIPs with the Highest Mortgage Fraud RiskAnnual 2014

TypeALL

PURCHASE

REFINANCE



Figure 5: Annual Change in Risk by Type

Type-Specific Mortgage Fraud Risks

Interthinx tracks four type-specific fraud risk indices: Property Valuation, Identity, Occupancy and Employment/Income. Figure 5 shows the annual changes in the overall Mortgage Fraud Risk Index and the type-specific indices. Although property valuation fraud risk increased by 17 percent from last year, the overall index was mitigated via decreases in each of the other three risk types resulting in a net reduction of 4 percent. The Employment/Income Fraud Risk Index dropped to 65, a 24 percent decrease from 2013, which can be directly attributed to the positive impact of obtaining tax transcripts to verify income and satisfy regulations adopted by the majority of lenders.

Fraud Type

Overall PropertyValuation

Identity Occupancy Employment/Income

-25%

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3

Figure 5 Annual Change in Risk by Type

TypeALL

PURCHASE

REFINANCE

You can:� Select to view information for All Loans, or only Purchases, or only Re-finances using the radio buttons to the left.


MSAFraud Risk

Index Annual2014


2013



















ST. LOUIS, MO-IL 143







UNITED STATES 123

1.9%

-28.5%

5.7%

-12.1%

14.3%

27.5%

71.4%

-46.0%

33.1%

-24.7%

-10.8%

25.2%

-24.0%

-13.1%

-38.6%

-14.4%

-1.4%

-4.4%

11.7%

19.5%

6.4%

90.4%

16.3%

-30.3%

-18.2%

17.1%

Table 3: Property Valuation Fraud Risk for the 25 MSAs with theHighest Estimated Originations - Annual 2014

TypeALL

PURCHASE

REFINANCE


Table 3: Property Valuation Fraud Risk for MSAs with Highest Estimated Originations 2014

PROPERTY VALUATION FRAUD RISK INDEX

Property valuation fraud is perpetrated by manipulating property values. We have observed the intentional over-inflation of values to create false equity, which is then extracted from loan proceeds by various means, but also the compression of value particularly in markets with high levels of foreclosed and real estate owned (REO) properties combined with investor activity. Table 3 lists the Annual Property Valuation Fraud Risk Index for the 25 MSAs with the highest estimated originations in 2014, ranked by origination in descending order. The national Property Valuation Fraud Risk Index in 2014 was 123, up 17 percent from last year.


MSAFraud Risk

Index Annual2014


2013



















ST. LOUIS, MO-IL 53







UNITED STATES 82

-10.1%

-22.2%

-14.5%

-18.8%

1.1%

-14.8%

7.5%

-12.8%

20.0%

-15.1%

-3.6%

19.5%

-5.2%

-15.2%

-23.2%

-22.3%

13.5%

-31.0%

-28.4%

-17.9%

-1.2%

-19.2%

-14.4%

-8.0%

-11.8%

-10.9%

Table 4: Identity Fraud Risk for the 25 MSAs with the Highest Es-timated Originations - Annual 2014

TypeALL

PURCHASE

REFINANCE


IDENTITY FRAUD RISK INDEX

Identity fraud is a mechanism often observed in various fraud schemes to cloud the true identity of a buyer or seller and thereby hide the identity of the perpetrators and/or to obtain a credit profile that meets lender guidelines. Professional identity theft—stealing the credentials of realtors, appraisers or other participants—may also occur in carrying-out a fraud scheme. Table 4 lists the Annual Identity Fraud Risk Index for the 25 MSAs with the highest estimated originations in 2014, ranked by origination in descending order. The national index for identity fraud risk is 92, down 11 percent from last year.

Table 4: Identity Fraud Risk for MSAs with Highest Estimated Originations 2014


Table 5: Occupancy Fraud Risk for MSAs with Highest Estimated Originations 2014

OCCUPANCY FRAUD RISK INDEX

Occupancy fraud is primarily committed by investors who falsely claim the intent to occupy a purchased property to obtain a mortgage with a lower down payment and/or lower interest rate. Table 5 lists the Occupancy Fraud Risk for the 25 MSAs with the highest estimated originations in 2014, ranked by origination in descending order. Nationally, the Occupancy Fraud Risk Index is slightly down 2 percent with an index of 132.

MSAFraud Risk

Index Annual2014


2013



















ST. LOUIS, MO-IL 90







UNITED STATES 132

-14.1%

-8.8%

-4.6%

13.1%

5.0%

4.5%

9.9%

-22.6%

0.8%

-7.9%

-2.9%

-7.8%

-8.8%

-3.8%

3.6%

-11.0%

19.2%

-6.3%

-7.2%

3.2%

0.8%

-15.6%

-26.6%

-18.6%

32.7%

-2.2%

Table 5: Occupancy Fraud Risk for the 25 MSAs with the HighestEstimated Originations - Annual 2014

TypeALL

PURCHASE

REFINANCE



Table 6: Employment/Income Fraud Risk for MSAs with Highest Estimated Originations 2014

EMPLOYMENT/INCOME FRAUD RISK INDEX

Employment/income fraud occurs when an applicant’s income is misrepresented to meet lender underwriting guidelines for a loan. Table 6 lists Employment/Income Fraud Risk for the 25 MSAs with the highest estimated originations in 2014, ranked by origination in descending order. The employment/income fraud risk is 65, a 24 percent drop from last year. Los Angeles-Long Beach-Santa Ana, California, the MSA with highest estimated orig-ination, ranks as the seventh riskiest MSA with an Employment/Income Fraud Risk Index of 117. We noted earlier in this report that the opportunity for employment/income fraud was greatly mitigated through verification of tax transcripts.

MSAFraud Risk

Index Annual2014


2013



















ST. LOUIS, MO-IL 37







UNITED STATES 65

-22.5%

-24.7%

-28.3%

-17.9%

-25.8%

-17.6%

-14.6%

-18.2%

-12.6%

-35.0%

-31.6%

-26.8%

-21.9%

-21.8%

-25.5%

-28.0%

-12.7%

-31.6%

-38.3%

-31.5%

-31.5%

-26.4%

-26.7%

-16.4%

-28.8%

-23.5%

Table 6: Employment/Income Fraud Risk for the 25 MSAs with theHighest Estimated Originations - Annual 2014

TypeALL

PURCHASE

REFINANCE



Figure 10: Mortgage Fraud Risk by FICO Band Annual 2014

FICO Score Band

All Loans 350-600 601-650 651-700 701-750 751-800 801-850

0

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40

60

80

100

Mor

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raud

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Fraud TypeOverall You can:

� Select to view information for overall risk , or typespecific risk using the slider.

Figure 6: Mortgage Fraud Risk by FICO Band 2014

Special Interest: Non-Geographic Indicators of Mortgage Fraud Risk—Credit Score and Loan Amount

In addition to the geographic factors that were the focus of previous sections, a number of non-geographic factors are associated with loan applications that can provide actionable intelligence. In this section we examine the Mortgage Fraud Risk Index trend along non-geographic indicators of credit score and loan amount in 2014.

Figure 6 shows mortgage fraud risk trends associated with credit score band. Surprisingly, the fraud risk does not trend down as credit scores increase in general. The riskiest credit band appears to be 701-750 with an overall risk index of 106, 6 percent higher than pool average. Conversely the lowest credit band 350-600 shows the least risk with the index of 66. With the tightening of credit standards post crisis, a prevailing majority of loans tend to exhibit higher credit scores.

An enhanced level of diligence may be applied in cases where lower credit scores occur during the loan origination process. This may be a contributing factor to the lower fraud risk associated with the lowest credit band. Identity theft is not often associated with these groups as little benefit is gained by using the stolen identity of an individual with a low credit score when attempting to open additional credit accounts.


Figure 11: Mortgage Fraud Risk by Loan Amount Annual 2014

You can:� Select to view information for overall risk , or typespecific risk using the slider.

Loan Amount

All Loans 0-100K 100-200K 200-300K 300-417K 417K+

0

50

100

Mor

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e F

raud

Ris

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Fraud TypeOverall

Figure 7 illustrates the fraud risk as it relates to a borrower’s loan amount. The indices increase as the loan amount increases, which suggests that as the loan amount increases, mortgage fraud risk is likely to increase too. Overall fraud risk increases by more than 50 percent when comparing the lowest loan amount buckets to the highest buckets.

Since higher loan amounts are more closely aligned with higher subject property values, it appears that more concern with mortgage fraud risk is present in high-end property markets where it may be easier for property values to become inflated, and where the resulting profit from misconduct would be correspondingly higher.

Figure 7: Mortgage Fraud Risk by Loan Amount 2014


Evidence of Market Dynamics

We have observed a correlation between the health of a particular market and risk factors. In the graph highlighted below we show the market dynamic versus the risk dynamic relationship. In the investor-heavy states where the market has more “froth”, we see better HPI values and better overall market health as evidenced by Freddie Mac’s Multi-Indicator Market Index® (MiMi®). The top 10 riskiest states for fraud all exhibit a weak housing market with the exception of California. Four of the top ten riskiest states—Florida, Georgia, Nevada and California—are noted as improving while the remaining six states are either flat or declining. The corresponding Home Price Index values are higher in the more dynamic or improving markets.

Table 7: Top 10 Riskiest States | Housing Market Comparison

State Risk Type 1 Risk Type 2 Freddie MiMi Comments Freddie HPIFL Property Valuation Occupancy Weak and Improving Housing Market

CA Occupancy * In Range and Improving

NJ Property Valuation Occupancy Weak and Declining

RI Property Valuation * Weak and Flat

NH Property Valuation * Weak and Declining

GA Property Valuation Occupancy Weak and Improving Housing Market

NY Property Valuation * Weak and Declining

NV Property Valuation Occupancy Weak and Improving Housing Market

NC Property Valuation * Weak and Declining

AZ Property Valuation Occupancy Weak and Declining

7.50%

7.40%

1.20%

5.50%

4.80%

6.70%

1.60%

8.80%

3.10%

4.70%

Figure 12: Top 10 Riskiest States | Housing Market Comparison


Extended Forecast

As this report indicates, it would appear that fraud risk has normalized. Although the improvement we observed in 2014 was not evenly dispersed across the United States, there is a general trend toward a new normal. Certain geographic pockets around the country remain dynamic markets that provide ripe opportunity for fraud risk. Fraud risk may still rise again as resources are diverted toward loan compliance in the short term, or the expansion of the products and programs that lenders provide to their customers. Fraud for profit schemes are often conducted by industry insiders so we will need to remain vigilant in 2015 and beyond as the industry seeks to shore up weaknesses, limit opportunity, enhance loan performance and ensure data integrity.


About the Report

The Interthinx Mortgage Fraud Risk Report is an effective tool for the interpretation of data aggregated from original loan submissions to the FraudGUARD system. In combination with data sourced from forensic reviews, industry reports and indices provided by regulators, it empowers proactive credit risk policies to help reduce mortgage lending risk.

ABOUT THE INTERTHINX FRAUD RISK INDICES

The Fraud Risk Indices are calculated based on the frequency with which indicators of fraudulent activity are detected in mortgage applications processed by the Interthinx FraudGUARD®system, a leading loan-level fraud detection tool available to lenders and investors.

The Interthinx Fraud Risk Indices consist of the Mortgage Fraud Risk Index, which measures the overall risk of mortgage fraud, and the Property Valuation, Identity, Occupancy and Employment/Income Indices, which measure the risk of these specific types of fraudulent activity.

The Mortgage Fraud Risk Index considers 40+ indicators of fraudulent activity including property mis-valuation; identity, occupancy and employment/income misrepresentation; non arms-length transactions; property flipping; straw-buyers; “silent seconds”; and concurrent closing schemes. The four type-specific indices are based on the subset of indicators that are relevant to each type of fraudulent activity.

Each Index is calibrated so that a value of 100 represents a nominal level of fraud risk, a value calculated from the occurrence of fraudulent indicators between 2003 and 2007 in states with low foreclosure levels. For all five indices, a high value indicates an elevated risk of mortgage fraud and each Index is linear to simplify comparison across time and location.

The Interthinx Indices are leading indicators based predominantly on the analysis of current loan originations. FBI and FinCEN reports are lagging indicators because they are derived primarily from Suspicious Activity Reports (SARs), the majority of which are filed after the loans have closed. The time lag between origination and the SAR report can be several years. For this reason, the Interthinx Fraud Risk Indices’ top geographies and type-specific findings may differ from FBI and FinCEN fraud reports.

ABOUT THE INTERTHINX MORTGAGE FRAUD RISK REPORT

The Interthinx Mortgage Fraud Risk Report represents an in-depth analysis of residential mortgage fraud risk throughout the United States as indicated by the Interthinx Fraud Risk Indices. Published quarterly, as part of the Fraud Risk Report, Interthinx will report on the geographic regions with the highest Mortgage Fraud Risk Index as well as those with the highest Property Valuation, Identity, Occupancy, and Employment/Income Fraud Risk Indices. The Interthinx Fraud Risk Indices track these risks in all States, Metropolitan areas, Counties and county equivalents, and ZIP code throughout the United States. Starting in Q1 2013 all this information is available based on all loans, as well as on purchases only, and refinances only.


About Interthinx

Interthinx®, a subsidiary of First American Financial Corporation (NYSE: FAF), provides essential products and services to mitigate risk in the mortgage lending marketplace. Interthinx offers solutions in mortgage fraud and verification, property valuation, compliance, quality control, loss mitigation and capital planning that are used by the nation’s top financial institutions. Interthinx helps its clients minimize risk, increase operational efficiencies, satisfy regulator demands, manage data verification, and remain compliant. For more information, visit www.interthinx.com or call 1-800-333-4510.

MEDIA CONTACT: Depth Public RelationsTelephone: 301-337-8477Email: [email protected]

2014 data reveals “new normal” for mortgage fraud risk, … 2014 2 infor af ˜liates. Executive...

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