Mortgage Fraud Losses to Hit $2.5 Billion in 2008, Report Says

MBA (3/28/2008 ) Sorohan, Mike
New research from TowerGroup, Needham, Mass., predicts that losses from mortgage fraud will reach $2.5 billion in 2008 and that comparable losses could continue for several years to come.
The report, U.S. Mortgage Fraud: Types, Trends and Detection Tools, found that the scope of fraud—by and against lenders—continues to increase, despite renewed efforts by lenders and law enforcement to crack down. The report said lenders will respond to fraud by deploying technology tools to assist in detection and prevention and that their annual spending on such tools will reach several hundreds of millions of dollars in the next few years.

“Much of the growth in mortgage fraud has been due to the ever-increasing sophistication of fraudsters’ schemes to fabricate the values of mortgaged property,” said David Hamermesh, senior analyst in the consumer lending research service at TowerGroup. “Fraud prevention is best done proactively, before the loan closes. Lenders must invest in analytical tools to identify loans at a high risk for fraud, while technology vendors must do more to improve the predictive power of the analytical tools they provide.”

Mortgage fraud is difficult to track and takes many forms, Hamermesh said. For example, fraudsters cheat borrowers out of their properties with false promises of foreclosure avoidance or use the identity of a real person (often without his or her knowledge) to fraudulently purchase one or more properties.

Key findings of the report include:

• The growth rate in filings of Suspicious Activity Reports (SARs) related to mortgage fraud rose to 56 percent annually between 2002 and 2007 from its previous average of 26 percent annually from 1996 to 2002.

• Lenders, investors and other mortgage industry participants will come to recognize the value of pooling data to support more accurate predictive modeling as well as to facilitate their analysts’ ability to find and react to innovative fraud schemes.

• To combat growing losses from all types of mortgage fraud, technology companies should develop a “one-stop shop” that provides lenders with a truly integrated solution. "Such a comprehensive tool would provide increased predictive power, better system performance and holistic risk assessment that cannot be matched by a lender trying to cobble together individual tools from multiple sources," the report said.

“Technology companies that offer fraud detection solutions will need to develop professional services capabilities to provide lenders with file reviewers who are trained in assessing possible fraud,” Hamermesh said. “This service can supplement a lender’s own underwriters and be an efficient way to evaluate those loans flagged as most risky by automated scoring tools.”