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 6: Mortgage Fraud Risk by FICO Band 2014
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 10 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.
Figure 7: Top 10 Riskiest States | Housing Market Comparison
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.
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