The effects of fraud on the mortgage banking industry are acute, and even in today's tight market there are still plenty of fraudsters engaged in miscreant behavior. This week, MortgageOrb spoke with Mark Fleming, Ph.D, chief economist with First American CoreLogic and one of the industry's leading experts in mortgage fraud strategies, to discuss the continuing challenges created by fraudsters.
Q: Is fraud still a major problem for the mortgage banking industry?
FLEMING: It is still a major concern. There are different types of fraud being done in different types of market environments. When house prices were running up, the fraud was more along the lines of the appraisals being inflated and flipping schemes. Today, the fraud is primarily builder bailout schemes, condo conversion schemes, getting multiple loans at the same time and Ponzi schemes. None of these schemes are necessarily new, but they are the old schemes that are being reused because of the kind of market we're in.
The threat hasn't subsided, but maybe the techniques for facilitating the fraud are different now, and it is still a concern to the industry. It represents large amounts of losses.
Q: Until relatively recently, the U.S. Department of Justice did not make mortgage fraud investigation a top priority. What effect did this have on the rise of mortgage fraud?
FLEMING: It's like speeding – if you know the cops aren't on that stretch, it's more likely that you'll speed there. The perceived lack of importance placed on it by law enforcement meant people were maybe more willing to do it because the fear or risk of being caught is lower.
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Now, there is heightened awareness among law enforcement agencies. But with the advent of fraud detection tools in the last two or three years, it is easier for us to identify potential fraud, screen for fraud, and alert the law enforcement agencies. It may not have been a lack of interest by law enforcement, but we as an industry are doing a better job at finding the schemes to report to the law enforcement agencies.
Q: What professional advice would you give to lenders who want to increase their fraud detection efforts?
FLEMING: Clearly, the optimal thing to do is never book a loan that is fraudulent. The ideal place is to put your efforts and screening tools as far up-front in the process as possible, ideally in the application and early underwriting stages – anywhere before you put money out the door. From the lender's perspective, deterrence is the best solution.
There is a heightened awareness of managing risk more appropriately and increasing the quality of the loans. There is also a greater interest in the industry for using tools and technology for risk mitigation. Production and volume are no longer the issue – quality and risk mitigation are the key.
Q: Do you see the heightened push for risk mitigation to be the result of trade association or government influence?
FLEMING: I don't think it is so much trade groups or government as the industry itself – from the rating agencies to the Wall Street firms, the government-sponsored enterprises, originators – everyone is eager to have more and better insight into the riskiness of loans.
