Although overall mortgage fraud risk in the third quarter of 2014 was down 2% compared to the second quarter and was down 9% compared to the third quarter of 2013, the risk of certain types of fraud increased, according to Interthinx' quarterly mortgage fraud risk report.
For example, the report shows that the risk for occupancy fraud was up 4% in the third quarter compared to the second quarter – although it was down 10% compared to the third quarter of 2013.
It's important to note that the report does not measure actual fraud, but rather is an indicator of the potential risk of fraud, based on a variety of market data.
In the third quarter, California was once again the riskiest state, in terms of overall risk, with a score of 128 on Interthinx' Mortgage Fraud Risk Index. However, that's down 6% compared to the previous quarter. New Jersey came in at number two again, with an index score of 120, down 2% compared to the previous quarter. Connecticut rose to number three, with an index score of 166, up 9% compared to the previous quarter.
Rounding out the top 10 ‘riskiest states’ in the third quarter were Florida, Illinois, Alabama, District of Columbia, Tennessee, New York, and Texas.
Interthinx points out that although the risk of property valuation fraud in California exceeds the national level by 1%, the risk of property valuation fraud in that state dropped by 16% compared to the previous quarter.
South Dakota was once again the least risky state with an index score of 48. Nebraska, West Virginia, North Dakota, Mississippi, Iowa, Idaho, Missouri, Virginia, and Louisiana rounded out the 10 least risky states.
Interestingly, but not surprisingly, the report reveals that mortgage fraud risk is highest in markets with lower affordability metrics.
‘Qualifying for loans in these markets tends to present greater challenges, and therefore raises the incentive for misrepresentation,’ Interthinx says in its report. ‘When first time or lower income homebuyers face challenges during the qualification of credit, it can open the door to potential risk factors.
‘Conversely, in the most affordable markets – where median income exceeds monthly housing expense, deposits are stronger, and consumer debts are lower – there is less likelihood to misrepresent income and our indices show comparatively lower fraud risk,’ the report adds.
Interthinx also points out that mortgage fraud risk tends to be higher in states that have disproportionately higher levels of distressed sales and investor activity.
‘In dynamic markets where investors are typically more active, flipping and the use of straw buyers occurs more frequently,’ the report states. ‘These factors all contribute to higher incidences of property valuation and occupancy fraud risks.
‘Mortgage fraud perpetrators take advantage of economic and market opportunities,’ the report adds. ‘For the past several years, areas with concentrations of distressed properties and borrowers – California and Florida, for example – have presented a wealth of opportunity.’
The report also ranks the top metropolitan statistical areas for overall fraud risk as well as fraud risk by type.