California Named No. 1 State for Mortgage Fraud Risk

In the fourth quarter of 2009, California had the highest mortgage fraud risk, according the quarterly Mortgage Fraud Risk Report released Friday by Agoura Hills, California-based ""Interthinx"":http://www.interthinx.com/, a provider of risk mitigation and regulatory compliance tools for the financial services industry.

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With an index value of 222, California took the No.1 spot from Nevada, which had topped the rankings over the last five consecutive quarters. Nevada dropped to second place with an index of 220 and was closely followed by Arizona with an index of 211. Florida remained in fourth place with an index of 179, and Colorado was ranked fifth with an index of 153. With indices between 55 and 71, West Virginia, Maine, Kansas, South Dakota, and Montana were named as the five states with the lowest mortgage fraud risk.

According to Interthinx, its fraud risk indices have proven to be a leading indicator of foreclosure activity. As a result, the company said regions that currently have high fraud risk indices are likely to have high foreclosure rates going forward, particularly if housing prices continue on their downward trajectory and if there is no significant improvement in general economic conditions.

The Mortgage Fraud Risk Report also included an analysis of national mortgage fraud and indices for the four most common types of mortgage fraud, including property valuation fraud, occupancy fraud, employment/income fraud, and identify fraud. The findings showed that most fraud types are on the rise.

Despite a 4 percent quarter-to-quarter decrease, the property valuation fraud risk index was up 40 percent over the fourth quarter in 2008 and jumped more than

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100 percent from the same period in 2007. Interthinx said this index will continue to be driven by schemes involving short sales, REO inventories, wholesale flipping, and refinancing by borrowers whose equity has been impaired by falling real estate values.

The occupancy fraud risk in the fourth quarter of 2009 rose 16 percent from the third quarter, marking the first significant increase in the index since the fourth quarter of 2006. The magnitude of the quarter-to-quarter increase suggests that occupancy fraud risk will be a serious issue going forward, Interthinx said. The company explained that this will be especially true as continuing price declines and ""get-rich-quick"" schemes lure investors back into the market and as builders face continuing difficulty in moving unsold inventory.

While employment/income fraud was down 29 percent over the previous year, it increased 3.4 percent from the third quarter -- the first increase since the index peaked in the third quarter of 2007. Interthinx said it is too soon to tell whether this uptick signifies a rebound in employment/income fraud risk or whether it reflects a temporary ""blip"" associated with schemes involving the federal homebuyer tax credit.

Identity fraud, which is frequently used in mortgage fraud schemes in order to hide the identity of the perpetrators and/or to obtain a credit profile that will meet lender guidelines, was the only type of mortgage fraud that showed no increase in the quarterly report. According to Interthinx, the identity fraud risk index has remained relatively constant over the last two years, declining 2 percent from the previous quarter and 4 percent from a year ago.

Going Forward, Interthinx projects that if interest rates remain low, the predominant fraud type will continue to be related to property valuation, as speculative investors and ""flipping"" return to the market and as consumers attempt to refinance their mortgages despite reduced equity in their properties. Interthinx also expects a rebound in occupancy fraud, particularly in light of investor demand, fueled by ample inventories and the expected release of shadow inventory. In addition, the company said it is likely that the fraud risk index will continue to rise through 2011, as a wave of adjustable-rate mortgages recast for the first time.