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Operational Enhancements Result in Lower Mortgage Fraud Risk
Mortgage fraud risk is being lowered by changes in residential origination practices and new regulation.
According to a Fitch Ratingsreport released Tuesday, since the financial crisis, risk of fraud and misrepresentation has declined.
"A key driver behind the poor performance of the peak vintage collateral was weak operational controls for the information used in the loan decision process," Fitch said. "The industry as a whole, through its own initiatives, investor demands and regulatory mandates, has created a new lending paradigm that has improved the quality of the information and should result in lower credit risk."
Much of the mortgage fraud risk improvement is credited to legislative changes, Fitch reported. National standards for non-depository loan officer licenses were introduced for the first time in 2008. These standards required officers to complete a written test, education courses, and a criminal background check.
Additionally, in 2014, the Ability to Repay rule was implemented, which prohibited 'stated income' loan programs for most mortgage loans.
"A new lending paradigm that has improved the quality of the information and should result in lower credit risk."
Lenders have also taken steps to reduce operational and misrepresentation risk including careful watch of quality control results for loan officer compensation and underwriters, which are more frequent and comprehensive than prior to 2008, the report found. Underwriting and loan origination departments are now typically separated to allow for greater underwriting independence and communication between loan officers and appraisers is limited.
Technology advancements such as fraud risk tools and publicly available housing information on the internet have also played a key role in reducing risk, Fitch says.
The report found that the 2014 Annual Mortgage Fraud Risk Index value decreased by 4 percent from 2013 to 100. This is a sign that the gradually rising trend observed in the previous four years has come to a stop. Of the four type-specific fraud risk indices Interthinx tracks including property valuation, identity, occupancy, and employment/income, only property valuation risk saw an increase of 17 percent.
“After three years of increasing fraud risk, the 2014 data show both an overall decrease and a shift to more localized concentrations of specific fraud types,” said Jeff Moyer, chief product and strategy officer at First American Mortgage Solutions. “In no way diminishing the imperative for lenders, servicers and investors to remain vigilant, overall market stabilization does allow our industry to focus on more highly targeted strategies to address specific fraud threats.”
Justin Lee Thayer is Lane counties expert in market analysis for real estate investors. Call Justin @ 541-543-7287