Shrinking Market Could Expose More Fraudulent Mortgages for Non-Certified Lenders

Mortgage fraud is likely to increase as the mortgage market continues to shrink, according to The Prieston Group, which provides lender quality certification to hundreds of lenders for fraud insurance coverage approval. Based on The Prieston Group’s most current statistics, housing values are dropping by about 9 percent in some areas while defaults are rising by as much as 22 percent. TPG has also observed that lenders are increasingly dealing with harder loans and less qualified borrowers. Requests for exceptions to loan guidelines have increased, as have the cases of suspected misrepresentation and the resulting referrals to lenders’ pre-funding quality control departments.

Additionally, some lenders have reported a 10 percent drop in volume during January over the previous six months. FICO scores have also dropped, averaging 610 in January compared with 649 for the six months ending January 31.

Lenders who have not been certified by The Prieston Group for the 2005 vintage are more likely to fund fraudulent loans than lenders that have been certified or have maintained their certification. According to The Prieston Group’s Correspondent Management team, lenders seeking to qualify for coverage have reported significant increases in early payment defaults containing fraud.

All these factors are signs of a contracting market. As the market contracts and margins thin, lenders are under more pressure to accept loans of dubious quality. In response to the desire to keep loan volumes up, lenders may be more tempted to not look too closely at loans. Fraudsters understand this, and may try to take advantage of the situation by pushing through loans containing material misrepresentation.

“The mortgage industry must remain vigilant in the fight against fraud, even as loan volumes decrease,” said TPG Chairman Arthur Prieston. “It is absolutely essential that lenders maintain their certification of process and procedures for the benefit of their investors. They must continue to maintain loan quality through all cycles of the mortgage market.”