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36 | Th e M Rep o RT o r i g i nat i o n s e r v i c i n g a na ly t i c s s e c o n da r y M a r k e t ORIGINATION the latest Mortgage Fraud risk continues downslide, Heloc Fraud remains a concern While fraud continues to decline nationally, higher levels of fraud persist in a few markets experiencing large distressed inventories and high investment activity. M ortgage fraud risk declined overall in the third quarter of 2014, though some categories still remain tricky as rising costs present a challenge to homebuyers. Based on an analysis of loan applications passing through its own fraud detection technol- ogy, Interthinx said its national Mortgage Fraud Risk Index measured 98 in Q 3 2014, down 2 percent from the quarter prior and 9 percent from a year ago. The findings align with CoreLogic's latest fraud report, which revealed application fraud risk was down across all catego- ries—except home equity lending, which has seen risk indicators rise as demand grows. While the overall trend indicates an ongoing drop in fraud, a handful of states are still experiencing elevated fraud rates in particular high-risk markets, including Florida, California, and Arizona, all of which have "disproportionately higher levels of distressed property sales and investor activity," Interthinx said. Also included on that list are New Jersey, Connecticut, and Illinois, which have higher-than- average levels of both occupancy fraud risk (usually committed by investors) and property valuation fraud risk as straw buyers domi- nate some of the local markets. At the national level, Interthinx's Property Valuation Fraud Risk Index was 122 as of Q 3, down 5 percent quarter-to-quarter but up 20 percent year-to-year. The national Occupancy Risk Index was 133, up 4 percent over the quarter but down 10 percent from the year prior. Also declining in Q 3 was Interthinx's measure of employ- ment/income fraud risk, which dropped both quarter-over- quarter and year-over-year to 59. California was far and away the riskiest state for that category, contributing nine of the top 10 riskiest metro markets, including the No. 1 spot: Fresno, which posted an index value of 133. The one outlier was Boulder, Colorado, which took the No. 2 spot with an index of 123—an 81 percent spike from the second quarter. While increased scrutiny brought on by last year's ability- to-repay rule helped drive down employment/income fraud in the latest index reading, decreases in housing affordability are keep- ing levels up in those high-risk markets, Interthinx said. "Housing price pressure and home affordability can closely correlate with fraud risk," said Jeff Moyer, president of Interthinx. "When first time or lower income homebuyers face challenges during the qualifica- tion of credit, it can open the door to potential risk factors." He added, "Conversely, in the most affordable markets—where median income exceeds monthly housing expense, deposits are stron- ger, and consumer debts are lower, there is less likelihood to misrepre- sent income and our indices show comparatively lower fraud risk." There is one exception, however: Home equity lines of credit (HELOCs), which have seen fraud risk rise along with demand for loans over the past year and a half. That trend comes despite the recent decline in the total number of mortgage applications compared to normal levels. "When interest rates troughed and then began to rise in late 2012 and early 2013, many of the best-qualified borrowers exited the refinance market. At the same time, increasing home values gave rise to higher levels of home equity, enabling many homeowners ... to purchase a different property, refinance, or obtain a home equity loan," said Xiaolin Tan, staff scientist for CoreLogic, in a blog post for the company. "While this dynamic has been a positive one for many households, the increase in HELOC activity has brought with it a higher level of fraud." Tan offered as an example multi-lien HELOC fraud, which is an "extremely profitable scam" that takes advantage of the lag time between closing and record- ing a loan to solicit multiple loans on one property. While that's just one example, Tan said many more types of HELOC fraud have come to light recently as equity loan volume increased. At the state level, Florida remained the riskiest place for mortgage application fraud in the third quarter, keeping its historical spot. Nevada, another state hit hard by the housing crisis and still strug- gling to recover, ranked second. New York, New Jersey, and Hawaii rounded out the top five. Meanwhile, Delaware and New York each saw mortgage application fraud risk hit its highest level locally since 2010 in the third quarter.