I never really thought about mortgage fraud in terms of geography, but after getting my hands on Interthinx’s quarterly Mortgage Fraud Risk Report, I’ve had to change my point of view.

Interthinx of Agoura Hills, Calif., provides risk mitigation and regulatory compliance tools for the financial services industry and what it has been able to do is mine its data to locate nodes of mortgage fraud risk.

The operative word here is "risk," because Interthinx’s fraud detection tools find discrepancies in loans, but the company can’t use the word fraud unless litigation is brought forward, so "mortgage fraud risk" is the phrase it has devised.

Mortgage fraud risk means that individual loans have red flags in regard to such things as manipulated property value or borrower identity, explained Ann Fulmer, Interthinx’s vice president of business relations.

"You can’t say it’s fraud until that loan blows up, investigated and identified as fraud. In the environment we are in now with the secondary market and all the repurchases, there is an awful lot of investigation going on into these loans and it is becoming very clear there is a huge amount of fraud."

What’s interesting about Interthinx’s report is that it centers on individual locations because incidents of mortgage fraud migrate geographically to take advantage of local market conditions.

In its most recent report, issued late summer, the five states highest on its mortgage fraud risk index were Nevada, Arizona, California, Rhode Island and Florida.

Four of the top five are fairly obvious because fraud thrives where there is uncertainty in property values. To a lender, valuation represents security, but when valuation is manipulated it represents profit margins to fraudsters. The states with the highest ranking of fraud risk are those with high levels of foreclosure activity and underwater borrowers.

What’s happening in these states is that individual borrowers want to refinance but they have impaired equity and not enough income to support a refinance so they are fudging income and employment facts.

All that shuffling of numbers is secondary to the primary incidents of mortgage fraud risk, which is the manipulation of property values when your home is underwater and your opportunities to refinance are limited.

The odd state out in the top five for mortgage fraud risk is Rhode Island, which economically has its own set of troubles. The state is experiencing serious unemployment problems and high mortgage failures.

With foreclosures come a lot of uncertainty in property values, thus there is opportunity for fraud. Combine that with the desperation that’s often a byproduct of unemployment and you get a lot of motivation to commit fraud.

The 10 states with the lowest mortgage fraud risk rankings are: Wyoming, Louisiana, Montana, Alabama, Alaska, Mississippi, South Dakota, West Virginia, Kansas and Maine.

If one drills down into the Interthinx data to cities, the top 10 metro areas for mortgage fraud risk are all in the busted residential states of California, Arizona and Florida: Modesto, Calif.; Stockton, Calif.; Vallejo-Fairfield, Calif.; Cape Coral-Fort Myers, Fla.; Riverside-San Bernardino-Ontario, Calif.; Phoenix-Mesa-Scottsdale, Ariz.; Las Vegas-Paradise, Nev.; Visalia-Porterville, Calif.; Fresno, Calif.; and Bakersfield, Calif.

Diving even deeper into the data to individual ZIP codes, one finds some real surprises: Of the top 10 ZIP codes for mortgage fraud risk, the No. 1 and No. 3 spots are in Chicago and the No. 6 and No. 10 rankings in Atlanta.

Locally what happens, Fulmer explained, is that once fraud gets hold of an area, it infects public records and creates so much uncertainty that a cycle of fraud develops.

Fulmer used a personal case as an example. In her neighborhood, which remains unidentified but is probably near Agoura Hills, Calif., there were eight homes involved with fraud and it took eight years to get those homes out of the fraud cycle and into the hands of true owner-occupiers.

Another problem to individual localities is organized rings of fraudsters. Interthinx breaks out mortgage fraud risk into four categories: property valuation fraud, identity fraud, occupancy fraud, and employment/income fraud.

Property valuation fraud (manipulating value to create equity, which is then extracted from loan proceeds) mimics the wider fraud indices in that the top five metros (Modesto, Stockton and Vallejo-Fairfield in California; Cape Coral-Fort Myers, Fla.; and Phoenix-Mesa-Scottsdale, Ariz.) are all in the infamously busted states.

When it comes to identity fraud, a whole new set of cities appears. The term identity fraud refers to schemes where perpetrators hide their identity and/or obtain a credit profile to meet lender guidelines.

The top five metros for identity fraud risk are: Cleveland-Elyria-Mentor, Ohio; Miami-Fort Lauderdale-Pompano Beach, Fla.; Honolulu; Salinas, Calif.; and Trenton-Ewing, N.J.

This set of metros has been beset by organized mortgage fraud rings.

"These are professional criminals who come into an area, hit hard and fast, and then move to a different market," Fulmer said. "Identity fraud has gone up because so many people have impaired credit scores so if you want to refinance or buy a house, you insert someone else’s Social Security number to try to qualify."

Some of these cities have other problems as well. Cleveland, which has high unemployment, has been a hotbed for mortgage fraud for a long time, as has the Miami area, but for a different reason: out-of-control speculative development. Seemingly innocent Honolulu pops into the rankings every now and then mostly due to rise and fall of local, organized rings.

Fulmer has one last note about mortgage fraud risk: the involvement of unscrupulous real estate agents and brokers. "One of the things we are hearing from our clients," she said, "is that in flopping schemes, which is where the price is manipulated on a short sale so a home could be sold at a higher price to an end buyer, there is an increasing involvement of real estate agents and brokers."

She added that some agents and brokers "have gone to jail because of this."

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