The FBI recently reported that pending mort-gage fraud cases increased 91.5 percent between 2003 and 2006 – a strong indica-tor that the mortgage fraud epidemic shows no sign of slowing. In this month’s edition of FraudFacts, CoreLogic will take you through a fraudulent loan transaction featuring “Freddie the Flipper” who’s out to make a quick buck, the accomplices he recruits to help him and “Ingrid the Innocent Borrower” who loses in the end. We’ll show you the different stages where fraud can occur and what could have been done to avoid it. While this is only one ex-ample of a mortgage fraud scheme, it shows how the process unfolds and identifies some of the potential parties involved in perpetrat-ing fraud.

Although the characters featured in our story (see feature story for detailed story chart) are fictional, this mortgage fraud cycle may be happening at any time in any neighborhood across the country. CoreLogic tools help banks and lending institutions identify risky loans where this scenario, and others, are po-tentially unfolding. Using a compilation of data from various sources including borrowers, lenders and brokers, CoreLogic can assess the risk of a loan and help the industry detect and prevent this mortgage fraud scheme and many more.

As the mortgage industry combats fraud, man-aging the risk at the lender level and increas-ing consumer awareness about how to avoid becoming a victim remains crucial to maintain a healthy housing market with fair and accu-rate prices across the country.

A Story of Mortgage Fraud

“Freddie the Flipper” buys a property.

• Ideally, “Freddie” is seeking a property that would be easy to artificially inflate the value on such as a foreclosure property because it sells for under market value. He throws on a fresh coat of paint and cheaply installs car-pet to cover the rotting hard wood floors. He claims the property has been professionally remodeled and carpeted to inflate the value.

• “Freddie” has purchased the property under a false name and falsified his borrower infor-mation because when the flip is complete, he doesn’t want his real name associated with the property.

“Ingrid the Innocent Borrower” approaches “Bob the Unscrupulous Broker” to discuss fi-nancing a purchase. “Bob” sees an opportu-nity to help his buddy, “Freddie the Flipper.”

• A loan application is filled out with “Ingrid’s” information and a proposed value for the home – conveniently, the proposed value is what “Freddie the Flipper” is asking.

• “Bob the Unscrupulous Broker” encourages “Ingrid the Innocent Borrower” to fib on the

Mortgage Fraud: Unfolding the Vicious Cycle

CoreLogicClient CornerHere’s what our customers are saying about CoreLogic:

“Our contacts at Corelogic are excellent. We have been very happy with the level of part-nership and support we have received, and are very excited about the CoreLogic tools.”

—- Wholesale Mortgage Lender

IN THIS ISSUE:

Mortgage Fraud: Unfolding the Vicious Cycle

Case Study: NetBank Increases Efficiencies, Reduces Cost Across Company

Industry Buzz:Reports: Real Estate Loan Fraud Getting Worse

Summer Starts with Sudoku

HomeSpun Hilarity

Spotlight On...PreQualPro

Events at a Glance

Inside EdgeCOLLATERAL RISK MANAGEMENT NEWS AND INTELLIGENCE DELIVERED MONTHLYIssue 11 :: June 2006

June Fraud Facts Tells Tale of Fraud Scheme

Continued on page 4

Another industry first from CoreLogic, PreQualPro is an automated pre-qualification value range tool that determines the validity of a proposed property value.

PreQualPro provides users with a value range and a probability rating that helps determine the accuracy of a client’s value estimate.

This information provides loan officers, account executives, and brokers with the clearest possible indication whether a 1004 or AVM will conclusively support that customer estimate value if the origination proceeds.

Find out more at http://www.corelogic.com

SPOTLIGHT ON

Industry Buzz: Reports: Real Estate Loan Fraud Getting Worse

Mortgage fraud, described as an “epidemic” by the FBI, is intensifying in the United States, according to reports released this month by two key mortgage industry sources.

The number of mortgage-related suspicious activity reports to the federal Financial Crimes Enforcement Network in the first half of 2005 was 33 percent higher than in the first six months of 2004, according to a report issued on behalf of the Mortgage Bankers Associa-tion by the Mortgage Asset Research Institute (MARI).

“It’s getting worse,” said Mark Fleming, chief economist at CoreLogic, a provider of fraud prevention technology that publishes the quar-terly Core Mortgage Risk Monitor. Collateral risk rose by 6.4 percent between the fourth quarter of 2005 and the first quarter of 2006, according to the CoreLogic report.

Residential real estate loan fraud is a national epidemic, costing communities nationwide an estimated $1 billion in 2005, compared with $429 million in 2004, according to the Fed-eral Bureau of Investigation.

States including Georgia have enacted legis-lation to fight mortgage fraud and U.S. Sen. Barack Obama has asked the Senate Commit-tee on Banking, Housing and Urban Affairs to hold hearings on mortgage fraud.

Both reports cited conditions in the mortgage industry as factors driving the increase.

“If rising interest rates produce a significant reduction in originations for 2006, additional cases could surface in the future at a rapid rate as some originators press to maintain high origination levels,” the MARI report said.

Or, as Fleming said, “You’re (brokers) going to work harder to find ways to make a loan work by pushing value to get your commission.”

The MARI report concluded that although 2005 statistics are still preliminary, “it ap-pears that Florida, Utah and Georgia are lead-ing the mortgage fraud pack.” Colorado and Illinois show steadily increasing problems over the last five years, the MARI report said.

In a note of hope, the MARI report said Geor-gia’s problems “appear to be abating in re-sponse to authorities’ strong anti-fraud activi-ties.” In 2005, Georgia enacted the Resi

By Janice Mara, Inman News

Continued on page 3

2

Number of suspicious activity reports up 33%

dential Mortgage Fraud Act, a pioneering law combating mortgage fraud. The state is no lon-ger at the top of the list in mortgage fraud, a position it occupied in 2004.

South Carolina showed the greatest improve-ment in its MARI Fraud Index over the past five years, the MARI report said.

Youngstown, Pa.; Akron, Ohio; Memphis, Tenn.; Toledo, Ohio; and Buffalo, N.Y., are in the great-est danger of succumbing to mortgage fraud, according to CoreLogic’s quarterly Core Mort-gage Risk Monitor, which shows predictions of areas likely to experience negative economic consequences over the next 12 to 18 months because of mortgage fraud.

The top five markets showing the most notice-able increase in mortgage fraud are Alexandria, La.; Pascagoula, Miss.; Laredo, Texas; Mor-ristown, Tenn.; and Lakeland, Fla., CoreLogic said.

CoreLogic provides mortgage lenders with tools to help identify elements of loan applica-tions that might indicate mortgage fraud. Its system processes 55,000 applications a day, Fleming said, and the mortgage monitor index is based on the aggregation of the loan scoring by the system.

“The risk of mortgage fraud causing economic impact in vulnerable markets continues to rise at an unprecedented rate,” the CoreLogic re-port said.

MARI noted that the number of suspicious activ-ity reports, may not be an entirely accurate rep-resentation of the amount of mortgage fraud. For one thing, only federally insured financial institutions are required to file such reports.

“We think there is a large number of mortgage fraud situations that are not covered by the sta-tistics we report, based on SARs (suspicious activity reports),” the report quoted an FBI agent as saying.

Also, an increased number of mortgage origina-tors are now submitting such reports, because commercial banks and thrifts, which are re-quired to make such reports, acquired almost 150 independent mortgage banks (which are not) between 1997 and 2005.

Regardless, the MARI report concludes that in-cidents of fraud have risen, citing an FBI report on the subject that concluded that despite the limitations of suspicious activity reports, “Based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing.”

Quick Tips:

By establishing an employee training program that provides instruction on understanding common mortgage fraud schemes and recognizing red flags, data reports from tools such as HistoryPro can be used to save your company several million dollars in fraud every year.

Read about CoreLogic’s Collateral Risk Management Certification at http://www.corelogic.com.

Industry Buzz: Real Estate Loan Fraud Getting WorseContinued from page 2

Reprinted with permission from Inman News

Training:

NetBank Increases Efficiencies, Reduces Costs Across Company

Meritage Mortgage Corporation, the non-con-forming lending division of NetBank, the na-tion’s oldest online bank and a top mortgage lender nationwide, set out to simultaneously reduce the cost of processing loans while decreasing their exposure to costly forms of risk. Focusing on the appraisal review func-tion, they set a goal of reducing the number of loans reviewed by increasing the efficiency of the appraisal review staff.

Meritage implemented CoreLogic ’s History-Pro collateral scoring tool and CoreLogic ’s AVMSelect™ cascading AVM tool with Geo-

preferencing to its workflow, and immediately experienced a dramatic increase in hit-rate from 70% to 90%, and a significant increase in hit-rate accuracy. HistoryPro also enabled Meritage’s underwriters to make smarter, faster decisions, reducing the time spent con-ditioning loans. HistoryPro is run on the front end of 100% of all Meritage non-prime loans using a specialized business model developed by Meritage with guidance from CoreLogic.

For more details about this enlightening new case study, request a copy online, or call 888.288.2009.

Top 30 Lender Cuts Three Days from Approval Time Using HistoryProTM

CoreLogicprovides the mortgage banking industry with the most innovative, powerful and comprehensive set of collateral risk management and fraud detection tools in the marketplace today. CoreLogic’s technology enables mortgage originators and investors to increase profitability and loan quality by making more informed lending and investment decisions. Financial institutions throughout the United States utilize CoreLogic’s suite of tools to streamline their workflow and mitigate losses.

corelogic.com

888.288.2009

For comments or questions regarding Inside Edge, please email newsletter@corelogic.com

Copyright © 2006 CoreLogic, Inc.

CoreLogic10360 Old Placerville Road, Suite 100Sacramento, California 95827

Events at a Glance

CMBA Western Secondary Conference July 12-14, 2006San Francisco, CA

CBA Home Equity Lending Conference September 10-13, 2006Orlando, FL

MBA Quality Assurance Conference September 26-27, 2006Coronado, CA

June Fraud Facts Tells Tale of Fraud Scheme

Be sure to visit CoreLogic at the following events to learn more about our

innovative solutions for detecting and managing fraud risk.

loan application, saying everyone does it. “Ingrid” inflates her income slightly to qualify for the loan.

• At this point the value of the property has been inflated significantly to create a profit for “Freddie the Flipper” over the cost of purchasing the property in the first place.

Application is sent to underwriting and ap-praisal is ordered

• “Amy the Dishonest Appraiser” is brought in to justify the inflated value of the prop-erty.

• “Ingrid’s” lender doesn’t use CoreLogic fraud detection and collateral risk manage-ment tools and no one realizes that “Bob the Unscrupulous Broker” has been at this before, as has Amy, even though “Freddie the Flipper” is selling a house in a neighbor-hood known for flipping schemes.

Underwriting approval

• Based on “Amy’s” inflated appraisal and Ingrid’s fraudulent loan application, the loan is approved and a closing date is set.

Closing - funds are allocated to pay “Freddie the Flipper” and a loan is originated to Ingrid the Innocent borrower.

• “Freddie the Flipper” walks away with his profit. He gives “Bob the Unscrupulous Bro-

ker” and “Amy the Dishonest Appraiser” their cut and moves on to the next property.

• “Ingrid the Innocent Borrower” is now left with a property that is not worth what she thought it was and a loan that may be bigger than the true value of the property.

Lessons Learned:

• Do not ever falsify information on any document during the loan transaction – no matter who tells you it is ok.

• Compare neighboring house prices to the appraisal price. If it seems too high, get a second opinion.

• Have a licensed professional inspect the house for any “undercover” blemishes that could potentially deflate the value of the home.

• Always remember the golden rule of home buying: If it looks or sounds too good to be true, it probably is!

CoreLogic experts are available to discuss the issues surrounding mortgage fraud in depth.

If you have any questions or are inter-ested in learning more about manag-ing the risk of mortgage fraud, please email sales@corelogic.com or call 888.288.2009.

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