MORTGAGE RISK MANAGEMENT NEWS AND INTELLIGENCE DELIVERED MONTHLYIssue 22 :: June 2007

Client Corner

IN THIS ISSUENew Mortgage Fraud Schemes Coming to Light

Lenders Fighting Back Against Multi-Closing Fraud

Impac Lending Group Mitigates Repurchases on Stated Income Loans

LoanPerformance Risk Summit Coming in July

HomeSpun Hilarity

Spotlight On...Multi-Closing Alert

Events at a Glance

Sudoku Puzzle

Inside EdgeNew Mortgage Fraud Schemes Coming to Light

As if times weren’t challenging enough in the mortgage lending industry, fraud perpetrators continue to develop new fraud schemes to illegally profit from the exploitation of unsuspecting borrowers, lenders, and investors.

In recent months, three increasingly common fraud schemes have been observed by and discussed among various mortgage industry groups.

Affinity Fraud

This growing fraud scheme occurs when an investor convinces a group (church members, police stations, military) to buy into their “easy money” investment plan. The investor usually offers $25,000 to $100,000 per loan transaction. The buyers then sign a contract for a number of transactions within a short time period. The unsuspecting buyers are told that the investor will pay the monthly payments with the tenants they arrange to live in the home. The investors then pay the first four mortgage payments, but none afterwards. The loan defaults unless it is sold quickly. The buyer, of course, makes no profit from the sale.

In recent months, affinity fraud perpetrators have discovered that they are less likely to be tracked down if they pay the mortgage for the first year rather than for the first four months. This builds additional trust with the buyer, giving the crooked investors more time to abscond with the victims’ investments.

Free Enterprise Fraud

This scheme involves straw buyers who purchase homes in upscale neighborhoods for the purpose of growing illegal marijuana crops. To avoid arousing suspicion, payments are made in a timely manner until,

of course, the illegal activity is discovered (usually only if law enforcement is alerted to the suspicious activity).

One-Transaction Flip Fraud

In this new take on the classic “flipping scheme,” an investor, targeting upper-scale neighborhoods, finds a seller who is experiencing difficulty locating a buyer. Using the victim’s desperation to sell against them, the fraudster makes a deal to buy the home. The crooked investor then has a realtor who is working for them find another buyer for the home at a significantly higher sale price. The investor takes the new contract to the original seller to sign, and if the seller asks about the inflated price, the investor assures them that the increase is for repairs and upgrades. However, this addendum is never revealed to the closing agent or appraiser, and the appraisal and condition are locked in. The seller is then offered extra cash back at closing to complete the transaction. This scheme allows the fraudulent investors to keep the title companies from reporting a change of title in a short period of time, or even reporting two closing transactions in a single day.

With so many new fraud schemes emerging to threaten productivity and profitability within the mortgage industry, it is easy to understand why automated fraud identification and prevention solutions have become such a critical part of the workflow processes of a growing segment of lenders and investors.

The latest scams threatening the mortgage industry

Note to Our Readers: Beginning in July, InsideEdge will be published every other month.

Here’s what our customers are saying about First American CoreLogic:

First American CoreLogic’s sales team is always very responsive, making sure all of our team members know how to use the tools correctly. They are also quick to follow up with any issues we may have, and are more than willing to hold refresher training sessions for anyone who needs them.

—Sr. Vice President, OperationsLeading Wholesale Lender

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Lenders Fighting Back Against Multi-Closing Fraud

As lenders are increasingly squeezed between the “rock” of tightening origination standards and the “hard place” of production demands to fund loans in a struggling marketplace, a new pressure point is quickly gaining momentum—a clever and deceptive scheme called multi-closing fraud, or “shotgunning.” This type of mortgage fraud takes advantage of the absence of cross-lender communication to criminally extract hundreds of thousands of dollars.

In a typical shotgunning scheme, the perpetrator applies for a home equity loan from multiple lenders simultaneously, using a single piece of collateral. The perpetrator, employing the appearance of good credit (falsely obtained) to facilitate a quick closing, leverages the systemic delays between closing dates and lien filing to perform simultaneous closings on the same property with multiple lenders. By the time the dust clears, the “borrower” has extracted three or four loan payouts, never to be heard from again.

Fortunately, with the help of recent technological advances and the cooperation of some of the nation’s largest financial institutions, lenders are making significant progress in combating these costly fraud scenarios.

While collateral and identity scoring are already established as effective weapons against mortgage fraud for individual lenders, detecting multi-closing schemes requires a proactive approach across lending institutions to share current loan information. With this type of cooperation, solution providers can leverage their data warehouses of loan application information to provide daily updates to participants on lien activity to prevent “shotgunning.”

Since the beginning of this year, significant strides have been made toward thwarting multi-closing fraud. For example, three large nationwide lenders, working closely with

First American CoreLogic, have saved millions of dollars in potential loss using a groundbreaking multi-closing alert program.

In the first case, a lender avoided $728,000 in loss in just one month using this solution. Another lender was able to prevent several multiple-closing schemes, averting $1.25 million dollars in potential loan loss, while a third lender saved nearly $2 million through its use of the same multi-closing prevention solution.

All three lenders are eagerly participating in this progressive program, providing daily updates to the shared database. As the industry continues navigating recent challenges, cooperation across lenders and the technological links to facilitate this cooperation will be key contributors to minimizing damage from criminals gaming the system. Technology plays a significant role in preventing this type of mortgage fraud by facilitating open communication among lenders for a shared benefit of preventing related loss.

Reprinted from National Mortgage News Online

Detecting multi-closing schemes requires a proactive approach across lending institutions to share current loan information.

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For more information on the Multi-Closing Alert Program, contact First American CoreLogic Customer Care at 888.288.2009 or customercare@corelogic.com.

Emerging fraud scheme being thwarted through technology, cooperation

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Quick Tips

Impac Lending Group Mitigates Re-Purchases on Stated Income Loans

“IncomePro™ assists us with preemptive detection of income, occupation, and employment falsification which are primary causes of early payment defaults and delinquencies. This helps reduce investor repurchases due to EPD and mitigate the magnitude of losses from scratch and dent sales. The credit default protection and resultant loss severity abatement make IncomePro a necessity for the stated income loan origination process.”—Andy Chawla, Senior Vice-President of Risk Management

Impac Lending Group is the wholesale division of Impac Funding Corporation, a top 40 Alt-A lender. Impac Lending Group originates residential loans through a nationwide network of mortgage professionals. A substantial portion of Impac-funded loans fall in the stated income product category. Impac is weathering industry challenges by protecting itself

against collateral, borrower, and broker risk through deployment of the LoanSafe Risk Decision System (RDS). LoanSafe RDS™ enhances risk measurement by integrating FICO, LTV, CLTV, and loan type.

“LoanSafe RDS helps us manage collateral risk assessment. Adding IncomePro allows us to have a comprehensive loan-level risk assessment tool that also authenticates the borrower’s stated income. Together these tools help us better manage layered risk and make prudent loan-level decisions,” says Chawla.

Impac QC audits indicated that borrower income, employment, and occupation misrepresentations explained roughly 70 percent of the reasons for defaulted loans and early payment defaults.

Wholesale lender adds IncomePro™ for comprehensive risk evaluation

Homespun Hilarity

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When using ThirdParty Scorecard™ and LoanSafe™,you can utilize location-specific information (most recent loans within a ZIP code and 1/2 mile from the subject property) in limited information areas such as non-disclosure states to identify real-time sales and loan prices for properties in the areaof the subject.

For more information, contact First American CoreLogic Customer Care at 888.288.2009, or customercare@corelogic.

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Assuming an average loan size in excess of $240,000 and average loan loss of $5,000 per loan, on as few as 50 loans per month, our savings can be as much as $3 million per year in just one channel.

Impac Mitigates Repurchases on Stated Income Loans

Prior to IncomePro, income reasonableness checks included use of online HR salary systems to validate reported income. However, this method only produced a 22 percent hit rate for given occupation and title. For the majority of loans where no title and salary range was found, underwriters relied on their own subjective life experiences or other Internet searches and calls to establish some grounding in reasonableness for a borrower’s income. This effort created processing delays for the sales team.

An alternative means of validating a borrower’s stated income and employer information was needed to protect the company from loss and speed up loan processing.

Since Impac was already utilizing LoanSafe RDS, adding IncomePro enabled a more complete review of borrower risk by validating the borrower’s reported salary and employer information for stated income loans.

To incorporate IncomePro into its operations, Impac used a staged approach. Impac partnered with First American CoreLogic to add IncomePro’s web-based reporting into its workflow. Impac began running IncomePro on FICO scores below 660 as a test until the tool gained acceptance internally. As the implementation progressed, Impac developed a permanent guideline of conditions calling for IncomePro to be run on stated loans with FICO scores below 700, and any loans with additional risk factors such as LTV greater than 80 percent, CLTV greater than 90 percent, assets less than twice their stated monthly income, loan amount greater than $250,000, or a 300 percent tolerance for payment shock. IncomePro is also required for these conditions in Impac’s correspondent channels.

First American CoreLogic assisted with the technology integration into Impac’s loan origination system by participating in business requirements development

and providing consultation and training throughout the product integration process. “There is no way we could have completed the process without the support of their integration team,” said Lily Van, Senior Project Manager. “We worked through the natural challenges together.”

Impac processes stated income loans using both IncomePro and LoanSafe RDS scoring systems in prefunding evaluation. Specifically, IncomePro allows lower risk scores to be streamlined and approved, while higher risk scores are either conditioned with tolerances related to the validated income range, or, for the highest scores, require full documentation and management approval.

“Without any systematic information or analytics to help evaluate borrower-reported incomes, our stated income loan guidelines were left to underwriters’ subjective loan-level assessments. IncomePro enabled us to establish guidelines and rules to make thorough and objective decisions that help streamline decisioning and tracking to protect us from loss,” said Chawla.

Impac is now preventing the funding of many loans with exaggerated or false income, employment, and/or occupation misrepresentation by using IncomePro in prefunding.

“Assuming an average loan size in excess of $240,000 and average loan loss of $5,000 per loan, on as few as 50 loans per month, our savings can be as much as $3 million per year in just one channel. In addition to loss prevention benefits, the streamlined process and portfolio tracking help us integrate our people, process, technology, and statistics,” added Chawla.

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For more about IncomePro, the industry’s first fully real-time income validation tool, contact First American CoreLogic at 888.288.2009.

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SPOTLIGHT ON

LoanPerformance RiskSummit Coming in July

Our recent merger with First American Real Estate Solutions to form First American CoreLogic has brought a new association with LoanPerformance, also a part of First American CoreLogic. Together we are positioned to redefine the possibilities of mortgage risk analytics, delivering the most innovative, comprehensive family of analytics products ever conceived.

First American CoreLogic’s commitment to deliver ever-improved data and ever-more-powerful analytics will be on full display at the upcoming LoanPerformance RiskSummit, taking place at the legendary La Costa Resort and Spa in Carlsbad, California, from Sunday, July 22nd to Tuesday, July 24th. LoanPerformance continues to design and develop the most innovative, robust, trustworthy mortgage intelligence tools available anywhere, providing clients with the best possible mortgage risk decisioning capabilities.

Featuring a full slate of industry experts, Loan Peformance’s RiskSummit will provide attendees with detailed analyses of the current state of mortgage finance risk, penetrating explorations of the most significant factors driving it, fascinating “laboratories” in modeling and other

analytical techniques, along with ample opportunity to power-network with fellow industry leaders.

Among the informative track sessions offered throughout the summit will be a series titled “Focus on Loan Quality.” This series—taking place on the morning of Monday the 23rd—includes such enlightening presentations as “Managing Stated Income Risk,” “Revaluing Risk in Times of Change,” and “Loan Modification vs. NOD’s: Whose Interests Are Best Served?” First American CoreLogic’s Executive Vice President of Risk Management Steve Schroeder and Director of Economics Mark Fleming will be among the esteemed industry experts moderating these timely track sessions.

Multi-Closing Alert™ The Multi-Closing Alert program identifies and proactively delivers notifications to the closing agent’s desktop, identifying specific institutional exposure to multiple closings on the same property. The program gives lenders the ability to guard against this widespread and extremely costly form of mortgage fraud. For more information on the Multi-Closing Alert Program, contact First American CoreLogic Customer Care at 888.288.2009 or customercare@corelogic.com.

Industry leaders to gather at 19th annual mortgage risk management conclave

CMBA Western Secondary Market ConferenceJuly 18-20, 2007San Francisco, CA

LoanPerformance 19th Annual RiskSummitJuly 22-24, 2007Carlsbad, CA

Events at a GlanceBe sure to visit First American CoreLogic at the following events to learn more about our innovative solutions for detecting and managing fraud risk.

To register for LoanPerformance’s RiskSummit, visit the LoanPerfor-mance RiskSummit 2007 website.

CBA Home Equity Lending ConferenceSeptember 23-25, 2007San Diego, CA

MBA’s 94th Annual Convention and ExpoOctober 14-17, 2007Boston, MA

Sudoku Presents Unprecedented Challenge!Difficulty rises, pushing puzzle fans to use new levels of logic

With summer just around the corner, we’ve decided to turn up the heat on our loyal Sudoku puzzle players. This month, we’ve presented a difficulty level that many may consider beyond challenging. Just as we are proud of our accomplishments in providing clients with tools that rise to the challenges facing the mortgage lending industry, we hope you’ll find the reward worth the hard work!

For those not yet familiar with Sudoku, the rules are simple: Enter a numerical digit from 1 through 9 in each cell of a 9x9 grid made up of 3x3 subgrids (called “regions”), starting with random digits already revealed in some cells (the “givens”). Each row, column, and region must contain only one instance of each numeral, 1 through 9.

Copyright ©2007First American CoreLogic, Inc.

is the leading provider of residential mortgage risk management and fraud protection technology and services to the U.S. mortgage banking industry. First American CoreLogic quantifies the risk in more than 25% of U.S.-based originations on behalf of its clients, collectively identifying more than $1.4 billion dollars in potential loan loss annually. Since 1997, mortgage originators and the capital markets have relied on us to increase loan performance by making smarter lending and purchase decisions.

First AmericanCoreLogic

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