Occupancy Fraud Tops List of Most Common Type of Mortgage Fraud

Occupancy fraud was the most common type of mortgage fraud reported during the first half of 2005, according to statistics released September 6 by The Prieston Group, which provides fraud insurance, training and loss mitigation.



More than half -- about 53 percent -- of claims filed with The Prieston Group contained some type of occupancy misrepresentation. Occupancy fraud occurs when borrowers -- or someone acting on behalf of borrowers -- misrepresents whether they plan to live at the property. Following behind occupancy fraud were schemes involving hidden debt (found in 31.6 percent of all claims), employment fraud (found in 30.3 percent of all claims) and straw borrowers (found in 12.9 percent of all claims).



"Although occupancy fraud was the most commonly reported type of fraud during the first half of this year, we often find that claims contain multiple types of fraud and involve multiple people," said TPG Chairman Arthur Prieston. "Recognizing all the fraud in a particular file is essential in identifying fraud schemes."



In fact, occupancy fraud was the No. 1 type of fraud reported in four of the top five mortgage fraud hot spot states. In Georgia, which led the list in number of claims filed during the first half of the year, occupancy fraud was found in 48 percent of the files. The average FICO score of claims filed in Georgia was 633 and the average loan-to-value ratio was 86 percent.



That compares with an average FICO score of 628 on all claims filed from across the country during the first six months of 2005. The average loan-to-value ratio on all loans was 81.7 percent. Full-documentation loans accounted for 55.5 percent of claims filed, which mirrors general industry trends.



Another industry trend mirrored in the filed claims is the use of automated fraud detection tools. Yet TPG data show that reliance on such technology is clearly not enough. In fact, about 80 percent of claims filed with TPG's PBIS Insurance Services program involved loans screened by such systems.



"Since we are standing side-by-side with lenders absorbing fraud losses, we support any tool that can reduce the incidence of fraud," Prieston said. "However, our internal data show that tools alone are clearly not enough."



Training, a cornerstone of TPG's philosophy and approach to fraud prevention, is the key to preventing and detecting fraud. Lenders that employ TPG's guidelines and have been trained by TPG's expert trainers experience, on average, a 58 percent reduction in fraudulent claims incidence.



TPG clients also benefit from the combined power of the company's insurance protection and loss mitigation expertise of TPG-affiliated law firm Lanahan & Reilley. General industry statistics estimate loss severity from fraud at 37 percent, and TPG sees loss severities as high as 50 percent. Yet TPG clients experience far less loss. Research on the first half of 2005 indicates that the efforts of Lanahan & Reilley's loss mitigation on claims files resulted in an average 30 percentage point reduction.



Overall, Georgia (16 percent), Texas (10 percent) and Florida (9 percent) accounted for the most claims filed during the first half of 2005. Other states rounding out the top 10 were Illinois (8 percent), Michigan (7 percent), Tennessee (6 percent), California (5 percent), North Carolina (5 percent), Ohio (5 percent) and Utah (4 percent).



Claims filed in first half of 2005

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Fraud Type Percent of claims with fraud type



Occupancy 52.9

Hidden debt 31.6

Employment 30.3

Straw borrower 12.9

False verification of rent 11.6

Appraisal 9.7

Closing funds 3.2

Broker fraud 1.3

Investment scheme 1.3

False SSN 0.6

False verification of mortgage 0.6

Identity theft 0.6



Note: Some claim files contain more than one type of fraud.



About The Prieston Group



The Prieston Group is a diversified risk management consulting company. It offers the only fully integrated suite of mortgage fraud protection, mitigation and indemnification services in the industry. Called TPG Mortgage Assurance Solutions(SM), these services provide lender due diligence and data integrity, fraud loss insurance and repurchase protection and legal consultation for loss mitigation and recovery.



Founded in 1986, the company's proprietary Lender Representation & warranty Insurance (Pat. Pend.) protects more than 700 lenders and more than $50 billion in residential loans to date. TPG has been an industry leader in fighting mortgage fraud, supporting lenders, aggregators, investors and issuers, as well as working closely with rating agencies, industry representatives and government and legislative agencies.