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By Evan Nemeroff
NOV 20, 2013 12:50pm ET
Jumbo Loans Present Higher Fraud Risk


The mortgage industry’s shift toward a purchase-driven market increases the risk of fraud, and that was evident in the third quarter, according to Interthinx.

Interthinx’s national Mortgage Fraud Risk Index value through the end of the third quarter is now 108, a 4% rise from the previous quarter and up 10% from a year ago. What stands out from the latest report is that jumbo loan index values are much higher across all the risk types than conventional loans.

Jumbo loan fraud risk nationwide is 164, Interthinx revealed, while non-jumbo loans have a risk of 102. The biggest difference was seen in the employment/income fraud risk index, where the value is 146 for jumbo loans versus a 69 for non-jumbo loans. Occupancy fraud risk for jumbos was also extremely high—more than 200 compared to 150 for conventional loans.

A mortgage is classified as “jumbo” when the amount of the loan exceeds the limits set by Fannie Mae and Freddie Mac. In most states, the conforming loan limit is $417,000. But this rises to $625,000 in Hawaii, Alaska and other markets designated as high-cost.

“With the rise in popularity of jumbo loans, lenders must be aware of both the credit risk and fraud risk those loans carry,” says Ashley Woodworth, vice president of business development and corporate strategy at Interthinx. “The risk is out there, and lenders need to be aware.”

California claimed the top spot for mortgage fraud risk with a value of 151, a 16% increase from the second quarter, Interthinx revealed. California contains seven of the top ten metropolitan statistical areas for overall risk, six of the top ten MSAs for identity fraud risk, and all of the ten riskiest MSAs for employment/income fraud risk.

Washington, D.C., with a score of 146, entered the top two for potential fraud for the first time since the Agoura Hills, Calif.-based company began this report in early 2009. First-time entrants into the top 10, Delaware and Montana, were at three and four, respectively. Hawaii rounds out the top five riskiest states for fraud.

Nevada, ranked 10th in the third quarter, fell from one of the top three spots for the first time since the inception of this report.

Conversely, Mississippi and West Virginia tied for the least risky states for fraud with index values of 66.

Of the four type-specific indices Interthinx tracks, there were increases in identity (up 18%) and occupancy (17%) fraud risk. The jump in occupancy fraud risk was due to increases for both purchase and refinance transactions, while there was a decline in the market share of refinances which inherently have less occupancy fraud risk than purchases.

On a yearly basis, occupancy fraud risk is up 36%.

Meanwhile, property valuation and employment/income both fell from the second quarter, by 3% and 17%, respectively.
Risk Management