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With Industry in Chaos, Fraud Detection is Focus

June 19, 2008: The FBI Los Angeles office announces the formation of a multi-agency task force to deal with mortgage fraud. Called SCAM, the task force includes nine federal agencies that have partnered to investigate a variety of mortgage and housing fraud. On the same day, the national FBI press office announced that Operation “Malicious Mortgage” had resulted in the arrest of 60 people in mortgage fraud-related cases spread out over 15 FBI districts. Operating from March to June, the operation charged 406 defendants in 144 mortgage fraud cases across the nation that caused an estimated $1 billion in losses. June 27, 2008: Four members of an alleged mortgage fraud scheme are indicted by a federal grand jury in Los Angeles for collecting loan proceeds worth approximately $4 million from properties that were not actually for sale. A 14-count indictment accuses the defendants of conspiracy, wire fraud and money laundering. “There are about 1,400 investigations in the country open for fraud,” said a spokesperson for the FBI Los Angeles field office, “and a good portion of those are in Los Angeles.” Those investigations, she said, are targeting everyone, from individuals to company insiders. With California being one of the top 10 states for mortgage scams, fraud protection and risk mitigation has become one of the hot spots of the lending industry. That’s where companies like Interthinx in Agoura Hills step into the picture, providing lenders with the technology to find potentially fraudulent information in mortgage applications and identify patterns of fraud. “Our goal is to help anyone with skin in the game to mitigate risk,” said Jeff Moyer, senior vice president of Interthinx. “The focus is primarily around mortgage fraud or misrepresentation, however you classify it, but there’s a risk component as well.” More detail When a loan application is submitted to Interthinx for review, within 10 to 15 seconds the lender is given a report that flags potential problems. As you might suspect, loan applicants do not always give data that is 100 percent accurate. Perhaps they fudge a little on how much income they have, or they might say that this is going to be their primary residence when it’s really an income property. The very sophisticated automated fraud detection system can point out that the borrower is apparently already a mortgage holder with several properties to their name, giving the lender an opportunity to scrutinize that application in greater detail. “You’ll have someone who has bought a lot of properties in a sort of fraudulent way,” said Moyer. “They’re not going to use the same lender: they’re going to use 50 or 60 lenders.” It’s the fraud rings, he adds, that can quickly put a lender out of business. They may include the real estate agent or broker, escrow agents, appraisers and even the seller. One way Interthinx products combat that is to run all of the loan process participants through the database to identify patterns of fraud. Another hot button issue has been that of value. Perhaps an appraiser has been “rewarded” for inflating the value of a home in order to secure a larger loan. An automated risk detection system can, within seconds, compare the stated value of the house with others in the area to identify whether that value makes sense. Moyer said they look at things like whether there are a lot of foreclosures or defaults in the neighborhood. “The system is designed to think like an underwriter would,” he said, “But faster.” The underwriter can use the reports generated by Interthinx as a tool to help them in determining whether to move forward with funding. Local Troubles Tallied In 2007, 150 mortgage lenders failed and 43 were acquired, according to MortgageDaily.com. Thus far in 2008, according to their count, 45 mortgage lenders have failed and 29 have been acquired. The San Fernando Valley has been one of the hardest hit regions, with major companies like Ownit taking the bankruptcy route in December 2006; Metrocities Mortgage getting acquired in June 2007; and WMC Mortgage, a division of General Electric, being divested with the portfolio sold to a foreign company for $100 million (a loss of $987 million) in December 2007. In July, Countrywide was acquired by Bank of America and IndyMac was seized by the Federal Depository Insurance Corporation. Linda Coburn

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