Mortgage fraud incidents in which insiders in the lending process misrepresented a borrower's information jumped 42% in the first quarter from a year earlier, according to the Mortgage Asset Research Institute.
The antifraud software vendor, a unit of ChoicePoint Inc., said Florida accounted for 24% of all properties with "material misrepresentation" on loan applications in the quarter. California accounted for 10% of reported fraud claims in the quarter, followed by Illinois, Maryland, and Michigan, each with 7%.
The figures are from a report the Reston, Va., institute released Monday on fraud investigations by its own customers.
The reported incidents of fraud "all involved a professional somewhere in the loan process, whether it was the originator, the underwriter or the loan processor," said Jennifer Butts, the director of operations at the institute. The report does not include incidents of consumer fraud in which a borrower inflated their income or otherwise falsified information, she said.
Increased fraud has reverberated through the mortgage insurance industry, which has been denying more claims after reviewing loans for fraud and faulty underwriting, industry executives said. Lenders have been forced to reserve heavily for loan repurchases.
Analysts at Fitch Inc. wrote in a report released last month that there is "the probability that many potential claims on mortgage insurance policies may be determined to be ineligible for coverage" because of fraud.
The type of fraud varies by state. In Maryland, 69% of fraud claims result from misrepresentations on tax returns and financial statements, the institute found. In Michigan, 38% of fraud claims involved misrepresentation of a borrower's assets or debt. Borrowers in California and Illinois reported higher incidences of employment misrepresentation, while Florida and Maryland reported more income misrepresentation.
Ms. Butts said the majority of fraud in Florida and California involved properties near the coastline. It is "easy to falsify information" for loans on vacation homes and investment properties.
Fitch painted a largeley bleak outlook for the mortgage insurance sector, but said "the level of rescissions related to" mortgages originated in 2006 and 2007 "will be significantly higher than historical experience, reducing the amount of losses that will be incurred by" insurers. Factors include the recent "prevalence of stated income loans (which have proven to be highly susceptible to fraud)" and "looser underwriting controls at loan origination," Fitch said.
Large-scale rescissions pose some drawbacks for insurers by potentially impairing "the value of mortgage insurance generally" and alienating "long-term customers and beneficiaries even though the rescissions may be technically justifiable," Fitch said.
During a conference call last month, Curt Culver, the chief executive of MGIC Investment Corp., the nation's largest mortgage insurer as measured by outstanding coverage, said that the Milwaukee company had been denying more claims but that it had not stepped up its vetting efforts. During the second quarter the number of denials at MGIC more than doubled from a year earlier, to 294, and the amount of claims it denied roughly tripled, to $23 million.
"What we're doing is not out of line with what we've always done. We've always enforced the policy," Mr. Culver said. "It is up … but it's not as though we're looking for these in more detail than we always had." Rather, "we had a number of loans that were done with reduced documentation that have just opened themselves up for more investigation."
Fannie Mae said this month that it plans to quadruple its review of defaults for "fraud or improper lending practices," to 4,000 a month, by the end of the year, focusing on alternative-A mortgages. The government-sponsored enterprise also said it is expanding its "quality-control reviews for targeted products and practices" and that it is "on track to double" its antifraud investigations this year.