If you read this blog with any regularity, you may have noticed that I’ll be speaking at next month’s Joint NPRRA-REIPA Conference in San Antonio, TX, about technology’s growing influence in detecting real estate and mortgage fraud. With nearly every major newspaper in the country, along with industry trade publications and blogs like mine, covering the surge in real estate and mortgage fraud-related activity, it’s a no brainer that tech firms are rushing to market with solutions they claim can detect the warning signs of fraudulent real estate transactions.

Carlsbad, California-based BasePoint Analytics–an early provider of ’scientific fraud scoring’ software for the banking industry–says it now helps mortgage lenders by applying ‘lessons learned’ in banking’s fight against credit card fraud in the fight against mortgage fraud. As a result of using BasePoint’s ‘FraudMark‘ software, the company says real estate industry insiders are able to protect against fraud while keeping their mortgage offerings more affordable.

BasePoint may be onto something here. To combat credit card fraud, the nation’s banks essentially went through a 4-step ‘fraud detection solution evolution’ that spanned nearly 30 years. Those steps included:

1. Reactive Investigations: Banks manually investigated customer reports and tips from other institutions and law enforcement officials.

2. Exception Reporting: Banks used computers to track common indicators of risk, such as the number and amount of transactions in a day.
3. Analytical Prevention: Using advanced scientific pattern recognition software, banks were able to provide early warnings of potentially fraudulent activity.
4. Optimized Fraud Sciences: Banks optimized scores and rules to obtain the greatest profit while keeping fraud at a minimum.

The result of banking’s investment in this process has been a 70 percent reduction in credit card fraud.

As we know all too well, fraudsters and scammers have expanded their focus to include real estate, where complex underwriting processes and a competitive lending market enable them to steal money on a much larger scale. Making the problem even more challenging is the fact that fraudsters are joining forces with industry insiders like REALTORS, brokers, appraisers, lawyers, notaries, and closing agents to achieve their goals. BasePoint says its customers are turning to their company’s technology to leapfrog steps two and three in the fraud solution evolution and keep fraud in check.

As a part of my research for next month’s talk at NPRRA-REIPA Conference, I did some research on BasePoint’s FraudMark system, and found that it uses patent-pending technology to identify and provide analysis of applicants, brokers, and appraisers behavioral trends, as well as provide analysis of the historical patterns of both fraudulent and non-fraudulent loan applications. By combining both approaches, BasePoint says FraudMark provides a high degree of predictiveness to identify which loan applications present the greatest risk of fraud.

It’s an interesting claim, but since I’ve never used FraudMark myself, I can’t say one way or another if it actually works. At the end of the day though, despite unique ‘patent-pending technology,’ the product won’t make a bit of a difference unless mortgage brokers, lenders, and other industry insiders agree to use it. I don’t know how much FraudMark costs to install and deploy, but I’m guessing it’s a fairly expensive proposition. Despite the unknown cost associated with using the product, the fact that the overwhelming majority of real estate and mortgage fraud acts are NOT committed by mistake begs the following questions…

1. Will enough industry insiders use FraudMark (or any number of other technological solutions being rushed to market) to make a measurable difference in the fight against real estate fraud? And…

2. If not, why not?

I’ll take an educated guess at the ‘why not’ part… 1. Because industry insiders who commit fraud have no real incentive to stop; and 2. Because those who want to contribute in the fight against fraud cannot afford to participate via the use of ‘cutting edge’ technology like FraudMark.

While I’m a firm believer in capitalism and all that it stands for, perhaps it’s time for the Federal government to step in and develop educational standards and an evolving technological solution that all real estate industry insiders are compelled to use. I know that sounds like a pretty dramatic solution, but something has to be done soon to educate the masses and put affordable fraud detection technology into place.

According to BasePoint’s own internal data, mortgage fraud has grown at a rate of 140 percent per year over the past three years, costing mortgage lenders and their customers between $1 and $3 Billion annually. BasePoint also says that at least one in every 250 mortgage loans contain some element of fraud that will result in financial loss to the lender, and that up to 40 percent of early payment defaults include material misrepresentations on loan applications that could have been detected before the loan was funded.

Clearly, the risks and costs are too high for us not to be talking about this.