More than two years agp, I wrote a blog entry titled “Call To Action: Automated Notification Systems Are Needed for Change in Status of Property Ownership.” Now, someone’s finally doing something about it. But before I go there, take a look what I wrote (in part) back on June 22 of 2006:

Here’s a better approach to stopping unscrupulous mortgage ‘rescue’ firms and others who prey off the ignorance of unsuspecting homeowners: Just like they do in the credit scoring industry, start a national campaign aimed at getting homeowners to be more in tune with what their local government says is the ownership status of their property. How many times have you seen those advertisements on television for companies selling credit score monitoring services? As a result, more American’s know their credit score now than at any other time in history.

Local governments should act now to establish notification systems to alert homeowners of any changes to the ownership rights of their property. How simple would it be for an automated system to be kicked into place once real estate-related documents are filed with the proper authorities? Pretty darned easy! If I can do it for the people who inquire about my real estate services (send them automated e-mail messages, that is), surely local government can procure a system that e-mails and snail-mails notification immediately upon any attempted change in status to real estate.

With the stakes being as high as they are, can we really afford not to have automated notification of the change of property ownership status in place?

Now, some two years later, word comes from the Dane County, Wisconsin, Register of Deeds that they just launched a free online service that affords consumers the ability to have their name monitored within the Register of Deeds office in order to track possible fraudulent activity. According to Kristi Chlebowski, Dane County’s current register of deeds, county residents are notified only when the name they have submitted to the new Property Fraud Alert system is found on a document recorded in the Register of Deeds office.

“Protecting consumers information and real estate property are our top priorities,” says Chlebowski. “While the Property Fraud Alert will not prevent fraud from happening, it will provide an early warning system that will allow our citizens to take appropriate actions should they deem possible fraud activity has occurred with their property.”

Flipping Frenzy salutes Kristi Chlebowski and the staff of the Dane County, Wisconsin, Register of Deeds office. Your Property Fraud Alert system is a step in the right direction!

Strongly recommended reading from a very well respected colleague… Ann Fulmer of Interthinx (courtesy of National Mortgage News Online):

What Goes Around…

By Ann Fulmer, VP of Industry Relations, Interthinx

The mortgage lending landscape has changed dramatically in the past few months. Dozens of lenders have gone out of business, tens of thousands of workers have lost their jobs and tighter underwriting guidelines are reducing origination volume. Under these circumstances, someone might conclude that mortgage fraud would also be declining.

That would be completely wrong.

The majority of fraudsters are industry insiders who leverage their knowledge to take advantage of weaknesses in lenders’ processes and defenses. Thus mortgage fraud does not disappear during the “down” portion of the mortgage cycle, it just morphs to take advantage of current market conditions. If your company is still in business and originating mortgage loans, it is a target. The question is will your staff recognize a fraudulent application if it sees one?

I ask that question because a friend, who recently took over as the underwriting manager at a community bank, told me that she was teaching her staff to examine disbursements from the seller’s proceeds when one of the employees asked her why they should bother since the money belonged to the seller. My friend explained that mortgage fraudsters use bogus claims and liens against the seller as a way to extract loan proceeds. The employee retorted that their department had never, ever, been hit by fraud. What is much more likely is that these employees simply didn’t recognize fraud because their institution had not been a primary target during the expansion phase of the real estate/credit bubble.

This lack of fraud recognition is not limited to employees of smaller lending institutions. It also plagues some so-called financial experts. For example, last year, I was driving down the road listening to the radio show of a nationally syndicated consumer advocate. A caller told the advocate that his house was for sale, that someone had offered him $100,000 more than the asking price, and could the advocate please tell him how he should respond? The expert said, “I have no earthly idea why someone would offer you more than your asking price.” I nearly drove off the road because I was screaming at the top of my lungs, “I do! It’s mortgage fraud!”

But I digress.

With lenders returning to more old-fashioned underwriting standards and requiring full documentation, W-2s, higher FICO scores and higher downpayments, “old” frauds are on the rise. So, it’s not surprising that Interthinx investigators and clients are reporting an increase in “silent seconds” and self-employed borrowers. The Interthinx F.R.A.U.D. Report shows that income and employment misrepresentations in new applications doubled between the first and second quarters of this year, and that there are still significant rates of misrepresentation regarding collateral value even in this declining market.

Just as the use of utility and phone records for no-file or thin-file borrowers won’t ensure credit worthiness, requiring full documentation will not stop fraud. In both cases, the required documents are easily forged.

In addition to training staff in the use of automated fraud detection technology to spot “silent seconds,” false collateral values, identity theft and occupancy issues, underwriters must also be able to recognize forgeries and credit profiles that don’t match the borrower’s income, especially when the borrower represents self-employment.

Unfortunately, the old adage, “What goes around, comes around” is all too true. If the industry is content to ignore certain types of mortgage fraud or take a less than aggressive approach to training and automated detection designed to prevent mortgage fraud in the pre-funding stage, then the financial fallout that is sure to follow will bring even more job losses and company closures.

The decision rests with each of us. The time to act is NOW.

Home valuation sites are the rage among homeowners, buyers, and sellers. Instead of hiring an appraiser to look at a house and write up a well educated estimate of its true market value, you can go online, type in the address, and find out the market value yourself instantly and best of all for free. Why pay an appraiser several hundred bucks?

Now, I like technology as much as the next person, and I believe in handing over more power to the people, but this is just another instance in which we are taking the human gatekeepers out of real estate transactions and leaving the system wide open to abuse. We are literally turning the buying process into a free-for-all, in which he who pushes the buttons on the keyboard defines the value of a home. We may as well install money machines in everyone’s home that print $20 bills.

With these home valuation sites, whenever a transaction is recorded, the data is automatically transferred to the home valuation system, where sellers and buyers can immediately access the information. While that’s not so bad in and of itself, it can intensify the negative effects of real estate and mortgage fraud. If, for example, a property’s value is artificially inflated as a part of a flipping scam, that property’s inflated value appears immediately online. People selling homes in the same area see the numbers and instantly jack up their asking prices. Buyers see property values rising and are willing to pay more. A con artist who knows how to play the game, can pull the strings on the system like a puppeteer, inflating and deflating the market at will.

Now, you might argue that given the proper incentive, appraisers have been known to fudge the numbers, too. You might also argue that these valuation models are even more honest–after all, can’t a computer automatically check whether a property’s value is out of sync with the prices of similar properties in the same area? In theory, yes, but in practice, these valuations are significantly less reliable than what competent, certified appraisers can deliver. In some areas, they may be off by 10%. In other areas, the discrepancy can be as much as 50%. I tried to look up the value of my own house, and it wasn’t even listed.

In addition, these valuations can be extremely old. Based on a valuation model, a bank could conceivably approve a mortgage loan to purchase a house that burned down two or three months ago. Only a human being, an appraiser visiting that house and looking at it inside and out, can determine whether the valuation is truly accurate.

Recently, I sold a home to a client who was approved for a mortgage loan in less than 24 hours. The lender didn’t require an appraisal and never even looked at the house. They relied exclusively on a home valuation model to verify the property’s value. I have seen enough fraud to know that if a seasoned con artist had put together a phony deal, that valuation model could not have detected it, and the deal would have proceeded without the slightest hint of suspicion.

As we rely less and less on the human factor as a system of checks and balances, we are sure to see an increasing problem with real estate and mortgage fraud. Home values will be able to skyrocket overnight without governance, creating a housing bubble that will make the dot.com crash of the nineties look like a soft landing.

When I see customers, clients, and even a few of my colleagues singing the praises of these online home valuation sites, all I can say is “No thanks, I’ll stick with a licensed, reputable appraiser.”

The First American Corporation–one of North America’s largest providers of business information–today announced that it has merged its Real Estate Solutions division with Sacramento, California-based CoreLogic Systems, Inc., a provider of mortgage risk assessment and fraud prevention solutions for the Real Estate industry. In 2006, First American’s Real Estate Solutions generated $252 million in revenues, while CoreLogic pulled down approximately $74 million. The merger is the largest transaction in a series of acquisitions completed by First American in recent years, and is a part of a larger domestic and international mortgage risk analytics strategy.

Traditionally, risk associated with mortgage lending is managed through labor-intensive quality control and due diligence reviews. First American says the newly combined company makes this process more efficient and effective by applying advanced data and analytics at every point in the lending process. (For more information on technology’s growing role in real estate and mortgage fraud detection, read my March 8, 2006 blog posting, Technology’s Role in Detecting Real Estate Fraud).

Since 2004, First American has acquired analytics companies LoanPerformance, UK Valuation and Basis100 and has purchased minority stakes in The Bohan Group, ComplianceEase, BasePoint Analytics and Australia-based RP Data. Together, these companies provide data, analytics and technology solutions that First American says address the most pressing challenges in mortgage risk management, including fraud detection and prevention.

As I reported earlier this month, Illinois Governor Rod Blagojevich recently signed a series of bills into law that are aimed at protecting Illinois’ homeowners from fraudulent actions by unscrupulous mortgage ‘rescue’ firms. One of the bills Blagojevich acted upon–House Bill 4760–requires that the signatures on any deed or other documents that attempts to transfer property must be notarized. This new law, known as Public Act 94-0821, becomes effective January 1, 2007.

This morning’s online edition of the Elk Grove Times has an interesting little diddy about that new law. In an article titled Notarized Deeds Aimed at Stopping Mortgage Fraud, Staff Writer John Roszkowski writes:

Rosanne Pulia, deputy supervisor of the consumer fraud unit for the Cook County State’s Attorney’s Office, said she was not aware of the new law but questions how effective it would be in reducing most mortgage fraud.

“Most documents I’ve seen in the cases I’ve investigated have been notarized,” she said. Pulia said often times notaries will be present when a deed is signed but the thieves are providing fraudulent information and identification. Pulia said the law may be designed to better track down all of the parties who have attested to the signing of the documents in hopes of catching the thieves.

Pulia said mortgage fraud is a growing problem throughout the Chicagoland area and the state. “We get calls all the time,” she said. “People are getting foreclosure notices on homes they didn’t buy or didn’t even know about.”

Click here for the entire article.

While I find it interesting that a deputy supervisor for consumer fraud did not know about this new law, I find her commentary about the new law itself to be spot on accurate! Requiring that a notarized stamp accompany signatures won’t amount to a hill of beans so long as the bad guys continue to evolve their methods of identity theft, and government sits by while it happens right under its nose.

Here’s a better approach to stopping unscrupulous mortgage ‘rescue’ firms and others who prey off the ignorance of unsuspecting homeowners: Just like they do in the credit scoring industry, start a national campaign aimed at getting homeowners to be more in tune with what their local government says is the ownership status of their property. How many times have you seen those advertisements on television for companies selling credit score monitoring services? As a result, more American’s know their credit score now than at any other time in history.

Local governments should act now to establish notification systems to alert homeowners of any changes to the ownership rights of their property. How simple would it be for an automated system to be kicked into place once real estate-related documents are filed with the proper authorities? Pretty darned easy! If I can do it for the people who inquire about my real estate services (send them automated e-mail messages, that is), surely local government can procure a system that e-mails and snail-mails notification immediately upon any attempted change in status to real estate.

With the stakes being as high as they are, can we really afford not to have automated notification of the change of property ownership status in place?

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.